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IPFS News Link • Pandemic

Go Big or Go Home

• https://dailyreckoning.com, By Charles Hugh

The point of this exercise is to distinguish between the market value of assets and net worth, which is what's left after debts are subtracted from the market value of assets.

Let's say the household has done very well for itself and owns assets worth $1 million: a home, a family business, 401K retirement accounts and a portfolio of stocks and other investments.

The household also has $500,000 in debts: home mortgage, auto loans, student loans and credit card balances.

The household net worth is thus $1,00‌0,00‌0 minus $500,000 = $500,000.

Let's say a typical financial crisis and recession occur, and the household's assets fall 30%. 30% of $1 million is $300,000, so the market value of the household's assets falls to $700,000.

Deduct the $500,000 in debts and the household's net worth has fallen to $200,000. The point here is debts remain regardless of what happens to the market value of assets owned by the household.

Then the speculative asset bubbles re-inflate, and the household takes on more debt in the euphoric expansion of confidence to buy a larger house, expand the family business and enjoy life more.

Now the household assets are worth $2 million, but debt has risen to $1.5 million. Net worth remains at $500,000, since debt has risen along with asset values.


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