“Easter Island was a practical joke that got out of hand.” – 3rd Rock from the Sun
And now you know what those statues are for! Found on Twitter – I have no idea who to attribute this to.
Many of the things that you think of as assets are, to someone else, debts:
- Your salary is a debt that your employer owes you – you’re a liability on their books.
- Payments like Social Security or Medicare or any other government payment – is a debt that’s funded by taxpayers.
- Your bank deposits are a liability on the books of the bank – technically you gave them a loan that they would have to pay back at some point.
This goes on and on, but I think this gives a flavor of the concept that debts are double-sided. Your debt is someone else’s asset, and vice versa. I’ve heard people (especially after a few beers) slur at the ceiling that the debt the economy is facing is, somehow, easily a solvable problem. “Jus’ eliminate the debt!” This is often followed by, “gonna be right back – gotta get rid of some of this beer.”
Well, if the bank did that, every one of my checks would bounce, which tends to irritate me, since by eliminating all of their debt, they eliminate all of my deposits. Yikes!
And if the government just said “debt’s gone – we forgive ourselves,” everyone who owned government bonds would be broke.
It’s interesting that this concept (asset requires a debt) only applies to financial instruments. If I own a car, or a really cool PEZ® dispenser and have NO loan against it, well, that asset is just an asset. It’s not someone else’s liability. This is rather crucial because the average dollar bill that is available in the United States is borrowed into existence. Take one of them out – look at it. It’s called a Federal Reserve Note. You’re actually walking around with a bit of somebody else’s debt in your pocket.
This wasn’t always the case. In fact, as recently as 1963, silver certificates were issued. These were just called . . . dollars. And they implied that you were still the holder of a debt, but the debt was payable in silver. Which is way better than a current dollar, which is payable in . . . another dollar.
Look, Ma, no Fed!
Again, if I own an asset, there’s just no debt that goes against it. Keep that in mind . . . .
Okay, how much debt is out there? Well, I was reading John Maudlin’s post (LINK) and he had a number. It was a LOT. Like $250,000,000,000,000. That’s $250 trillion dollars. And to think, some people don’t make that much in a year!
So who owes this debt?
Well, corporations owe a huge chunk. And why not? Governments around the world have been force-feeding them money since 2008. Corporations, per Maudlin, own 41% of the increase. But the big owner? Governments. You can fiddle around with a maps and see how doomed your country is by going here (LINK).
As a note, the United States has a combined total of over $47 trillion in combined government, corporate, and household debt. If we didn’t eat or go to the movies or do anything else, we could pay it off in 2.5 years . . . .
But what happens when the debtor fails?
- If the government fails? No Social Security. No free PEZ® monthly. No food stamps.
- If the company fails? No salary.
- If the bank fails? All of your money above $250,000 in a particular bank vaporizes. There are exceptions, but you can sort that out for yourself.
How likely is any of that to happen?
Governments fail all the time – and their currencies, historically, fail even more especially when we’ve reached the point where most currencies are backed by nothing. A silver certificate promised a certain amount of silver. Our current world currencies just promise that they’re worth a dollar, or a euro, or a ruble, or a yen – they have no intrinsic value. So, yeah. This really happens. And what’s one way to get out of debt, if you’re a government? Print lots of money. Oh, and your money isn’t worth so much after they pull that little trick. Again.
Companies can’t print money, or at least not for very long before they get Enron®-marched off to jail. But companies fail or disappear at a pretty significant rate. The average lifespan of a company, big or small? 10 years – then they get sold off or fail. Some, of course, last longer, like Sears®. Oh . . . nevermind.
Banks rarely fail so that your assets disappear, at least they haven’t since the Roosevelt presidency. For that to happen would call into question the entire financial system – so governments will print money by the bucket load so banks don’t fail. Make cars? You can fail. Make burgers? You can fail. Loan money at interest? Your doors will never close – worst case some other bank will be enticed to take you over.
One thing, as Maudlin mentions, is government hasn’t ever taxed actual wealth like your pile of silver or your vintage collection of Sarah Michelle Gellar photographs. Maudlin’s pretty convinced that the next debt crisis will be so big and difficult that governments will look at all the medium-size piles of wealth around the country, and start just plundering that like a pirate on a vacation. They’ll never get the big guys – those folks will move their money to places that even the IRS and God won’t be able to find. Like Easter Island. Or, (shudder) Cleveland.
REMEMBER, JOHN WILDER IS NOT A FINANCIAL PLANNER. I do hold positions in US Currency, and will probably get of some dollars in the next few days to establish positions in PEZ™, maybe a nice bottle of wine, or a steak.
Hawaii note mentioned in comments:
John
Maudlin is wrong. Governments handle debt crises with devaluation. They are doing it right now. It’s simple. If you need to pay back a trillion dollar debt, pay back dollar for dollar (plus fixed interest rates) with dollars which are worth significantly less than those you received. This is usually the domain of Argentina, Brazil and other high inflation countries but the US did this during the late 70’s. The government is loath to place asset taxes.
They are, and I generally agree they’ll try to play with the money value first. But certain groups (cough cough) leftists are okay with making everyone poor, if they can hurt the rich. Makes no sense, but there’s a post coming on that . . .
So, building wealth – in dollars – is an illusion. True wealth has to be measured in tangibles. (The assets like PEZ dispensers you mentioned.)
It is certainly a category of risk that you have very limited control on. Other people control the value of your asset if they have it (i.e., banks and your money). I almost posted a picture of a “Hawaii” note. These were regular Federal Reserve notes that were stamped “Hawaii”. Just in case the Japanese attacked – they then could declare those dollars worthless. The Army burned millions of dollars in crematoriums(!) because shipping it back to the mainland would have been too expensive. The number of dollars each citizen could have were limited by law . . . heck, I’ll post a picture in the post.
“Render unto Caesar . . . “
Just an interesting aside on the Hawaii Certificate… the “HAWAII” was printed on after the initial run of them b/c of the fear of the Japanese possibly invading the Islands and capturing all the $$$ there. It’s called a Hawaiian Overprint… From Wiki: “A Hawaii overprint note is one of a series of banknotes (one silver certificate and three Federal Reserve Notes) issued during World War II as an emergency issue after the attack on Pearl Harbor. The intent of the overprints was to easily distinguish US currency captured by Japanese forces in the event of an invasion of Hawaii and render the bills useless.” My best friend growing up had a stack of the silver certificates… they were pretty cool…
Note to self… read the comments above… LOL