Congratulation! You have found the new site of Going Concern Economics. Chances are you did not reach the site by serendipity but you are here because you knew what to look for – You knew that the traditional school of macroeconomics has bankrupted and were searching for alternatives.
Going concern economics, or simply GC economics, is a hybrid accounting-legal-economic-financial construct. It is premised on the accounting concept of going concern presumption, which states that corporations and governments are going concern economic entities until they become gone concerns, which is proverbially known as economic insolvency or simply insolvency. GC economics provides explanatory and predictive insights into the unveiled secrets of insolvency, an economic event that has been conflated with bankruptcy, a legal event.
Prior to the 2008 financial crisis, the status of going concern or solvency had been determined by the two traditional accounting tests as follows:
- Asset value > Liability value (the balance sheet test).
- Cash flow > Due payments (the liquidity test).
However, Starr International v. U.S., a lawsuit brought by the former AIG CEO Hank Greenberg against the U.S. government alleging illegality of the AIG bailout in the wake of the 2008 financial crisis, has exposed the cognitive dissonance of the traditional accounting tests for solvency – AIG was balance sheet solvent but liquidity insolvent. In other words, AIG was solvent and insolvent at the same time, a legal ambiguity too dynamic for the current jurisprudence of law to conduct any legal discovery of the dynamic economic damages among AIG’s competing stakeholders. While the lawsuit was ostensibly between the shareholders and derivative counterparties, in reality it should have involved the life insurance policyholders, bondholders and management because nearly 40% of the economic insolvency losses came directly from the securities lending activities of the regulated life insurance subsidiaries.
The cognitive dissonance and the legal ambiguity are caused by the binary accounting definition of going concern, in which there is not a transitory state between going concern and gone concern. This is similar to many binary definitions of dichotomous legal concepts, such as bankruptcy which has caused the too-big-to-fail cognitive dissonance. But the effect of the going concern cognitive dissonance is significantly more profound on the economy than the bankruptcy cognitive dissonance given insolvency as a pre-bankruptcy economic event occurs significantly more frequent than bankruptcy.
To make matter worse, the FASB conveniently refused to provide a legally binding definition for going concern in its new rule for management disclosure of going concern uncertainties which went into effect on 15 December, 2016. The FASB believed that going concern is a legal concept that should have been defined by the SEC, which has similarly abdicated its responsibility to provide a legally binding definition.
Hence, the unenforceable, indefensible management liability without a legally binding definition created by the FASB will engender legal mayhems as securities litigation alleging management misrepresentations in disclosure of going concern uncertainties cannot be enforced, defended, attest, adjudicated or settled. These cases could potentially collapse the legal system because the current jurisprudence of law is unable to discover economic damages that are evolving rapidly (dynamic) among several competing stakeholders represented by multiple legal regimes whose relative ranking to each other are not at all define. For example, the relative economic damages of shareholders, bondholders, management, derivative counterparties, pensioners, life insurance policyholders, management and employees of AIG during the time leading up to the insolvency, known as the zone of insolvency, were so dynamic that could not be discovered by traditional legal discovery involving several competing legal regimes whose relative ranking orders were not defined at all. Furthermore, none of the existing financial analytical tools, such as credit ratings and audit, could convey any incremental information on AIG’s insolvency.
GC economics is a revolutionary economic theory that can effectively resolve all of the issues mentioned above, namely the going concern cognitive dissonance, the bankruptcy cognitive dissonance, the inability of traditional legal discovery to assess dynamic economic damages among several competing stakeholders represented by multiple competing legal regimes without clearly defined relative ranking orders and the inability of traditional financial analytical tools to convey any incremental insolvency risks.
In the coming months, new contents on GC economics will be incrementally added to this site at different conceptual pages, such as alternative legal discovery, ranval (a new currency defined in the context of GC monetary economics), or GC politics (focusing on new electoral and economic gerrymandering strategies).
As your continued interests and supports for GC economics would be crucial to the advancement of this newly developed social science of political economy, I strongly urge you share this website and its contents with your intellectual cohorts or start your own discussion groups on various aspects of GC economics at the Contact page. Similarly, your questions would be appreciated.