Wealth and Happiness

Here is an excerpt from an article that provided an evidence that money can't bring happiness. It is an illusion. These thoughts are akin to Quranic teachings

Fair in the eyes of men is the love of things they covet: women and sons; heaped-up hoards of gold and silver; horses branded (for blood and excellence); and (wealth of) cattle and well-tilled land. Such are the possessions of this world's life; but in nearness to Allah is the best of the goals (to return to). Say: shall I give you glad tidings of things far better than those? For the righteous are gardens in nearness to their Lord with rivers flowing beneath; therein is their eternal home; with companions pure (and holy) and the good pleasure of Allah. For in Allah's sight are (all) His servants. (Ayat 14-15, Sura Al-i'Imran)

Say: "In the Bounty of Allah and in His Mercy in that let them rejoice": that is better than the (wealth) they hoard. (Aya 58, Sura Yunus)

 

It's a mystery why money doesn't make us happy, because it feels like it damn well should. With money we can buy whatever we want, go wherever we want, even be whoever we want. Surely that should make us happy? 

And yet study after study shows that in affluent societies money might bring satisfaction, but it doesn't bring much happiness.

Deficit Terrorist at work again

Here is a reproduction of a news item from DAWN

ISLAMABAD, July 12: While the rest of the country was fixated on the face-off between the media and the PML-N, Prime Minister Yousuf Raza Gilani was provided a reality check last week about the precarious economic situation in the country. He was warned by the finance ministry that with the fiscal deficit touching 6.2 per cent of GDP (Rs925 billion) last year, the government ran the risk of IMF backing out unless it earned Rs500 billion through additional revenue or reduce its expenditures drastically during the current fiscal year. More serious still, he was informed that the only way of controlling expenditures was to ask the provinces not to exercise their powers to raise additional funds under the new NFC award. This was the gist of the message hammered home during a presentation by Finance Minister Dr Abdul Hafeez Shaikh and his team to the prime minister during his visit to the ministry. A major headache in this regard, Dawn has learnt, is the overall fiscal situation which can deteriorate because of inter-corporation circular debt. This, according to the finance ministry’s estimates, will take a 25-30 per cent hike in electricity tariff during the current financial year to breakeven on this count. However, what makes this crisis unpredictable is that an increase in international oil prices or Pakistan’s failure to produce estimated amount of gas and hydel energy (which would mean more thermal energy and hence more oil) can push these numbers higher. No wonder then that the World Bank and the IMF, sources told Dawn, had estimated a 49 per cent increase in electricity rates. As a result, the government has no choice but to check its spending and improve revenue collection. The prime minister was informed that the government had exhibited little fiscal responsibility and failed to limit debt for the third year running because of financial indiscipline by the provincial governments. Hafeez Sheikh and his team pointed out that the provincial governments, which were expected to provide a surplus of about 0.6 per cent of GDP during the last financial year, ended up with deficits. The Punjab government closed its accounts with a Rs38 billion deficit, followed by Sindh at Rs27 billion and Balochistan Rs7 billion. As a result, the provincial governments together contributed about one per cent to the overall fiscal deficit of 6.2 per cent instead of helping to meet the 5.1 per cent target agreed with the IMF. The prime minister was also informed that Federal Board of Revenue had missed the revenue collection target by about Rs70 billion, excluding over Rs50 billion of refunds. The total revenue shortfall, therefore, remained in excess of Rs120 billion. If the refunds were also excluded, the fiscal deficit could be close to Rs1,000 billion. MORE BAD NEWS: The bad news for the prime minis ter did not end here. He was informed that the economic situation could further worsen because of the strong parliamentary opposition to the value-added tax (VAT). The reformed general sales tax could also face practical and administrative hiccups in case the Sindh government did not drop it insistence on collecting the tax on services. And if the government fails to introduce the uniform reformed GST across the country, it should stop counting on the IMF programme under which more than $2 billion is still to be transferred to Pakistan. As a consequence, the country will not be able to get bilateral and multilateral financial support, increasing the chances of a default. Mr Gilani was told that if the government wanted to avoid this situation it would have to persuade the provincial governments to check expenditures and prepare themselves for additional revenue generation. The problem the government may face is that the finance ministry cannot rein in the provinces and force them to spend less or to reduce their federal transfers in view of a consensus NFC award. Therefore, the prime minister had been requested to persuade the provinces to limit their spending to the last year’s level, notwithstanding additional shares they had thanks to the new NFC award to generate a surplus of at least 1.5 per cent of GDP (which translates to about Rs170 billion), the sources said. According to the sources, the prime minister assured the finance ministry officials that he would raise the matter with chief ministers on Tuesday.

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It seems that these terrorists are developing their arguments for the total surrender of our autonomy, whatsoever is left, to IMF. To me this deficit and its consequences can be taken as a blessing in disguise as we, the masses, shall not be taking another burden of $2 billion that the IMF has yet to disburse. We all including the so called Servants of the country have to face the stark reality of living within our means so there would be automatic cut in expenditures, no need to worry about increasing trend in expenditures. As the saying goes " Necessity is the mother of invention", when there will be acute shortage of electricity on numbers of accounts, people will find a way to out of this seemingly impossible obstacle. And this necessity shall not be only in electricity but shall be everywhere and when you put the brains of some 200 million people on innovation, then everything and anything is possible. Moreover, we, the masses, shall be relieved of the rampant corruption as Muslims we have faith in Allah (SWT) that He is the One who has all answers to our miseries and as we have shown time and again that in adversity we turn toward Him for help and we then behave or try to behave as closely as possible as Allah (SWT) has ordained.

So, default and save the country from the plunderers.

Capital Structure and Its Determinants

Harris, M. and A. Raviv (1991) in their paper "The Theory of Capital Structure" identified four categories of factors that are responsible for determination of capital structure of a firm. These factors or as they put it "desires" are

• ameliorate conflicts of interest among various groups with claims to  the firm's resources,  including managers (the agency approach), 
• convey private  information  to capital markets or mitigate adverse selection effects  (the asymmetric  information approach), 
• influence  the  nature  of  products  or  competition  in  the  product/input market, or 
• affect the outcome of corporate control contests. 

The theories that it is to "ameliorate conflict of interest" and "affect the outcome of corporate control contests" have nothing to do with the basic purpose of the firm - to create value for stakeholders - and in all probability, these are satanic designs that ruin the firm in the end. If all the stakeholders are working according to the well defined norms of justice and fair play than why there is conflict of interest? The theory of Capital Structure to avoid agency costs that Jensen and Meckling identified lead the managers on the path of destruction since the managers are given incentives such as based on EVA etc. and managers when faced with -ve results try to manipulate the earnings in order to achieve the target and earn incentives, the examples are "Enron", "Worldcom", etc. Debt provides incentive to engage in suboptimal investment because  in debt  contract  there is an implicit provision  that  if  an  investment  yields  large returns, well  above  the face value of the debt, equityholders capture most of the  gain.  If,  however,  the  investment  fails,  because  of  limited  liability, debtholders  bear  the  consequences in case liquidation is insufficient to cover the entire amount of debt. So clever managers who would like to hold on to power would go for the higher debt equity ratio and this is the strategy that comes to mind immediately there is any threat of take over. But that is a dangerous path to move on because debt has to be paid at some fixed time in future and that future is highly uncertain. Uncertainty coupled with fixed nature of debt commitment puts the managers under pressure for results and that is where the best laid out plans fall apart and lead the managers to play games.

The theory that capital structure decison is to convey inside / private information to market means it is used / can be used as a deception. Why can't we convey inside information in a straight forward manner without taking any steps that can lead the firm on the road to destruction? If the answer is no, then something is wrong that is being dragged under the rug. Information asymmetry between insiders and outsiders cause different value for the firms' assets and that may result in financing a new project / investment opportunity by existing owners / managers with debt if internal fund are insufficient - pecking order theory of capital structure. This pecking order begins when outsiders have some serious doubts about the information not available to them and that makes them suspicious. The question is why such asymmetry of information in the first place? Market, it seems always thinks of the information asymmetry that is why  "Noe shows that the average quality of  firms  issuing  debt  is  higher  in  equilibrium  than  that  of  firms  issuing equity.  Therefore,  like Myers-Majluf,  Noe's model  predicts  a  negative  stock market response to an announcement of an equity issue. Noe  also predicts a positive  market  response  to  an  announcement  of  a  debt  issue." There is always mistrust of managers by the market about firm's inside information. Why can't insiders speak the truth? Or why can't market take the words of insiders to be true on its face value unless otherwise proved? Is there lack of trust or lack of reputation? Because of lack of trust and distortion of communication between management and market, the market tends to heavily tilted towards the debt, which promises a fixed return irrespective of any reference to profit / (loss) - a figure that is highly questionable from the point of view of the outsiders for numbers of reasons but mainly on account of asymmetry of information. 

Leverage changes the behavior of the firm and its strategy because a levered firm assumes a sure commitment of periodic fixed payment to debtholders to remain in business. In the face of debt, it is very difficult to sustain high quality. Because quality can only be achieved through truth - speaking truth about its systems, products, people and speaking truth to its suppliers, customers, but when a firm has a debt to pay its ability to speak truth is highly undermined. This is even more true in case of an adverse forecast or less than expected results then the deviations from the straight path take start. All information asymmetries, conflicts of interests, contests for control of firm and competitive strategies move in different directions than the relevant theoretical models predict.