Study that screamed "Fire!" - opps, sorry, spreadsheet mistake

http://wallstcheatsh...eral-debt.html/

Did This Excel Error Cause Panic Over Federal Debt?

The debate over federal debt and the urgency with which to cut the United States’ dependency on borrowings has paralyzed policymaking in Washington. Now, it turns out, a mistake in a Microsoft (NASDAQ:MSFT) Excel worksheet may be partly responsible for the gridlock in the nation’s capital.

Harvard University economists Ken Rogoff and Carmen Reinhart had written in a 2010 paper that the ratio of the country’s debt to gross domestic product reaching 90 percent could spell a period of lower economic growth, and presents the biggest reason to cut the deficit. The research quickly gained popularity and became the rallying cry in some policy circles for lowering government spending.

A new study by three researchers at the University of Massachusetts — Thomas Herndon, Michael Ash, and Robert Pollin — finds that the widely cited 2010 paper by Rogoff and Reinhart, which painted an ominous picture of the rising debt to GDP ratio, was based on questionable data exclusion, and worse still, erroneous coding in the Excel sheet they used. Among those who cited the research by the Harvard economists was Republican leader Paul Ryan, who highlighted the report as a reason to force big spending cuts in the government’s budget.

After being unable to replicate the data from the 2010 report, the University of Massachusetts researchers obtained the working spreadsheet from Rogoff and Reinhart. “While using RR’s working spreadsheet, we identified coding errors, selective exclusion of available data, and unconventional weighting of summary statistics,” they wrote in their paper… more at the link

I've realize for some time that the R&R study was fundamentally flawed by mixing up non-monetarily sovereign nations (e.g. Greece, Weimer Republic, Zimbabwe) with monetarily sovereigns (e..g US, Japan, UK) and getting the cause-and-effect backwards (decline in production proceeds govt debt - debt-to-GDP is a ratio, duh). This has helped immensely in increasing my wealth in the last few years betting against those who believe in the R&R and similar thinking.

But now the cat's out of the bag. For different reasons but it still discredits the thinking.

As a citizen, I hope this smartins up a lot of people, particularly in the US Congress and in Brussels. The trader in me, however, hopes that it will be ignore; that the stupidity goes deeper that just one report.

Or as Miss Emily Litella would say:

IN A WORD

Both studies are a bunch of BS, created by economists who are paid to support a political point via "studies". I'm telling you that as an economist who isn't paid to conduct studies Any person with a credit card can maintain any level of credit on 2 conditions : 1. There is a willing party to extend credit 2. There is a level of income, that can support the credit repayment. As long as income keeps rising ( i.e economy expands and taxes keep flowing in) the credit can be expanded, If income is lost .. you're screwed. The cause and effect must be reversed. Thats it.

Edited by ogm, 17 April 2013 - 12:20 PM.

Both studies are a bunch of BS, created by economists who are paid to support a political point via "studies".

I'm telling you that as an economist who isn't paid to conduct studies

Any person with a credit card can maintain any level of credit on 2 conditions :
1. There is a willing party to extend credit
2. There is a level of income, that can support the credit repayment.

As long as income keeps rising ( i.e economy expands and taxes keep flowing in) the credit can be expanded,
If income is lost .. you're screwed.

The cause and effect must be reversed. Thats it.

No one can have income without someone else spending.
- that's not an opinion; that's an accounting identity.

In our system, spending is derived from the extension of credit that is then paid by the income the spending generates. The entire apparatus grows from the activity generated. Works great as long as it stays in reasonable balance, but since when do (greed and fear)humans stay in reasonable balance? [Note - certain entities hoarding income beyond reason (or their capacity to spend) is one source of imbalance.]

What humans can do is put in place aspects of the apparatus that come in to re-balance when necessary; these take time. R&R was one of the things that stood in the way of that rebalancing. It’s discrediting may have an impact – eventually; we’ll see. For now, the die was cast about 4 months ago.

Regarding the “credit card” and its conditions for use, when it comes to the federal govt –
- pssss, it is a mirage.