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Can citizens benefit from ‘value investing’ analysis of their governments?

July 29, 2020

We are looking forward to hosting Paul B. Kazarian in Truth in Accounting’s next “Ask The Experts” webinar on August 4. Kazarian is Chairman and CEO of Japonica Partners, an investment firm. He also founded and leads the Charles and Agnes Kazarian Foundation, a nonprofit with a mission to “improve public financial management and financial literacy.” 

In a recent debate hosted by Columbia Business School, Kazarian laid out a strong case, shared by Truth in Accounting, that cash-accounting based performance metrics and traditional measures of government debt and deficits can lead to misleading -- and overly optimistic -- communications received by citizens and taxpayers. 

The Kazarian Foundation website includes a glossary outlining the “Citizens Wealth” framework they have developed to analyze government financial performance. I appreciate how that framework frames government financial conditions not in terms of the government as the end, but as the means to the end. We have a government of popular sovereignty in the United States. The financial condition of the U.S. government matters most importantly not to the government, but to the people it serves.

Their glossary introduces the “Citizens Wealth” framework in the following terms:

Citizens’ Wealth is a per person government performance (track record) indicator that provides significantly better historical and comparative insights into the relationship between the total economy GDP and Total Government Balance Sheet (especially when compared to GDP or a debt to GDP ratio). The CW government performance indicator disrupts obsolete and financially destructive conventional thinking …

In turn, they identify the roots of their concern with traditional cash-based measures of government deficits in terms near and dear to our hearts at Truth in Accounting:

Simply put, the debt and cash deficit framework is both chronically flawed and massively value destructive in part because it enables corruption and mismanagement. In point of fact, for massive and highly complex organizations (unlike households or small businesses), cash-based fiscal balances (i.e., cash deficits) provide vastly more flexibility to create fiscal illusions than do numbers calculated in accordance with international accounting standards.

Kazarian lists Graham & Dodd’s classic “Security Analysis” book among his foundational readings, and he was recently interviewed in the Winter 2020 edition of theGraham & Doddsville” quarterly newsletter from Columbia Business School. He characterized Japonica’s investment philosophy in these terms: 

Japonica's transformational investments have three building blocks: discover systemic misconceptions, discover a massive undervaluation, and create extraordinary value. Discover systemic misconceptions rooted in financial statements (especially balance sheets), which do not reflect economic reality.

In turn, in that Columbia Business School debate, Kazarian listed “five misconceptions that are perpetuating the broken debt and deficit model.” One of them was “US government is a global benchmark in financial performance.” In turn, he has also stated:

Over the past eight years, we’ve met with or analyzed the research of the so-called best investors in sovereign bonds. The financial research and analysis we found was so deficient that if done by a professional equity manager, they would be criminally guilty of gross negligence and more likely recklessness.

We are looking forward to our conversation next Tuesday, and hope you are too. Audience participation in the Q&A is encouraged.

 

 
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