Comparing Household Net Worth to Total Credit: U.S. Is Insolvent

[Crewleader]

Comparing Household Net Worth to Total Credit: U.S. Is Insolvent (March 17, 2010)

by charles hugh smith


Total credit in the U.S. has surpassed household net worth. We are insolvent.


Total credit in the U.S. has surpassed household net worth. Without getting too fancy--even without counting the gazillion dollars of derivatives floating around, and all the off-balance accounting tricks of the banks, etc.--this is the definition of insolvency (debts exceed assets).

Astute correspondent Angry Saver submitted two charts for our review, and some explanatory commentary.

http://www.oftwominds.com/blogmar10/networth-credit03-10.html

[BridgeTheGap]

1. Assuming that definition to be true, I'm guessing all new homeowners are "insolvent" when

they get a mortgage...or at least in the 90s up to 2008. Think about it. Who, at the time they get a mortgage, assuming even a 10-20% down payment, holds assets that exceed the amount of the mortgage, not even considering other debts?

[Warpy]

2. While that is technically true, don't forget they hold an asset

that exceeds the value of the mortgage, the house. At least that was the case until the bubble popped. Now, people out there have negative net worth because they likely owe more than their house would bring should they put it up for sale. Factor in credit card, student loan and car debts, and there are a lot of folks out there who are living the good life but who are really long past the bankruptcy point.

[BridgeTheGap]

4. Equity is what you actually own in the house. Until you're at 50% equity, your liability exceeds

the value of your asset (in this case, just the house - excluding other debts). The bubble is tragic and made the situation far worse BUT many, many people have been in the situation for years, if not decades. The key factor in supporting this system is employment/income. As long as that's happening at a sufficient level, the fact that so many people's liabilities exceed their assets isn't all that apparent. While the bubble caused some of this, it revealed far more of it that had been there for awhile.

[Warpy]

5. My statement about balancing asset with debt in a mortgage stands

but you're absolutely correct in stating that the collapse of the bubble exposed a problem that has been there for many years: negative net worth from floating a lifestyle on a combination of inadequate wages and debt. People who thought they were middle class because they surrounded themselves with all the middle class trappings purchased with credit are coming to the awful realization that when they look at the balance sheet, they're destitute.

They're also learning another hard lesson: jobs come and go but debt is always there and has to be paid no matter what.

[BridgeTheGap]

7. Unless you file bankruptcy, which they've made a much more daunting task. n.t

[econoclast]

3. Too bad the author can't to basic accounting

This might be a troubling statistic if it were remotely accurate. But it's not.

The author of the sited post flunked basic bookeeping! They have double counted Household Debt in their figures.

Hoesehold net worth is, by definition, household total assets minus household debt. So to get household NET worth we have already taken account for household debt. But the author then puts it back as part of Total Debt. They have double counted it.

The there is much more shoddy logic and data trickery in the article, but even forgetting about all that the true comparison should be Household Total Assets vs Total Debt.

Want to know why we are in the state we are in? Because most folks know bupkis about accounting/finance. Rather they believe whatever some supposed "expert" tells them......starting with "Sure you can afford that house!"

Sad.

[Warpy]

6. They tried to pressure me into an ARM

in 1996, so it was going on before the bubble really started to inflate. "But you can afford so much more house with an adjustable mortgage! Low rates are here to stay! You can't pass this up!"

I had to gather my papers and head for the door to get them to stop talking tommyrot and write that 30 year paper.