Assignment : Essay based on Chapter 5 of “Beggar thy neighbour”.
Assignment number
Assignment –A (1238 words)
Essay-1
Question: The economic consequences of lending at compound interest resulted in loss of productive yield of the society. How finance dominated over economics and politics by using this concept of interest (Geisst 193)?
Introduction
The question given above poses a mandatory evaluation of the harmful impact of the compound interest based lending and consequent ease of loans for the people of America. The author, Charles Geisst, used the viewpoint of John Maynard Keynes to explain that the American society was so possessed by the idea of easily availing the loans using compounded interest that they almost overlooked the potential threat of this process. The tendency to consume normally unaffordable products and services became an obvious preoccupation of the society and developed at the cost of the social well-being and productive growth as a whole.
The economic indicators of Social yield, growth, and wellbeing
The social growth and wellbeing are important dimensions of national productivity which is an important determinant of the economic growth of a nation (Fox, "The Economics of Well-Being"). The economic development is assessed by using the growth in terms of productivity capacity and wellbeing of the society. The social growth is a cumulative term derived for the overall yield from individual members of the society. The national productivity can be assumed to be a magnified version of this concept where all the output generation by the nation in terms of produced goods and services (Fox, "The Economics of Well-Being"). This essay tends to evaluate the impact of ease of availing compounded loans on the factors of social output, wellbeing, and national economic growth.
Ease of access to compounded interest loans and loss of social yield
John Maynard Keynes expressed his concerns in terms of the fact that parallel growth in population, science, and financial systems can cancel each other to impact the social yield. It is generally observed that the people work hard to earn and afford their desired products and services. In this pursuit, people contribute to different sectors of national productivity which also decided their individual yield. However, an ease of access to compounded interest based loans might lower their efforts and output generation and ultimately affect their savings to pay the debt obligations surmounted by the compounded interest figures.
Conclusion
Aspiration to attain the desired products drives the intensity of efforts for an individual which ultimately define his productivity. This notion can be cumulated to form an approximate value of the national yield. However, the ease of attaining the desired products and services via loans can hamper the zeal in the people and they will start investing their savings in the repayment of the compounded interest component. Hence, the growth in lending facility can result in finance dominating over economics and politics.
Essay-2
Question: How a firm’s value is determined by jointly assessing its investment decisions and the financing decisions (Geisst 225)?
Introduction
The firm’s value has a two-fold dimension where the first interpretation of value determines the monetary value judged by the financial calculations and the second one is the perceived safety value which is determined by the assessed risks for investing in the firm by its stockholders. The author, Charles Geisst, used the above-stated concept to explain the relative importance of the corporate image associated with adequate loan repayment when compared to that of a sound investment from the owners and positive utilization of the debts for developing the asset-base for the firm. This essay tends to explore and elucidate the author’s rationale behind this statement.
Relation between a firm’s value and its decision of financing and investing
The capital budgeting decisions for a business determine which specific projects need to be invested and what investment is to be done into asset building for the current business so that the business proliferates in terms of targeted revenues and expansion (Merritt, "Capital Budgeting Decision Vs. Financing Decision"). On the other hand, the financing decisions determine how a firm manages the funds for investing them in its capital investment plans. Hence, the overall determination of a firm’s performance directly depends on how the two decisions are managed to gain the growth and monetary driven objectives (Merritt, "Capital Budgeting Decision Vs. Financing Decision").
However, in the book’s context, Geisst implies that it is not important for a firm to monitor its debt structure for manipulating the stockholder’s perceived value. Rather, the firm should focus on managing the key rations like its debt to equity, debt to asset, and return on the capital deployed. These ratios are important factors which express the image of the firm in terms of how the firm utilizes the debt for building its future expansion and revenue growth. Thus, being under heavy debt is no longer a concern but the utilization of the debt is an important determinant of a firm’s value.
Conclusion
The essay has clearly explained the actual link between the investing and financing decisions of a firm but the author’s implication is to stress over the relevance of the fact that being under a heavy debt is no longer a hampering factor for a firm’s image. The effective utilization of the undertaken debt determines the impact over the perceived value of the firm by the stockholders. Geisst has used the MM theory (Miller and Modigliani) to explain how this notion affects the overall image of the firm.
Essay-3
Question: Managing the systematic risk of investing in capital assets involves assessment of the company specific risk which can be diversified and the market risk that cannot be diversified. Why this difference of assessment exists between specific and market risk (Geisst 227)?
Introduction
The investment principle of diversity explains the fundamental of diversification which proposes building a multi-stock portfolio that actually mitigates the risks of value fluctuation with respect to specific assets. The author, Charles Geisst, used this context to explain the overall risks involved in investing into stocks and other volatile pricing based assets. The author has explained how the most adequate methods of risk mitigation in the investments (like that of portfolio diversification) are incapable of hedging an investment’s value against the market risk dynamics. The excerpt specifically focuses on the market risk aspect of any investment and explores the potential loss of value for the investment.
Systemic risk: Specific risk and market risks
Geisst has used the theory of William Sharpe and explained his concept of the systemic risk which can be further broken into the asset-specific risk and the market risk. The asset –specific risk determines the value changing risks associated with the specific asset categories (NASDAQ, "RiskMetrics - Unique vs. Systemic Risk"). This factor is further recommended to be mitigated by using an adequate diversification strategy. The diversification of the investment assets results in building a multi-stock portfolio for the investment. Thus, the diversification strategy hedges the asset-specific risks by averaging the risk of more risky assets with less risky ones.
Market risk (also termed as the ‘Unique Risk’), on the other hand, stands for the unpredictable market volatility which affects the entire market and hence, cannot be mitigated by using the diversification strategy (NASDAQ, "RiskMetrics - Unique vs. Systemic Risk"). The ideal example of market risk and the associated impact can be best explained through the collapse of the American real estate market due to subprime lending. Hence, owing to the coverage of the entire market, the assessment and consequent hedging against the market risk factor remains a very typical task of doing market-oriented hedging and corresponding asset management in the investment portfolio. Still, the market risks remain unpredictable and unavoidable for majority of the investors.
Conclusion
The book highlights the crucial role of Market risk in affecting the overall value of the investment. Hence, the use of adequate portfolio strategies for managing the asset-specific risks and the use of hedging techniques to mitigate the market risk is mandatory for all the investments. It has been discussed that both of the above-mentioned components of William Sharpe’s theory of systemic risk differ in their assessment because market risks cover the unpredictable risk dynamics of the entire markets. Hence, the common investor should always try to accommodate rationale risk mitigation strategies before building the desired portfolio for investment.
Works Cited
Fox , Justin. " The Economics of Well-Being".2012.Web. April 19. 2016.
Geisst, Charles. " Beggar thy neighbour ". University of Pennsylvania Press. Classic edition: 2013. 192-224. Print.
Merritt, Cam. " Capital Budgeting Decision Vs. Financing Decision ". 2012. Web. April 19. 2016.
NASDAQ. " RiskMetrics - Unique vs. Systemic Risk ". 2015. Web. April 19. 2016.
