The rest of the dinner table deficit/debt discussion: Equity

I promise, there are numbers here, but lets have some fun first and write a screen play to set up the point. It is long, but…

 
“Dear, I’m getting nervous. We seem to keep adding to how much money we owe and our income hasn’t changed for the better. What can we do?”
 
At this point of the conversation, the conservative ideology (Republican and Democratic Parties) suggests and encourages you to believe that the answer is something like: “Well Honey, as I look over the horizon I see no possibility for improving our current position. The only thing we can do is cut back on our spending. We have to stop spending on anything we don’t need to live. If we are willing to sacrifice then eventually we’ll have savings that we can then use to invest such that we have more income.”
 
Now, for most Americans at this moment in the euphemistically labeled “business cycle” Honey’s response would be: “But I don’t know where else we can cut!” Of course to the conservative there is always something that money is being spent on that is in actuality an indulgence for which one should repent and thus cut from their spending if said spending is greater than one’s income. This is true because no righteous individual would ever let the devil of consumption tempt them from the path to wealth heaven. Redeem one’s self through the power of restraint of consumption urges.
There are multiple things wrong with such a screenplay. For instance, I’ve noted in the past that we really do not need banks. You and I could do everything we want without a bank. I could build a business even, without a bank. Granted I could not build it as big and as fast as with working with a bank, but I could build one. What the bank does is allow one to borrow against the future. Lending allows the acceleration of the experience and results of the movement of money. Certainly that acceleration can result in a loss just as easily as a win, but then that is why we have all sorts of experts in money that can help one make the better odds beating decision such that the acceleration produces a win.  Dear is corrected in that they could do cuts and save and then take the next step.  It was Howard Prescott’s approach.
 
We’re talking about lending here. Borrowing money. It is accepted within that part of the conservative ideology which focuses on the concept of money that lending and borrowing are a given. It is an indisputable fact that such activity exists, is righteous and good. It is as much a part of the reality of life as oxygen is. It is a fact of nature. Nothing could ever be fully realized without lending and borrowing. Nothing! Thus banks are a necessity for life it’s self. So I hear.
 
Lending and borrowing is so much a part of nature that nature is currently ill and struggling because lending is not happening. Business can’t get loans and thus expand resulting in job creation.  At least that is what I have been told.
 
Businesses can’t get loans and expand and hire. Think about that statement and let’s change the screenplay. “Dear, I’m worried we are missing an opportunity here. You know our income is not changing and we are adding debt. If you would just let me borrow some money I could hire someone to help me around the house and buy the tickets to that ‘How to make money in real estate’ seminar. We could apply that knowledge and within a few years be making more money.”
 
Maybe you don’t think spending money on “How to make money in real estate” is the smart move, but is the proper natural answer to say: “Honey, you know we have to cut back on our spending and wait until we have saved enough to implement your plan.” ? Is the proper natural answer to tell someone to wait until they have saved their money before they decide to get an education? If your business is auto repair, is the proper answer to tell someone to wait until they have saved their money before they buy the tools needed for fixing cars? Would RI have been able to implement their emissions testing which required the purchase of dynos by the garages if the answer was: Wait until you have saved the money to buy the dyno?
 
Of course not. So this gets to one reason why the conservative concept, government borrowing is the wrong course of action, is it’s self so wrong never mind completely blasphemous according to their ideology. It is also why, when conservatives are in charge they do not cut and save.  They spend and borrow.  It is natural.
 
Let’s take Honey’s and Dear’s screenplay a little further. “But Dear, right now the rates are very low, lower than our mortgage. Also, the equity we have in the house is about 86%. I’ve consulted with the accountant, your friend the business consultant, listened to CNBC, Fox Business and interviewed others regarding ‘How to make money in real estate’. They all agree, my plan is doable and appears sound. If we just take about 15% of the equity, invest it in our knowledge and then apply the knowledge we will be doing better.”
 
We are now at the stickler of our dear conservative’s answer. “… I see no possibility for improving our current position…”. This is the part of the answer one has to believe in if you are to accept that the solution is only to cut and save. This is the part of the answer that completely will not fit, will make you choke, will make you stumble when considering any other scenario related to the dear conservative’s understanding of nature. Lending and borrowing is natural, righteous and good. Do you want to make the banks extinct in nature? If the answer is to “cut and save” then that is the implied desired results if we are to believe “I see no possibility for improving our current position”. Go ahead, try to gel the two concepts. Try to make your brain hold “I see no possibility, we must cut and save” and “lending and borrowing are natural, righteous and good” at the same time.
 
I ask you, be honest. Which screenplay seems the more likely for Honey and Dear as they sit around the table. Is it the one where they only cut spending or the one where a plan is laid out and they go to the bank so that they can accelerate the implementation and thus achieve the benefits sooner?  Which plan has the greater potential gain?  And, which one would be considered adding to the nations GDP? Are the vast majority of the 99% really just sitting back and accepting their lot or are they actually trying to plan and implement the plan? The simple fact that GDP is growing confirms the latter.
 
Here is the next thing wrong with the first screenplay but correct about the rewritten screenplay: equity.
At no time is the conservative (Republican or Democratic Party) using that word. Have your heard anyone talk about the nations equity? Its assets worth… net worth? Even by those who know we need to spend (the freshwater Keynes minded economists) I have not seen it mentioned as part of why we could borrow without fear. Borrowing is always justified with the rates are low, it would create jobs and grow the economy. Of course with the subscript caution note of maybe inflation in the future.
 
OK, everyone gets that part. Honey got that part. But, Honey understood it further: equity. Hell, the reason we had the real estate bubble is because the masses understood equity. The righteous and good and natural banks pulled a Monsanto genetic manipulation and turned it into a retail product removing it from it’s natural environment and contaminated everything but, that’s another story.
 
Assets. Tangible or otherwise. Currently the entire discussion regarding our debt and deficit are all done based on income. The numbers look huge.  $16.5 trillion in debt.  Deficits to add to the debt in the trillions and only $14 trillion per year to try to pay for it all. 
 
 
First, lets get Honey and Dear’s situation straight.  There is a very large chance as with you and I that their annual income did not and was in fact much less than the value of the house they purchased. Second, there are a vast majority of people who have, over 20 plus or minus years have paid off that house or are getting close to doing so with an annual income that is still multiples less than the value of the house. Get it? At the same time, that less than the value of the house annual income probably purchased some home improvements adding to the value of the assets? The income probably purchased some education, adding to the value of the assets? The income probably purchased some happy time, assuring the value of the knowledge assets? That less than the value of the house annual income has created assets over time worth more than the annual income. Multiples more. But, and lastly there is one major difference between Honey and Dear and We the People nation. The nation never will retire. Think about it for a moment.
 
I have been thinking about the problem with the use of the dinner table discussion as a vehicle for explaining the drive toward deficit reduction. I know the government is the counter force to all that the private sector does in an economy. I know about the World Banks report on intangible assets and our wealth creation. I have noted the 1% income was rising faster than our GDP. How long do you think that could/can go on, talk about dinner table discussion!  However, the public is in tune with the idea of dinner table discussions and the idea of cutting back to make ends meet at this moment in the “business cycle”. So what was missing?
 
The public knows you can’t spend more than you have at ever greater rates. I venture that the small business person knows you can’t take money out of the business faster than you can make it too. So, to try to convince them that deficit spending is the correct approach becomes the metaphor of spitting into the wind.
 
What was missing from the dinner table discussion was the word “equity”. Honey mentioned equity and the entire conversation took on an entirely different perspective. So, US equity? What is the value of our assets? What is our equity? Have we mortgaged so much of the equity that we can’t take advantage of nature and borrow? Of course, if this were the pre-recession period for sure the answer would be no. In fact, we would be able to borrow over 100% with no money down and no income check.  But, We the People have learned even if banking has not.
 
I went looking for equity numbers and found this article: Total Assets of the U.S. Economy $188 Trillion
 
The best source of asset market, or balance sheet, information we have today is the document Z1: Flow of Funds of the United States produced after the end of each quarter by the army of economists working at the Federal Reserve Board.
One way to do it is to add up the numbers that we do know. I have done so in line 13. We know there are $141,512 billion in financial assets. We know that just three of those sectors own $46,301 billion in tangible assets. Adding those two numbers together produces a (reported) total asset number of $187,813 billion…
 
I’m not going to argue with or for this persons approach to the calculation. There are some very good comments there regarding how to calculate the number. One person suggested this method:
 
A reasonable tack to estimate the networth of the nation is to use our traditional financial technique of discounting the future predictable cash flows, using a ‘elected’ rate for discounting the cash flows….So using this DCF discipline, we can posit that our net worth is about $234T.
 
 
My first house in 1988 was purchased based on this method.  I had $60K in the bank but, based on my income, presto…I was now worth $250K.  I was smart and only bought the house I knew I could afford, not what my new found wealth suggested.

At Wikipedia I learned that in 2008 the UN put our value at $118 trillion.

 
This is quit the range. $118 to $234 trillion.
 
Let’s rewrite the screenplay now. Honey convinced Dear that they should borrow the money so now they are talking to the bank. 
Natural Bank: “Hello Dear and Honey, how may I help you?”
Honey responds “Well, we need some money. Currently our income is $14 trillion dollars and our debt is about $16.5 trillion and we are getting a little behind. However, we have a plan to borrow some money and use it to improver our income flow. Here is our business plan”.
Natural Bank: “Well my quick read of your cover page looks promising, but I will need to let the department study it further. In the meantime, what are your assets worth, do you have any equity?”
Honey responds: “Yes, based on the latest evaluations for property tax purposes our equity conservatively measured is $118 trillion but based on income flows as high as $234 trillion. We like to use our own data tables from our accounting software and thus come up with $188 trillion”.
Natural Banker: “My, if this is true then certainly there is room to work with you. How much were you considering to borrow?  We don’t get many potential clients such as yourself.  I think we can give you a special rate too!”
 
Kind of changes the ending of the dinner table discussion doesn’t it? Honey and Dear have a debt that is between 7% of equity and 14% of equity. Natural Bank is normally willing to go 75% of equity. That gives us somewhere between $88.5 trillion and $175.5 trillion to invest in ourself. That is money right now we could put to work that, as every Honey and Dear including Honey and Dear Small Business knows, if they invest it with an eye on improving their life, their income from the increased value of the assets will more than pay for the loan. Also, the investment can only further improve the equity thus reducing the debt to equity ratio. We’ll ignore inflation’s effect on debt. This also ignores the fact that Dear and Honey are collecting rents from some of their assets that are well below historical market rates. They were doing some of their friends a favor, unfortunately at their personal expense.
 
There is one more thing. As noted the nation will never retire. There is no time in the life of the nation, unlike Honey and Dear where it will not work to produce income. Never. That means there is no time in the life of the nation where it will need to rely on savings to pay it’s bills.   In fact, if the nation decided to do this, it would die. Kind of like parts of Europe currently.
 
What do you think? Are you going to be the Dear that tells Honey “forget it”, just cut your spending until you can save the money? I think if you do, Honey is going to tell you where to go. In fact, I believe Honey has been telling Dear where to go for a while based on the polls. “If only you would just listen to me for once!”

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