Blog en Assets & Liabilities - Crash Course Chapter 14 ]]><p>As we learned in the prior chapter on debt, our nation has an historic, never-before-seen level of debt on the books.</p> <p>Now some would say that it&rsquo;s not reasonable to look only at debt, one also has to also consider the assets and total liabilities to assess the situation.&nbsp;</p> <p>And they&#39;re right.&nbsp; After all, does it really matter if you have a million dollars of debt if you also have no additional liabilities but assets worth $10 million?&nbsp;</p> <p>Not really, because your assets exceed your debts and liabilities, you should be $9 million in the clear.&nbsp;</p> <p>What we&#39;re going to do in this chapter is look at both the assets and the liabilities of the United States so that we can assess whether the current debt loads are worrisome or not.</p> <p>All right, let&#39;s begin here with assets. So what <em>is</em> an asset?&nbsp; &nbsp;</p> <p>One definition is: Items of ownership convertible into cash; total resources of a person or business, as cash, notes and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate.</p> <p>By this definition an asset is something of value that can be converted into cash or provides access <em>to</em>, or <em>enhances</em> a flow of cash.&nbsp;</p> <p>If we simply say assets are bank deposits, real estate, a stock or a bond, and the physical stuff we own, we&rsquo;d pretty much cover the vast majority of what we consider to be our assets.</p> <p>A <em>liability</em> is a likely future expense for which one has an obligation to pay.&nbsp; Not just the absolute legal requirements to pay &ndash; which are the debts - but also any outstanding obligations.</p> <p>To make this understandable, for a family, their assets would be cash in the bank, home equity and other real estate held, and the things in their home that they owned.</p> <p>The family&rsquo;s debts would typically be in the form of a mortgage, an auto loan, credit card debt, and perhaps student loans.</p> <p>And future other liabilities of this family might include college educations for children that have not yet been fully saved for, or taking care of ageing parents whose own resources are insufficient to cover their future needs.</p> <p>While &ldquo;debts&rdquo; are technically a type of liability, for the purposes of this chapter, when we refer to debt we&rsquo;re talking about a fixed commitment of a known amount.</p> <p>When we say &nbsp;&ldquo;liability&rdquo;, we&rsquo;re referring to a future obligation to pay that is neither fixed nor accurately known.&nbsp;</p> <p>We know that providing care for an ageing parent will cost a lot of money, but not how much because we don&#39;t know the duration of the expense or how much it will be in any given year.</p> <p>We&rsquo;re making this distinction between the terms &ldquo;debt&rdquo; and &ldquo;liability&rdquo; because the media &ndash; and even our government &ndash; often treat the two very differently, something Congress reminds us of every time they say that Social Security and Medicare can be modified at any time and therefore don&#39;t count the same as our national debt.</p> <p>So how does all this stack up in terms of our total net worth as a nation?</p> <p>To get a handle on the situation we&#39;re going to look at the net worth of <strong><em>households</em></strong> because on the public side of the story, as we saw earlier, the liabilities and assets of the US and State governments really belong to the citizens.&nbsp;</p> <p>On the private side, the assets and liabilities of companies belong entirely to the bondholders and shareholders of the company, not the company itself.</p> <p>And who holds bonds and stocks?&nbsp; Ultimately <em>somebody</em> does, which for the most part means a private citizen does.&nbsp;</p> <p>Since we can pool citizens into households, we could examine household assets, deduct some relevant liabilities and get a decent view of where things stand.</p> <p>The Federal Reserve tracks Net Worth at the household level and this data is routinely and widely reported in the media.&nbsp;</p> <p>According to the Federal Reserve, Household net worth exploded by more than &nbsp;$20 trillion dollars between 2003 and 2008&ndash; an astonishing feat &ndash; before collapsing by $17 trillion dollars during 2008 and 2009.&nbsp;</p> <p>And then again, between 2009 and 2013, the net worth of the country has increased again by nearly $20 trillion.</p> <p>To put those numbers in context, the entire net worth of the nation did not hit $20 trillion until 1989 so the recent gyrations are akin to amassing and losing as much wealth as was accumulated during the first 300 years of history.&nbsp;</p> <p>And these are NET assets, meaning debt has already been deducted so the Federal Reserve, and many in the media, take the position that with just over $77 trillion in <em>net</em> worth, Americans are doing just fine and our rapidly-climbing national debt levels are no cause for concern.</p> <p>But before we get too excited about the astonishing wealth indicated here, there are two key oversights and a fallacy hidden in this report of which you should be aware.&nbsp;</p> <p>As always, the devil is in the details.&nbsp; Before I address those I want you to observe this period here spanning from 2000 to 2003.&nbsp;</p> <p>That dip in the Net Worth of households was due to the stock market collapse that ran from 2000 to 2003 and caused such great panic at the Federal Reserve that Fed Chairman Alan Greenspan lowered interest rates to the emergency level of 1%, thereby igniting the greatest of housing and credit bubbles in all of history.&nbsp;</p> <p>That led to an even bigger crisis in 2008 that wiped out even more wealth, in response to which interest rates were lowered to 0%. Zero.</p> <p>As in, as low as mathematics will allow.&nbsp;</p> <p>Booms and busts. Bubbles and bursts.&nbsp; That&#39;s how the Fed prefers to operate.&nbsp;</p> <p>These declines in total net worth lead to this observation: debts are <strong><em>fixed</em></strong>.&nbsp;</p> <p>When you take on a debt, there it sits, growing larger until and unless you make payments on it.&nbsp;</p> <p>Debts do not vary with general economic conditions or whether you get a raise or lose your job.&nbsp; Assets, on the other hand, are <strong><em>variable</em></strong>, sometimes gaining and sometimes losing value.&nbsp;</p> <p>And so this leads to the next Key Concept of the Crash Course: Debts are fixed, while Assets are variable.&nbsp;</p> <p>OK - Where did the $18 trillion in new wealth since 2009 come from? About 80% of that growth came from a rise in Financial assets and the remaining 20% came from growth in real estate and other &lsquo;tangible&rsquo; assets.&nbsp;</p> <p>When we look closer at the actual amount of household net worth there is today, we see that 83% of the total net worth consists of financial assets totaling about $63 trillion while the tangible assets are the remaining 17% and total around $14 trillion.</p> <p>If we examine these assets a little more closely we see that the &nbsp;$63 trillion dollars worth of financial assets consist of things like pension funds, the assets of privately held businesses, deposits, stocks, and bonds, which we can roughly re-compose into these four main classes; stocks, bonds, cash or deposits, and the assets of privately held businesses.&nbsp;</p> <p>The other bucket of $14 trillion dollars in tangible assets consists primarily of real estate, which is 69% of this bucket, and consumer durables which would be your car, your dryer, and your snow blower, if you have one.&nbsp;</p> <p>For every single one of these assets, except cash, in order to liberate the wealth from these assets you&rsquo;d have to sell them first.&nbsp;</p> <p>One general rule of asset markets goes like this: &nbsp;Things go UP in price when there are more buyers than sellers AND things go DOWN in price &nbsp;when there are more sellers than buyers.&nbsp; Hold onto that thought for when we get to the chapter covering demographics.</p> <p>Now let me expose two great oversights of this household wealth report.&nbsp;</p> <p>The first oversight I wish to illuminate is that the data is presented as if it applied to our entire country in a fairly even and therefore useful manner.&nbsp; It does not. &nbsp;</p> <p>As of 2010 The <strong>Top 1%</strong> owned 35% of ALL net household wealth AND looking at stocks only owns 42% of ALL the country&rsquo;s financial wealth.</p> <p>If you can&rsquo;t see it, I apologize; the top 1% is represented by a very thin green smear at the top of the column there.&nbsp; So it&rsquo;s great that our stock market keeps powering higher but for every trillion dollars it goes up, $420 billion of that newly-created wealth goes to only one out of a hundred households.</p> <p>The <strong>Top 20%</strong> , which includes the top 1%, &nbsp;owns nearly 89% of ALL &nbsp;net household wealth and <strong>&nbsp;over </strong>95% of ALL financial wealth in the US.&nbsp;&nbsp;</p> <p>This means the bottom 80% of the citizens of this country, represented in yellow, holds only 11% of the total wealth of this country &ndash; and less than 5% of its financial wealth - and even within the remaining 80%, the distribution of wealth is similarly weighted nearly all at the top.</p> <p>Oh, but wait a moment. The top 1% isn&rsquo;t hogging everything.</p> <p>If we look at debt, we see that the top 1% only holds 6% of the country&rsquo;s debt. The next 9% own 22% of it; but the bottom 90% - that&rsquo;s 9 out of every 10 people in the US &ndash; holds 73% of America&rsquo;s debt.</p> <p>So the rich hold almost all the wealth, but generously, allow the rest of us to hold the debt. Gee, thanks.</p> <p>Given this tremendous disparity, I&rsquo;m reminded that Plutarch once cautioned that <em>an imbalance between rich and poor is the oldest and most fatal ailment of all republics</em>.&nbsp;</p> <p>More immediately, this helps us understand why the great credit crisis of 2008 worse than expected.&nbsp; Just as was true of the wealth gap in the late 1920s before the onset of the great depression, the severity of a crisis does not depend on <em>average</em> wealth, but the <em>distribution</em> of the wealth.&nbsp;</p> <p>If a large swath of the population lacks the means to weather the storm, then the storm will be longer, and harsher than otherwise would be the case.</p> <p>So what does it mean that 80% of our population possesses a meager 11% of the total wealth?&nbsp; For one thing it means that the recent efforts by the Fed to provide massive amounts of liquidity support to the biggest and wealthiest banks at the inflationary expense of the lower classes were not only misguided, but they were cruel and unusual.&nbsp;</p> <p>This leads to an easy prediction to make: <strong>The wealth gap in the US will hamper our recovery and deepen the downturn. </strong></p> <p>The second and bigger oversight is that that the fed mysteriously does not offset the net worth of the nation by the general liabilities of the federal and state governments or private corporations.&nbsp;</p> <p>Wouldn&rsquo;t it make sense for the Fed to offset these against household wealth?</p> <p>So let&#39;s look at those under and even <strong><em>un</em></strong>funded liabilities.</p> <p>What we&#39;re going to look at here are pension, retirement, and entitlement programs.&nbsp; &nbsp;At the state and municipal levels we find that pensions are under-funded to the tune of $4 trillion</p> <p>What this means is that as money was taken in through taxes, states and municipalities actively chose to spend that money elsewhere in preference to putting it into pension funds.&nbsp;</p> <p>Big promises and insufficient contributions were made at the same time.</p> <p>What does it mean when we say that the state and municipal pensions are underfunded by 4 trillion dollars?&nbsp; How is that calculated?&nbsp;</p> <p>The 4 trillion dollar shortfall is what is called a <em>Net</em> <em>Present</em> <em>Value</em>, or NPV, amount.&nbsp;</p> <p>This is important so let&#39;s take a quick peek into this idea.</p> <p>A net present value, calculation adds up all the cash inflows, in this hypothetical example $1000 per year for six years, and offsets, or &nbsp;&ldquo;<em>nets</em>&rdquo;, those inflows against all the future cash outflows.</p> <p>Since a dollar today is worth more than a dollar in the future, the future cash flows have to be discounted and brought back to the <em>present</em>.&nbsp; We <em>NET</em> all the cash inflows and costs, discount them back to the <em>PRESENT</em> to determine if the thing we are measuring has a positive or negative <em>VALUE</em>.&nbsp; &nbsp;NET. &nbsp;PRESENT. &nbsp;VALUE.</p> <p>This is the methodology used to calculate the status of state and municipal pension funds. &nbsp;</p> <p>Growth in the value of the pension fund assets plus future taxes are offset against cash outlays to pensioners, brought back to the present, to indicate that in order for the pension funds to simply have zero value, $4 trillion dollars would, today, have to be placed in those funds.</p> <p>An important realization about NPV calculations is that the future has already been largely taken into account so waiting and hoping for a different future result to emerge pretty much never works.&nbsp;</p> <p>If we have to place $4 trillion in the funds today, but don&rsquo;t do this, next year the shortfall number will be even larger.&nbsp;</p> <p>The only way it could be smaller is if fewer people are collecting benefits or the fund&rsquo;s assets outperform the assumed rate of growth that fed the NPV calculation.&nbsp;</p> <p>Moving right along. Corporations are coming off the highest levels of profitability in decades but they too opted to underfund their pensions, to the tune of &nbsp;$4 trillion <em>Net Present Value </em>dollars, in preference for, uh, other uses for that cash.&nbsp;</p> <p>Because pensions typically invest in bonds and stocks in a roughly 60/40 split any recessions or market declines will only add to the shortfall.&nbsp;</p> <p>In part, the pension shortfalls are a direct function of the extremely low interest rates currently available &ndash; <em>thank you Greenspan and Bernanke</em>! &ndash; and also because the main stock market index - even though it is making new highs here&nbsp; at the end of 2013 - &hellip;is still languishing by historical standards if we inflation-adjust the returns over the past 15 years.&nbsp;</p> <p>Since most pension funds assume a seven to ten percent yearly compounded return, and since stocks and bonds are not yielding anywhere close to that amount over time &ndash; even including the market run-up from 2011-2013 - the pension shortfalls are understandable.</p> <p>But when we get to the Federal Government, that&rsquo;s when scary numbers emerge.&nbsp; &nbsp;David Walker, the recently retired Comptroller of the US, and a personal hero of mine for valiantly and tirelessly working to raise awareness of the looming US government shortfalls, said of the US Government:</p> <ol> <li>It&rsquo;s financial position is worse than advertised</li> <li>It has a broker business model</li> <li>It faces &ldquo;deficits in its budget, its balance of payments, its savings &mdash; and its leadership.&rdquo;</li> </ol> <p>In my assessment he&rsquo;s absolutely right. And here&rsquo;s some data to support that.&nbsp; This is a table taken right from the US government annual report found on the treasury department website.&nbsp;</p> <p>Again we are going to be looking at NPV numbers.&nbsp; The first is a nearly $16 trillion dollar shortfall representing the total US government Net position without including social security and Medicare.&nbsp;</p> <p>Again, this means that ALL US government cash inflows PLUS &nbsp;&nbsp;the value of all government assets have been offset against&nbsp; &nbsp;known outlays to determine that, today, the US government would have to somehow obtain $16.1 trillion dollars to balance its liabilities and assets.&nbsp;</p> <p>But that&rsquo;s just 1/4<sup>th</sup> of it. &nbsp;Once we add in social security and Medicare, the shortfall suddenly balloons to $55 trillion dollars by the Treasury Department&rsquo;s own calculations.&nbsp;</p> <p>Whoa!&nbsp; Stop right there!&nbsp; That&rsquo;s over 3 times GDP!!&nbsp; This means the US government is <em>insolvent</em>.&nbsp; Full stop.&nbsp;</p> <p>Why is this not topic #1 on the President&rsquo;s agenda?&nbsp; A country this far in hock has some real future issues and is potentially on its way to bankruptcy.&nbsp;</p> <p>In case you are harboring the notion that there&rsquo;s some money socked away in a special US government account, like a &ldquo;lock box&rdquo;, this picture shows George Bush standing next to the entire Social Security &ldquo;trust Fund&rdquo;.&nbsp;</p> <p>There it is&hellip; the entire trust fund is a three ring binder with slips of paper in it saying that the US government has spent all the money and replaced it with &hellip; special treasury bonds.&nbsp;</p> <p>Hold on there. Aren&rsquo;t Treasury bonds an obligation of the US government?&nbsp; How can the government owe itself money?&nbsp; It can&rsquo;t.&nbsp;</p> <p>All government revenue <em>either</em> comes from taxpayers <em>or</em> borrowing so when the time comes to pay off those special bonds <em>that</em> money will either come from taxpayers in the form of higher taxes, or additional borrowing.&nbsp;</p> <p>If it were possible to owe money to yourself and pay interest to boot, then we could all become fabulously wealthy by writing ourselves checks.&nbsp; But of course, this is a foolish, easily dispelled, notion,</p> <p>At any rate, depending on which government agency&rsquo;s numbers you use, the Federal shortfall is anywhere from $53trillion dollars to $85 trillion dollars.&nbsp;</p> <p>This number is so large that it even scares small monkeys.&nbsp; And proving the point that you cannot grow your way out of an NPV shortfall, this number has grown by nearly $40 trillion dollars over the past 10 years, advancing during both strong and weak economic times.</p> <p>After all, who else besides taxpayers living in households are going to pay off those liabilities?&nbsp; Nobody, that&rsquo;s who.&nbsp; If the fed did perform this offset, because the federal government alone has a negative net worth that far exceeds total household net worth, the reported net worth would plunge below zero.</p> <p>I consider it a blatantly silly practice to tally up the assets of the country while neglecting its liabilities, let alone its debts.&nbsp;&nbsp;</p> <p>This is the same as someone with ageing parents and looming college bills claiming they are in good financial condition because they have a slightly positive balance in their bank account.</p> <p>In summary, US households have a positive net worth if and only if we neglect to include liabilities into the mix.&nbsp; When we include those, then the picture turns quite negative.&nbsp;</p> <p>Japan and Europe are in similar situations, driven by a poor combination of bad planning, failing to save, promising too much, again demographics, and low economic growth ever since the year 2000.</p> <p>Because the liabilities are so silly, so large, you can count on them never being honored.&nbsp; But just because we write a liability off it does not mean it goes away.&nbsp; By giving retirees less, they or their families have to shoulder the burden of living within their means &ndash; something our government still refuses to do.&nbsp;</p> <p>To really understand why future the future liabilities of so many developed countries are massive and growing larger, we need to quickly explore the topic of Demographics.</p> <p>Thank you for listening.&nbsp;</p> <p><a href="" target="_blank">read more</a></p> Blog assets Crash Course credit debt liabilities pensions Sat, 20 Sep 2014 02:29:22 +0000 Adam Taggart 87491 at The Dollar May Remain Strong For Longer Than We Think ]]><p>I have long been a dollar bull, not for any over-arching reasons based on inflation, deflation, rising geopolitical multi-polarity or any of the other issues that touch on the dollar&rsquo;s valuation vis-&agrave;-vis other currencies. My analysis focuses on a few basics:&nbsp; the dollar&rsquo;s status as the global reserve currency, Triffin&rsquo;s Paradox (a.k.a. Triffin&rsquo;s Dilemma) and global capital flows into the dollar and dollar-denominated assets such as U.S. Treasury bonds.</p> <p><a href="" target="_blank">read more</a></p> Blog bonds capital Charles Hugh Smith currency debt dollar exchange rates foreign exchange FX money purchasing power reserve currency reserves trade deficit trade surplus trading currency treasury Triffin's Paradox Wed, 17 Sep 2014 02:50:58 +0000 charleshughsmith 86923 at Debt - Crash Course Chapter 13 ]]><p>The fundamental failing of today&#39;s global economy can be summarized simply:&nbsp;<em>Too Much Debt</em></p> <p>We have taken too much of it on, too fast, in too many markets around the world, to have any hope of making good on it. Not only does the math not work out, but also on a moral level</p> <p><a href="" target="_blank">read more</a></p> Blog Crash Course credit debt default inflation loan Sat, 13 Sep 2014 01:04:24 +0000 Adam Taggart 87309 at Defying Gravity ]]><p>Today&#39;s markets exist in an Oz-like, fantasy world. For 5 years now, stock and bond prices have risen like Dorothy&#39;s balloon, without so much as a puff of&nbsp;downdraft&nbsp;to spoil the fun.</p> <p>Everybody likes higher prices, so let&#39;s have them&nbsp;<em>always</em>&nbsp;go up! Forever!</p> <p>Whether that can happen is a topic of current hot debate, though few think corrections have been permanently banished from the financial markets.</p> <p><a href="" target="_blank">read more</a></p> Blog bond market bonds bull market correction DMA financial markets futures hedging options S&P 500 shorting stock market stocks stops Wizard of Oz Wed, 10 Sep 2014 04:05:39 +0000 Adam Taggart 87192 at How Much Is A Trillion? - Crash Course Chapter 12 ]]><p>One trillion is a big number. In this short video, we try to help you get a sense for just how big; but the reality is simply that the human brain can&#39;t really suitably comprehend magnitudes this large.</p> <p>Which is why we should be concerned that the US&#39; money supply has ballooned to over $12 trillion dollars over the past decade. And that its outstanding debts and liabilities are many multiples that amount.</p> <p><a href="" target="_blank">read more</a></p> Blog Crash Course debt dollar how much is a trillion? Japan money quadrillion trillion Fri, 05 Sep 2014 15:45:14 +0000 Adam Taggart 87128 at Where To From Here? ]]><p>The financial markets were certainly correct in dismissing that rather abysmal first quarter 2014 GDP print, no?&nbsp; After all, the current 4.2% GDP growth snapback revision in&nbsp;Q2&nbsp;is proof positive Q1 was just a one-off fluke. Right?</p> <p>The fact is: for a good five years now, economic pundits have been both hoping for, and then repeatedly disappointed by, the US economy&#39;s inability to achieve &quot;escape velocity&rdquo;.</p> <p>So what lies ahead for the US economy? And for the financial markets? Are things going to get better or worse from here?</p> <p><a href="" target="_blank">read more</a></p> Blog bonds Brian Pretti capital credit crisis debt economic cycle economy GDP hiring Markets optimism small business stock market Wed, 03 Sep 2014 05:02:45 +0000 Brian Pretti 87019 at Inflation - Crash Course Chapter 11 ]]><p>For close to 300 years, inflation in the US remained very subdued. Small spurts occurred around major wars (Revolutionary, Civil, WW1, etc), but after each, inflation quickly trended back down to its long-term baseline. If you lived during this stretch of time, your money had roughly the same purchasing power your great-grandfather&#39;s did.</p> <p><a href="" target="_blank">read more</a></p> Blog Crash Course currency dollar inflation money nixon purchasing power war Fri, 29 Aug 2014 22:36:16 +0000 Adam Taggart 86953 at I Blame The Central Banks ]]><p>The current bubble in financial assets -- in both equities and bonds of all grades and quality -- raging in every major market across the globe is no accident.</p> <p>It&#39;s a deliberate creation. An intentional result of policy.</p> <p>Therefore, when it bursts, we shouldn&#39;t regard the resulting damage as some freak act of nature or other such outcome outside of our control. To reiterate, the carnage will be the very predictable result of our terribly shortsighted decision-making and defective logic.</p> <p><a href="" target="_blank">read more</a></p> Blog BOE BOJ bond market bonds bubble central banks credit debt Doug Short ECB Fed Federal Reserve GDP margin money stock market stocks wealth Thu, 28 Aug 2014 00:17:26 +0000 cmartenson 86887 at Quantitative Easing - Crash Course Chapter 10 ]]><p>At the exponential pace at which the Fed is increasing the money supply, and knowing the huge challenges the Fed &ndash; and most other world central banks&nbsp; - face in trying to stop or even slow down their money printing, the potential for a disruptive global inflationary period is very real.</p> <p>So what exactly is&nbsp;<em>quantitative easing</em>?&nbsp;</p> <p><a href="" target="_blank">read more</a></p> Blog asset purchase banks bonds cash central bank currency economics economy Fed Federal Reserve housing inflation interest rate Janet Yellen money money printing purchasing power QE quantitative easing stocks taper Too Big To Fail Treasury bonds trillion wealth Sat, 23 Aug 2014 01:34:20 +0000 Adam Taggart 86790 at Ukraine: A Perspective from Europe ]]><p>It is still a mystery to many historians as to how and why this World War I led to the slaughter of nine million people. But analysis of different parties to the original event, pursuing their own vested interests without a grasp of the bigger picture, certainly rings true of the Ukrainian situation today with regards to the West, embodied in a disparate committee called NATO. The similarity with the chaotic diplomacy that led to WW1 stops there: Russia under Vladimir Putin&rsquo;s leadership appears to have a good grasp of its objective.</p> <p><a href="" target="_blank">read more</a></p> Blog Alasdair Macleod Donetsk East energy EU Europe Gas Germany Luhansk NATO Niall Ferguson oil Putin Russia Ukraine war West World War 1 ww1 Wed, 20 Aug 2014 15:54:41 +0000 Alasdair Macleod 86672 at