When I started writing for this magazine over 40 years ago the editor was a wise old owl called Geoffrey Holmes. During a conversation on some thorny accounting controversy Geoffrey would slyly suggest that I tackle it in my next article. It was no use suggesting a different subject – he would simply look at his watch: it was time for a spot of lunch at our favourite Italian place in City Road.
Whatever the issue – whether off-balance sheet finance or “big bath” provisioning – he never revealed his own view of the “right” answer. On goodwill accounting Geoffrey put it to me that if purchased goodwill has a legitimate place on the balance sheet, it is surely arguable, for the sake of comparability, that companies should be permitted to value and disclose their internally generated goodwill on the balance sheet too? Indeed, many were doing so. “Let’s see what you make of that one!” was always Geoffrey’s wry farewell.
Working with Geoffrey was a valuable discipline for any young columnist. I wrestled with the goodwill conundrum on holiday in Cyprus, and one morning, at the Churchill Hotel in Limassol, it struck me: if goodwill represents the value placed upon a company’s ability to earn super-profits then, assuming its track record bears that out, its goodwill is already there. To show internally generated goodwill as a new asset (as many companies were doing in the guise of “brands”) would therefore be double-counting. Writing the article was easy !
Warren Buffet says he will not invest in anything he does not understand
Warren Buffet says he will not invest in anything he does not understand. Many, whose enterprises now litter the corporate graveyard, thought they knew better. The clever guys at Enron were able to falsely boost apparent earnings by pulling derivative instruments out of the magician’s hat. Only much later did shareholders learn that the reported earnings, on which multi-million dollar bonuses were paid, were a sham. Little wonder that the sage referred to derivatives as financial weapons of mass destruction.
The wider arena
This lesson appies equally to economics. You may find the intricacies of nominal GDP and Target 2 imbalances bamboozling. Or central bank ”asset purchases”; EU banking union initiatives; the “evil” of deflation (lower prices!); “unfair” cross-border wage differentials; CDOs stuffed with sub-prime junk; mark-to-market (what Buffet calls “myth-to-myth”) accounting; “structural deficits” in the eurozone periphery; and all that plausible-sounding jazz. Don’t worry about it. None of the participants in this bizarre farce have a clue – or even an exit strategy!
Far better to stick to facts: (1) most of the new money printed by the Bank of England is headed, not for businesses, but for mortgages that fuel rising house prices ;(2) money printed by the ECB is being funneled to eurozone banks who then pretend to be funding their own government’s sovereign debt, all in blatant violation of the Maastricht Treaty; (3) the imbalance between Germany’s (credit) trading balance with the ECB and Spain’s (debit) balance is Euros 1.05 trillion (!), and it will never be settled; (4) on inflation, trust your own knowledge of cost of living rises, not the official figures; (5) cross-border free trade does not require state involvement, still less another layer of regulating and taxing parasites.
The pundits say we are now far more sophisticated and smarter than our predecessors. Really? In 1802 Thomas Jefferson wrote: “I believe that banking institutions are more dangerous to our liberties than standing armies.”
The stupid notion that “this time it’s different” is on a par with heralding the end of boom and bust without knowing what causes it in the first place.