You have always been told that real wealth is based on assets, such as a house. In fact, your house is typically called the largest single investment that you will ever make. The problem with this concept is an ongoing confusion between assets and liabilities.
Real wealth is not built on debt, but on assets.
Assets are actually economic resources. They can be any item that a business or individual is able to both own and control in order to create value and positive cash flow, or income. Another way of putting the concept of assets is ownership of some item of value that can be changed into cash and produces cash flow. Assets either produce cash flow now or in the future.
Liabilities, on the other hand, represent present or future demands on a business or person that have to be repaid. They create negative cash flow, or take money away from the entity or individual. Anything that takes money out of your pocket is a liability and not an asset.
Because of the fact that only items that bring money into your account actually represent wealth, many of the items that you think of as wealth are not truly representations of wealth, but are liabilities and debt. The house is only the largest example of this truth.
The entire U.S. economy and most of American society is built on this idea of debt spending creating wealth. This belief is not reality. Deficit and debt spending created wealth is not real. More dangerous than this is the fact that such spending is not sustainable.
Most Americans and the Federal government itself both spend a great deal more than they actually earn. The government does this every time it makes a budget that exceeds the literal tax base and receipts. Consumers do this with credit cards and loans made against the value of their house.
For every dollar earned, a dollar and five cents is spent. This means that the U.S. borrows as part of every day operations in order to pay for the daily spending habits.
Such borrowing to spend has been encouraged by the government every time the economy took a dip. The Fed lowers interest rates to encourage you to borrow and spend. They intend for you to do this by making credit easy. This allows you to purchase and build up items and assets that are not based on wealth but on debt.
It has reached the point that it is no longer sustainable, as the financial crisis and Great Recession have made clear. National growth has been necessary just to keep the country and consumers ahead of the rising interest and debt levels. The built up effect of such unending growth, accompanying lending, and charging of interest have pushed the increase of the money supply so that there is enough money to repay the interest due.
It has been going on at an increasingly greater level since the 1930’s. This compounding effect of constantly requiring more and more money has grown like a snowball rolling down a hill. It has reached the point that it is ready to crash off of the cliff and to destroy everything in its path.
Remember that real wealth is built on tangible assets that produce positive cash flow. Debt spending to purchase such assets does not qualify as legitimate wealth. The next time that someone holds up his or her house as an evidence of their wealth, inquire how much their monthly payments on it are. If the house is taking money out of their pockets, then it is not real wealth, but a liability, which is a fake and unsustainable wealth.