The Difference Between Outlays And Expenses
At the Naked Capitalism link page, a link to Ambrose Evans-Pritchard's latest is included, with the last paragraph being particularly recommended. What is in that last paragraph? Well, this:
"The second clause said that if any country finds it cannot raise funding for the rescue at interest rates below the 5pc charge agreed for Greece, it may opt out of the bail-out. BNP Paribas said this would escalate quickly into a systemic crisis if Spain were in such a position, because the other countries cannot carry an ever-rising burden. The bank warned the euro project itself may start to disintegrate rapidly if these rescue provisions are ever seriously put to the test."
It seems that Evans-Pritchard (and BNP Paribas) fails to understand, or properly apply, the distinction between outlays and expenses.
Outlays means the purchase of something, an expense is loss of value. The two are in some cases the same, like when you buy a burger and eat it (or throws it away, or lets it go bad). In other cases, they apply to the same objects but during different time periods. An example of this is when a company buys a machine that lasts 5 years. The entire outlay is in the first year, while only one fifth of the expense is in the first years, with the rest of appearing the coming 4 years.
Sometimes however, an outlay may not be an expense at all. If you buy a security, then that is an outlay, but unless the investment goes bad, then it won't be an expense at all. It will simply represent a shift in your asset portfolio from cash to the bought security (or a shift from a sold alternative security to the new, or an equal increase in total assets and total liabilities if the money needed to buy the security is borrowed). But what does this brief accounting lesson have to do with the contents of the quoted paragraph?
Well, because the paragraph assumes that the rescue will be loss making, and respresents an expense for the involved countries. Then it would make sense to argue that if some countries dropped out, the burden might be too heavy. But if you realize that the outlays are not loss making, but profitable as it is an arbitrage operation, then there would be nothing economically unsustainable about for example Germany alone doing the entire rescue, especially now that the German government can borrow at ridiculously low interest rates, with the 6-month yield being 0.2%, the 5-year yield 1.47% and the 10-year yield 2.61% (when this is written, when you read this the yields may have declined or risen a few basis points).
"The second clause said that if any country finds it cannot raise funding for the rescue at interest rates below the 5pc charge agreed for Greece, it may opt out of the bail-out. BNP Paribas said this would escalate quickly into a systemic crisis if Spain were in such a position, because the other countries cannot carry an ever-rising burden. The bank warned the euro project itself may start to disintegrate rapidly if these rescue provisions are ever seriously put to the test."
It seems that Evans-Pritchard (and BNP Paribas) fails to understand, or properly apply, the distinction between outlays and expenses.
Outlays means the purchase of something, an expense is loss of value. The two are in some cases the same, like when you buy a burger and eat it (or throws it away, or lets it go bad). In other cases, they apply to the same objects but during different time periods. An example of this is when a company buys a machine that lasts 5 years. The entire outlay is in the first year, while only one fifth of the expense is in the first years, with the rest of appearing the coming 4 years.
Sometimes however, an outlay may not be an expense at all. If you buy a security, then that is an outlay, but unless the investment goes bad, then it won't be an expense at all. It will simply represent a shift in your asset portfolio from cash to the bought security (or a shift from a sold alternative security to the new, or an equal increase in total assets and total liabilities if the money needed to buy the security is borrowed). But what does this brief accounting lesson have to do with the contents of the quoted paragraph?
Well, because the paragraph assumes that the rescue will be loss making, and respresents an expense for the involved countries. Then it would make sense to argue that if some countries dropped out, the burden might be too heavy. But if you realize that the outlays are not loss making, but profitable as it is an arbitrage operation, then there would be nothing economically unsustainable about for example Germany alone doing the entire rescue, especially now that the German government can borrow at ridiculously low interest rates, with the 6-month yield being 0.2%, the 5-year yield 1.47% and the 10-year yield 2.61% (when this is written, when you read this the yields may have declined or risen a few basis points).
posted by stefankarlsson at 3:51 PM
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