This page has been archived and commenting is disabled.

Guest Post: Where's The Collateral?

Tyler Durden's picture




 

Submitted by Charles Hugh Smith from Of Two Minds

Where's the Collateral?

A sound system of credit is built on collateral. A doomed system of debt sits precariously on phantom collateral.

The global "recovery" is based not on reducing debt but on increasing it. Nice, but where's the collateral? The basic idea of debt is that credit is extended based on collateral, i.e. something of enduring, tradable value, or an income stream that isn't reduced to zero by non-discretionary spending and taxes.

A funny thing happened to collateral like housing equity and financial assets in the past four years--it shrank by trillions of dollars. According to the latest Z1 "Balance Sheet of Households and Non-Profits" from the Federal Reserve, real estate fell by $4.9 trillion since the bubble top in 2007 and owners' equity lost $4.2 trillion.

Despite the stock market doubling since 2009 and a healthy run-up in the value of bonds, financial assets shrank by $2 trillion as well.

These are non-trivial sums when we consider that collateral is generally leveraged. If a home buyer puts down 20% cash, then that cash collateral is leveraged 4-to-1 in an 80% mortgage. If the buyer puts down 3% (as in an FHA loan), then the leverage is over 30-to-1.

Collateral matters when it comes to assessing the value of the debt. If a bank lists the mortgages in its "assets" column at full value even though the underlying collateral (the houses) has lost much of their value, then the bank is grossly over-estimating the value and security of the mortgage. The bank's "assets" are based on phantom collateral.

Take away $1 in collateral and you impair $4, $10, $20 or even $30 of debt.

Recall that the vast majority of real estate equity and financial wealth is owned by the top 20%, with the majority of that concentrated in the top 5%. That means the bottom 80% own little collateral to leverage into debt.

How about leveraging income into more debt? Since the top 10% receive almost 50% of the income, and most of the bottom 90%'s income goes to non-discretionary spending and taxes, then only the top 10% have discretionary income that can be leveraged into more debt.

Interestingly, The Wedge between Productivity and Wages by economist Mark Thoma reports that the enormous advances in productivity over the past few decades did not translate into higher wages for the bottom 90%.

I have often addressed income disparity and the evaporation of collateral, for example, Two Americas: The Gap Between the Top 5% and the Bottom 95% Widens (August 18, 2010) and The Housing Bubble Broke the Middle Class (April 27, 2011).

Regardless of the various causal factors, the fact remains that 90% of American households have limited collateral or discretionary income to leverage into more debt. That leaves around 10 million households (the top 10%) with the means to take on more debt--if they want to. Can 10% of the households prop up the entire economy with more debt and consumption? What if the wealthy decline the opportunity to leverage more debt?

We can also ask "where's the collateral?" of the banking sector. As frequent contributor Harun I. observed about the European banking sector's phantom collateral:

European banks do not have enough money for deposit redemptions (people withdrawing their cash from the banks) and the only way to get it is to have the European Central Bank (ECB) print money out of thin air thereby devaluing every euro, thereby destroying purchasing power (you get your money but it buys less).

 

And what collateral are the banks providing for these loans? The sovereign debt of countries that are insolvent. Why not sell the bonds to raise the capital that is rightfully owed to depositors so that they could receive their money at par? Why then bond prices would tumble and governments would be forced to borrow at much higher interest rates. But borrow from whom? Insolvent banks that must have money printed to give depositors their money back at a fraction of its worth from when they deposited it. Not due to market forces which indicate their labor is worth less but because everybody just wants what's rightfully theirs.

 

So to summarize this, the ECB prints money to buy the bonds of insolvent banks which are backed by the bonds of insolvent nations. The result of which is insolvent nations or in reality the people thereof are not only poorer, they are now responsible for paying back money that was their property to begin with... at interest.

Put these two factors together and you get a global economy dependent on debt borrowed against phantom collateral and an American economy in which only the top 10% have credible collateral and income to leverage into more debt. In a sane system, when the collateral vanishes, so too does the debt (writedowns, write-offs, bankruptcy, take your pick). In an insane system, then phantom collateral supports ever greater mountains of debt.

How long do you reckon the insane system we have now will last? The collateral is phantom, but the interest payments are very, very real.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 05/01/2012 - 10:59 | 2388150 lolmao500
lolmao500's picture

Collateral is for the mafia, not the banks!

Tue, 05/01/2012 - 11:07 | 2388180 Dr. Richard Head
Dr. Richard Head's picture

Ben Bernanke shits in a bucket and securitizes it through his primary banks.  Jim Cramer gets on the boob tube and talks up this bucket of shit, while Krugman writes various essays on the quality of said shit.  Ganstas indeed.

Tue, 05/01/2012 - 11:10 | 2388192 Oh regional Indian
Oh regional Indian's picture

Az soon as the 100 monkey reading this or any other such line realizes that he/she IS the collateral, something will change.

Your ass is collateral, dear reader. The War of independence was never won. Not in Idnia, not in the US, not in Jamaica, nowhere in Africa, all a big screaming scam.

I'm serious. This article above is meaningless. All .govs have massive collateral. Any wonder they try to fill up their countries as much as they can?

ori

Tue, 05/01/2012 - 11:19 | 2388212 Dr. Richard Head
Dr. Richard Head's picture

Hence the social security number, social insurance number, etc. tracking.  It is our loan document number.

Tue, 05/01/2012 - 11:29 | 2388274 Oh regional Indian
Oh regional Indian's picture

Yup. I'd recommend everyone take a good read of thsi slightly dense but mind-boggling book available on the net.

Everyone because we've all been had in EXACTLY the same pattern/fashion, world over.

And ignite some debate, the facts are undeniable...

 

http://www.civil-liberties.com/books/main.html

 

What are you going to do?

ori

Bangalore Through My Dash Cam

Tue, 05/01/2012 - 16:23 | 2389220 LowProfile
LowProfile's picture

ORI, I've given you some shit for posting some seriously half-baked stuff here in the past, but that link (so far) is pretty damned interesting.

Thanks!

Tue, 05/01/2012 - 11:30 | 2388263 Bicycle Repairman
Bicycle Repairman's picture

 What is the collateral backing the state's debt?  It is the state's power to tax.  This is well known and shouldn't be a surprise to anyone here.  As long as you have income or wealth, the state's debt is secure.

Tue, 05/01/2012 - 11:34 | 2388286 Oh regional Indian
Oh regional Indian's picture

Take a read above B Repairman, and spread the word. 

Really, everyone should read this. It's the playbook and the basis of the big lie. Documented, foot-noted, corss-referenced.... crazy making.

ori

Edit:

 

Just to see how important it is to know words and their history, check this out:

collateral (adj.) 
late 14c., "accompanying," also "descended from the same stock," from O.Fr. collateral (13c.), from M.L. collateralis "accompanying," lit. "side by side," from L. com- "together" (see com-) + lateralis "of the side," from latus "a side" (see oblate (n.)). Lit. sense of "parallel, along the side of" attested in English from mid-15c. As a noun, from 16c., "colleague, associate." Meaning "thing given as security" is from 1832, Amer.Eng., from plrase collateral security (1720). Related: Collaterally.

Tue, 05/01/2012 - 13:21 | 2388539 Likstane
Likstane's picture

Good stuff, Indian.   Ultimately, every citizen is indebted to his owning country(corporation).  The illusion of individual sovereignty has been propagated even by the supposed guaranteer of said condition(USA corp.)  The control of a persons life is maintained by debt to the country(corporation).  The less debt, the less control that country has.  The right/duty of citizenship(the states claim on you), can be replaced with other assets for awhile, but they are almost all eventually backed(collaterallized) by something of value.  Your life, after gold, silver, property, food and water, is really just your last(real sovereign) asset.   None of us chose this ownership, but most of us tacitly agree to it by complying with the (countries/corporations) regulations.

Tue, 05/01/2012 - 14:04 | 2388740 I am on to you
I am on to you's picture

Oh right Indian,the word is democracy,this is the biggest illusion ever created.

Democracy is the collateral,mening yes everyone,i dint read the book you advised,might do so!

We always were kept under control,they just gave us a litle candy!

Tue, 05/01/2012 - 11:40 | 2388324 CPL
CPL's picture

Federal is broke.

States are broke

Municipalities are broke.

 

Who says the debt is secure?  Considering nobody seems interested in saving money, or hindering spending.

 

Why would you bother even looking at helping in anyways.  Let it die.  Pull the plug and be done with it.

Tue, 05/01/2012 - 11:59 | 2388394 Bicycle Repairman
Bicycle Repairman's picture

I don't think the state wants to pull the plug.  And they are going to "volunteer" your help.

Tue, 05/01/2012 - 11:29 | 2388270 Debugas
Debugas's picture

are you asking me (in order to stop paying taxes) to drop my job ?

Tue, 05/01/2012 - 11:30 | 2388281 francis_sawyer
francis_sawyer's picture

As I look around, I'm seeing a lot of 'Collateral Damage'... Does that count for anything?

Tue, 05/01/2012 - 11:20 | 2388217 duo
duo's picture

Where is the collateral for $1T of student loans?  Can a brain be repossessed?

Interesting that the interest expense of $1T in student loans at 5%, 50 $billion, would be about 60% of all the tuition spent this year.  Soon the interest on student loans could finance everyone in college!

Tue, 05/01/2012 - 11:03 | 2388164 djsmps
djsmps's picture

Two simultaneous headlines:
CNBAPPL: Fed's Evans Tells CNBC He Sees 'Tremendous Room' for More Easing, But Lockhart Is 'Reticent to Pull Trigger'
Reuters: Fed officials, hawk and dove, agree: no more easing

Tue, 05/01/2012 - 11:27 | 2388259 SheepDog-One
SheepDog-One's picture

Yea right, TREMENDOUS room for more easing here with oil at $106. Hey you GO FOR IT Evans! 

Tue, 05/01/2012 - 11:04 | 2388169 cossack55
cossack55's picture

The collateral may be phantoms, but at least the politicians are corrupt scumbags.

Tue, 05/01/2012 - 11:06 | 2388178 CPL
CPL's picture

If looking sideways at the housing affair and include all the scavenging that has been occuring in empty homes, occupied homes and even home sites that haven't been built.

 

The only collateral left in all those homes is the plaster in the walls and the wood that holds them up.

 

Here's a google news query.  If you want to know what's happening local put your city/state/country where the LOCATIONHERE is located.

(wire|cable|copper|metal|lights|solar|scrap|oil) (stolen|steal|theft|stolen|damaged) (thieves|criminal|crime|crook|thief) (target|home|city|district|street|local) LOCATIONHERE <--***

 

 

Tue, 05/01/2012 - 11:26 | 2388254 Dapper Dan
Dapper Dan's picture

 

April 30, 2012

The Banks New Shell Game Reinflating a New Housing Bubble? by MIKE WHITNEY

Have housing prices hit bottom?

So, how long will the banks be able to keep their stockpile of homes out of view?

Who knows? What we keep hearing from the realtors we’ve talked to is that inventory has virtually dried up over the last year. Now some of this has to do with the robo-signing flap. Many of the banks decided it would be better to slow their foreclosures until a settlement was reached in the case, which is what they did. But that doesn’t explain why inventories have plunged as much as they have. Just take a look at this list of cities from Redfin which records the year-over-year declines in the number of homes for sale in January:

•Denver (Denver County): -47%

•San Francisco (San Francisco County): -42%

•Phoenix (Maricopa County): -40%

•San Diego (San Diego County): -38%

•Portland (Multnomah County): -37%

•Seattle (King County): -32%

•Orange County: -32%

•Washington DC: -28%

•Los Angeles (Los Angeles County): -27%

•Dallas (Dallas County): -27%

•Las Vegas (Clark County): -16%

•Atlanta (Fulton County): -13%

Does that look normal to you or does it look like the banks are deliberately withholding supply to drive up prices and create the illusion of a market turnaround?

see the rest at counterpunch

http://www.counterpunch.org/2012/04/30/reinflating-a-new-housing-bubble/

Tue, 05/01/2012 - 11:35 | 2388300 CPL
CPL's picture

It's going to be the most beautiful Financial Explosion ever.

 

Nothing will be left will it?

Tue, 05/01/2012 - 12:02 | 2388406 Bicycle Repairman
Bicycle Repairman's picture

No collateral left in those homes?  Take another look at "mark to model".  The banks and FASB dare to differ.

Tue, 05/01/2012 - 17:24 | 2389421 CPL
CPL's picture

Sadly yes. 

 

Goddamn FASB.  Never seen an ace played so fast in a game of poker to win a 2 dollar pot.

Tue, 05/01/2012 - 11:10 | 2388182 LawsofPhysics
LawsofPhysics's picture

As MF-Global (and numerous versions of such organizations before it) has most recently shown.  Possession is the law.  You want collateral, come and get it, bitchez.

History rythmes, especially when it comes to paper promises, same as it ever was.

Tue, 05/01/2012 - 11:42 | 2388333 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1

Keep your collateral OUT of the financial system.  Else it gets hypothecated by thieves.

Tue, 05/01/2012 - 11:11 | 2388186 Dr. Engali
Dr. Engali's picture

 

"How long do you reckon the insane system we have now will last? The collateral is phantom, but the interest payments are very, very real".

It will last as long as the sheeple blissfully sleep. They have been sufficiently dumbed down to the point where they except the system as a legitimate long term economy. The sheep  don't understand the fact that they are living an illusion and they are pulling forward generations worth of economic activity so they can have their iPads now.

Tue, 05/01/2012 - 11:10 | 2388188 Wannabee
Wannabee's picture

Mark-to-market does not apply to "inniovative financial products". Greenspan told me.

Tue, 05/01/2012 - 11:11 | 2388195 GMadScientist
GMadScientist's picture

"What interest payment?" - G7 "home-owner"

 

Tue, 05/01/2012 - 11:15 | 2388202 asteroids
asteroids's picture

Mr. Smith makes an interesting point. Do US banks have enough cash on hand to handle a run on the banks?

Tue, 05/01/2012 - 11:18 | 2388209 SheepDog-One
SheepDog-One's picture

I took out $5,000 cash from the bank a week ago, you'd think from the flustered look on everyones faces running around that a robbery was taking place! Took me over an hour.

Tue, 05/01/2012 - 11:24 | 2388228 Dr. Richard Head
Dr. Richard Head's picture

My $12K withdrawal - nice commission last month - required them to scan my license and fill out a report which included questions such as;

What is your profession? Answer - Sales

What kind of sales sir? Answer - Services

Any reason why you are being so sparse in your answers? Answer - It's none of your god damned business.

Sir, if you have nothing to hide? Ansswer - When did non-disclosure of one's intention for federal reserve notes constitute a crime?

Are you going to buy somethign nice with this money? Answer - I sure am.

Parting blow was the comment about stupid people in America giving up every ounce of their privacy to their government was a sad state of affairs.

Fucking automatron seacow.

Tue, 05/01/2012 - 11:37 | 2388316 CPL
CPL's picture

Just get a cashiers check and use it like cash.  Sign on the back and you are done.

Tue, 05/01/2012 - 11:43 | 2388341 DoChenRollingBearing
DoChenRollingBearing's picture

Not quite as anonymous if you are buying gold at the coin shop though.

Some paper > than other paper.

Tue, 05/01/2012 - 12:08 | 2388438 John Law Lives
John Law Lives's picture

"Parting blow was the comment about stupid people in America giving up every ounce of their privacy to their government was a sad state of affairs."

It is even more amazing how many daft people willingly fill up "personal networking" sites like Facebook with their personal information.  I don't have a Facebook account, but I am amazed by how much information some people I know have put in their profile (they showed their profiles to me).  Amazing... and not a good idea.

 

Tue, 05/01/2012 - 19:41 | 2389665 Matt
Matt's picture

Easy solution, just create 10 dummy accounts for every real person and fill them with fake info. Drown the observation system with fake info. I'm sure the giant NSA database will have each person, but it will require actual human beings to sort out which are real profiles.

Tue, 05/01/2012 - 15:15 | 2388952 metaforge
metaforge's picture

Small amounts over time - avoid the interrogation.

Tue, 05/01/2012 - 11:18 | 2388214 Dr. Engali
Dr. Engali's picture

The peasants are too stupid to make a run on the banks. They think the banks are "safe". The name Corzine means nothing to them.

Tue, 05/01/2012 - 11:24 | 2388240 SheepDog-One
SheepDog-One's picture

'The money is safe in a bank' LOL what was the latest from FDIC, they have about $50 million dollars? LOL

Tue, 05/01/2012 - 19:45 | 2389677 Matt
Matt's picture

This is why the steady move away from paper money. Once you have purely digital currency,a bank run can never really happen since the central banks can refill the digits as fast as people can take them away.

Tue, 05/01/2012 - 11:15 | 2388204 SheepDog-One
SheepDog-One's picture

The peasants dont have any collateral? Wow!

Tue, 05/01/2012 - 11:17 | 2388206 John Law Lives
John Law Lives's picture

"Despite the stock market doubling since 2009..."

The Great Chairsatan knows he can not fix the moribund housing market or the job market, so he pumps the stock market to promote the illusion of recovery.

100% FUBAR.

Tue, 05/01/2012 - 11:20 | 2388216 SheepDog-One
SheepDog-One's picture

Yep, all meaningless as the INDEXES float on up to match the past record bubble highs, I'd like to see it cashed out. Cant happen, its just fake illusion.

Tue, 05/01/2012 - 11:30 | 2388275 Umh
Umh's picture

The stock market boom is a by product of keeping the should have failed banks going and the governments interest payments down. When those two objectives are obtained or no longer needed you need to watch out.

Tue, 05/01/2012 - 11:17 | 2388208 The Alarmist
The Alarmist's picture

Where's the collateral? Where's Jon Corzine?

Tue, 05/01/2012 - 11:19 | 2388213 LongSoupLine
LongSoupLine's picture

 

 

The collateral is in the bank accts of the middle class.  If that's empty, it's whatever they own or are wearing.

Tue, 05/01/2012 - 11:22 | 2388226 SheepDog-One
SheepDog-One's picture

My bank account I keep empty, except for a few hundred bucks in case I need a check. 

Tue, 05/01/2012 - 12:15 | 2388458 John Law Lives
John Law Lives's picture

I also don't keep much money in the bank.  It doesn't seem to make much sense to earn almost zero interest on a bank account and then get gigged by various fees seemingly at the bank's whim.

Tue, 05/01/2012 - 11:35 | 2388215 LouisDega
LouisDega's picture

Del.

Tue, 05/01/2012 - 11:26 | 2388250 dbTX
dbTX's picture

We aint got no collateral, we don't need no stinking collateral.

Tue, 05/01/2012 - 11:27 | 2388261 Caviar Emptor
Caviar Emptor's picture

Here's the imminent problem: inflation is once again breaking out all over the rest of the world. 

Today's alarm bell is Indonesia with food infaltion fears rising again:

http://www.bloomberg.com/news/2012-05-01/indonesia-s-inflation-accelerat...

http://www.bloomberg.com/news/2012-05-01/indonesia-s-inflation-accelerat...

And here is the feckless attitude that explains the problem: 

*GREENSPAN SAYS LOW FED RATES DIDN'T FUEL HOUSING BOOM

Tue, 05/01/2012 - 11:47 | 2388350 LawsofPhysics
LawsofPhysics's picture

Greenspan is correct.  Low rates are not a problem if banks do their fucking job and due diligence.  The low rates did facilitate the ability of many to live high on the hog regardless of their actual productive output.  FAIL

Tue, 05/01/2012 - 15:18 | 2388963 metaforge
metaforge's picture

Why should they "do their job" when they know they can immediately bounce the mortgages off their books and onto Freddie/Fannie/MBS, and in the worst case scenario, they get bailed out?

Tue, 05/01/2012 - 11:37 | 2388311 Hallpass2012
Hallpass2012's picture

who needs collateral? lol this is America, just borrow and run a ponzi yourself!!!!

Tue, 05/01/2012 - 11:40 | 2388326 DavidC
DavidC's picture

"Where's the Collateral?"

Silly Charles Hugh Smith - the collateral is the existing debt of course!

DavidC

Tue, 05/01/2012 - 11:44 | 2388336 ebworthen
ebworthen's picture

"Income Gains by Quintile"

Excellent chart, showing the parasitization post '79 of productive output, careers, and of the middle class (or in other words, of the "American Dream").

Really enjoy your articles Charles, keep up the good work.

Tue, 05/01/2012 - 11:46 | 2388347 spine001
spine001's picture

Dear Tyler, Your articles are extremly good most times. And this one is no exception. Nevertheless, it doesn't surprise me that you are missing the point of your own article, such is the brainwashing that all economists and financiers have done on most of us.

When you have a LOT more debt than collateral, as your articles illustrates so well in a system where bankrupcies are not allowed (to protect the system due to interconnectivity). What realy happens is that the value of the collateral (the real value, ie the true value of empty and gutted houses),  becomes:

Total value of real assets and income streams = Total Debt

I know, this would mean that the real value of anything today would be many times over its market value. True. People have not realized this, and some still believe that the FOMC will at some point remove the easing to preempt it from happening. I have been contending for a while, sadly unsuccessfully (current economic models are too entrenched in the main stream) that chaos theory, combined with game theory mathematically predict a new attractor for inflation stated by the equation above and that the move to that attracor will be so fast that NOTHING the FOMC or central bankers can do will preempt it, short of WWIII. Sadly, I recently found out that Steve Hawkins is in my camp by listening to his last conference that you can find in youtube. He is concerned that humanity may not survive the next 100 years, I sadly agree with him, that we are at the highest risk place in our history, perception that only very few have.

The transition to this attractor will not be accepted by the masses, neither by the leadership, since as you very well have described it can only occur by massive shifts in wealth from the top 5% to the bottom 95%. Sadly, the top 5% controld the weapons, and need I remind everybody of what Nixon used to say? That wars are the best way to increase per capita GDP.... :(

Until next time,

Engineer

Tue, 05/01/2012 - 16:07 | 2389142 hooligan2009
hooligan2009's picture

Don't be sad. All thought has value and the possibiltiy of solutions. Here are my (neither happy nor sad) thoughts.

 

Thought provoking. Lets take the equation "The value of debt must = the value of real assets plus income streams."

The article posits that this is not true because the value of debt is no longer tied to the value of assets and must fall. If I read you right, you believe that the value of real assets must rise to the value of the issued debt. Not because value is being created, but because debt is being printed and must equate to assets plus the PV of income streams.

Well firstly, the value of real assets is only the present value of discounted future income streams. The Fed is attempting to say that these future income streams are worth more by rigging the discount factor as far out as it can. The trouble is, it is creating an equal and opposite increase in liabilities to do this. It is a zero sum game and the Fed's antics are worthless. They have no value. Any increase in the present value of future income streams is entirely negated by the increase in the present value of debt.

Before intervention Real Asset value = PV of Cash Flow Stream

After intervention Real Asset value + Fed Assets = PV of Cash Flow Stream + Fed Liabilities.

Hence, you may as well simply cancel the Fed's balance sheet, since it made no difference in the first place and will make no difference once its cancelled. It is entirely circular (less the loss of time, money and effort implementing such a ridiculous model). 

You can swap the Fed Assets and Liabilities over and work out if the Fed is sterilising the economy, rather than the fiscal deficit , but since we are at 100% Debt to GDP it is all academic. We are at that place where the economy is tipping into consumption only with no asset creation. If it takes 1 dollar borrowed to create one dollar of consumption which counts as output in GDP, you are just left with one dollar of debt and nothing else.

All consumption is debt creation that will never be paid back if it is not backed by an asset. In that I agree with your broader conjecture that economics is fundamentally flawed as a relevant measuring device of human activity. It is (human) bullshit. Once you consume something it is gone and you either need more or you switch consumption patterns. However, the resources available are finite and not infinite, so you simply can't keep doing this without some kind of revolution (coal, gasoline, nuclear within energy or pasta, rice and potatoes for starch and sheep, seaweed or whatever else for protein. There is of course, no substitute for water, or dying.  

Going back to the article, what isn't circular is the fact that there are assets that there is a diminishing pool of assets that continue to produce cash flow and which are not based on (debt creating) consumption. The value of the pool of assets (collateral) is falling and is being used to secure the increasing amount of debt.

In my view, the value of the debt has to fall to align with the value of the assets. The mechanism is either correctly measuring the value of the cash flow producing assets (not the consumption prompted by welfare democracy) which means correctly valuing the assets at a market clearing price that is open to all (without government qualifying who is allowed and who isn't). The value of debt is then also apparent. You can't have debt (collateral) than is worth more than the asset. 

In my view, the figures on the fall in household assets in housing and other financial assets imply that we are using c. 6-7 trillion dollars of collateral (debt) that has no value.

By way of example, say you borrowed 10,000 to buy a 10,000 car. You did it because you thought the car would produce 12,000 in income. In your argument (I think) you are saying it is still worth 10,000 because that's what you borrowed. The problem is, the car (US economy) is producing 7,000 in income and you have increased your borrowings by 5,000 a year to make up for your consumptive behaviour, so after, say four years, you owe 30,000. How much is the car worth? That is your income generating asset. Are there cheaper cars out there that can produce 7,000 in income, or is the market judging your income producing trend as in a downward spiral and anyone can do what you do. 

Anyway, thought provoking. Assets are completely independent of their financing. As assets (collateral in the article) drop in value, then the value of the financing (whether it is debt or equity) also drops in value by the same amount. That is the equation. The value of assets is equal to the value of debt plus the value of equity. This can be turned round anyway you want it.

 

 

Tue, 05/01/2012 - 19:52 | 2389691 Matt
Matt's picture

If you actually read the article, the first thing you see at the top is that it was:

Submitted by Charles Hugh Smith from Of Two Minds

 

You propose that assets will appreciate to equal debt. Have you considered that the debt could depreciate to equal assets, instead?

Tue, 05/01/2012 - 12:01 | 2388395 falak pema
falak pema's picture

collateral is not the issue, legitimacy of government is the issue. If the elected people in a democratic republic do not represent general interest, do not apply existing laws, encourage biaised actions by oligarchies, favour a 1% population's interest, of which they themselves be an integral part, at the expense of the 99% others, then the founding postulates of good, legal government have been violated. On this blog and in this post this is the underlying impression based on uncontested evidence provided here since the crisis of 2008. The US government is no longer beacon of free world; even if you think it was during the great generation days.

The only way forward is not to throw the baby of rule of law in a republic out with the bath water of corruption and crony capitalism, now mired in unending debt cycle. For the US nation to survive IMHO we need a new awakening in the people of the United States; no other reasonable way out.

Collateral is the issue when Robber barons find that the people remain sheeple and the revolt will never come. It feeds their unending greed.

Tue, 05/01/2012 - 12:04 | 2388415 Jason T
Jason T's picture

I think productivity growth is going to suck these next few years and that is what will cause inflation and more volume demand collapse as prices go up but wages

Tue, 05/01/2012 - 13:46 | 2388685 newworldorder
newworldorder's picture

Collateral is what the worlds Central Banks say it is. The accounting profession and the rating agencies have given their blessings to this concept. The man on the street does not know any better.

Tue, 05/01/2012 - 15:52 | 2389108 LouisDega
LouisDega's picture

I have nothing. I am broke. The only thing of value i own is my Jerry Vale CD collection.

Tue, 05/01/2012 - 15:53 | 2389109 LouisDega
LouisDega's picture

Duplicate

Do NOT follow this link or you will be banned from the site!