Posts Tagged ‘subprime’

Wealth vs. Prosperity

Saturday, January 19th, 2008

Americans — and especially English-language media — commonly confuse wealth with prosperity. A primer:

  • Prosperity is how much you make. Wealth is how much you have.
  • Prosperity is revenue. Wealth is assets minus liabilities.
  • Prosperity is what America has (high GDP per capita). Wealth is what America doesn’t have (we’re a net debtor, i.e. negative equity).

Once you make this distinction clearly in your mind, you see the error everywhere. For example, consider this Reuters article about subprime lending in expensive neighborhoods. Reuters mistakenly refers to overleveraged owners of expensive homes as “wealthy.” This is obviously wrong, since the source of their problem is insufficient equity, i.e. insufficient wealth. They are prosperous, but spendy, and hence not wealthy enough to stay in their homes.

Discovering a reasoning error is often enough to change behavior. If the wealth/prosperity distinction were clearly understood by more Americans, we would grow rapidly wealthier. China’s government and citizenry understand the distinction, which is a big reason they are advancing so fast.

Life Imitates Monopoly

Tuesday, December 4th, 2007

Ah, youth. How fondly I remember the endless Monopoly games of summer, in which the winner would loan ever greater sums to the loser, thereby averting bankruptcy and continuing the game.

“You landed on Park Place again? What a shame! And me with hotels there. Don’t worry, I’ll loan you the $1,500, and you just keep right on rolling.”

Evidently the scions of our federal government were similarly raised. Lenders going insolvent? No problem, we’ll loan you more, and cheaper, to keep you going. Borrowers feeling strapped? No problem, we’ll simply tear up your mortgage contract and write a new one where you pay less.

Japan tried this in the 1990s, in case you don’t remember.

Argentina, not Japan

Tuesday, December 4th, 2007

Pundits worry the mortgage collapse may push us into Japan-style deflation. That’s one possibility, but there is a more likely one.

Japan headed into its long deflationary spiral with a mostly balanced federal budget, high trade surplus, immense foreign reserves, immense personal savings, low unemployment, and high educational level. This buys an awful lot of flexibility.

The US teeters on a similar precipice, but with no net underneath: gigantic federal budget deficit, large trade deficit, high personal debt, high corporate debt, net debtor status, and uneven educational level.

The stage is thus set more for Argentina than Japan: banking crisis, hyperinflation, currency collapse. I’m not saying it will happen; only that it’s more likely than the Japan scenario.