Serfdom 2.0
10-18-2011, 10:26 AM
#1
With The Resistance
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Joined APC: Jan 2006
Position: Burning the Agitprop of the Apparat
Posts: 6,191
Serfdom 2.0
Submitted by Charles Hugh Smith from Of Two Minds
Debt-Serfdom Is Now the New American Norm
Trapped assets that generate no income streams in the present are not capital; the value of such non-productive assets is illusory. Strip away these trapped assets and the reality is revealed: most American households toil to service their debts.
The typical American household is insolvent: its debts exceed its assets. There is nothing fancy about calculating insolvency: if debts exceed assets, the enterprise is insolvent. By this measure, most American households are insolvent, if their real assets are marked to actual market.
For example:
Auto loan balance: $9,000
Actual market value of auto: $6,000
Credit card balance: $6,000
Street value of stuff purchased with credit card: $300
home mortgage: $250,000
Auction value of house: $200,000
Student loans: $60,000
Market value of education: Not applicable, as it cannot auctioned off or securitized
And so on.
The typical American household is thus in service to its debt, not to its assets, and to the holders of that debt. This is debt-serfdom: serfdom in service to the owners of debt, debt that may well always exceed the value of the household's assets. This is debt-serfdom for life.
If we look at the American household as an enterprise, then we have to differentiate between unproductive, trapped capital, assets held in a house or retirement account, and productive, free capital which can be moved in and out of productive assets to earn a return which increases free cashflow income in the present.
By this standard, most of the typical American household's assets are trapped and therefore unproductive. In this sense they do not even qualify as capital. Let's say a household owns a house with a real-world market value in today's depressed market of $250,000, and the house carries a mortgage of $150,000. On paper, the household holds a net asset value of $100,000.
But this asset is not actually productive; it produces no income and exposes the household to the risks of declining real estate valuations. The asset provides the value of shelter, but if similar shelter could be rented for less than the costs of servicing the mortgage debt and the many costs of ownership, then sinking the entire household's net worth/assets in a house does not "pencil out" as a productive investment of assets.
In a practical sense, this $100,000 is inaccessible and thus trapped; housing is highly illiquid and has transfer costs of up to 10% in realtor and escrow fees. In most cases, the sale proceeds are simply reburied into another mortgaged home. The asset is trapped and thus not deployable capital.
The same can be said of many retirement accounts that are routinely counted as assets on household balance sheets. the assets are trapped in the account until retirement, and their deployment is often restricted to a handful of risky options (investing in Wall Street, for example). The purchasing-power value of the assets might decline considerably by the time the funds can actually be withdrawn, and in this sense their present value is chimerical.
Since these funds are trapped, they also don't qualify as capital: they cannot be used to start or buy a business or other assets which return free cashflow in the present.
Trapped assets are not capital. They cannot be moved into more productive uses that yield income streams that add to current income, which is the definition of capital. Borrowed money that is sunk into trapped assets is not borrowed capital; it is simply debt that must be serviced.
If we set aside assets trapped in real estate and retirement accounts, a truer picture of the American household's actual productive capital emerges: most households have essentially no productive capital, and their debts far exceed whatever meager free capital they do own.
In a very real sense, the non-cash, non-small-business assets of the typical American household are invisible, unuseable, inaccessible and thus illusory; they exist as entries on the balance sheet but not as real-world productive capital.
Wealth and income do not flow from servicing debt incurred by trapped assets, it flows from productive free capital.
Thus the typical household toils not to increase productive capital that can be deployed to increase household income but to service their crushing debts. How else can we describe this situation other than debt-serfdom?
Tomorrow I will discuss the slow and largely misunderstood transmogrification from a free people with limited access to borrowed capital/debt to a nation of debt-serfs.
Debt-Serfdom Is Now the New American Norm
Trapped assets that generate no income streams in the present are not capital; the value of such non-productive assets is illusory. Strip away these trapped assets and the reality is revealed: most American households toil to service their debts.
The typical American household is insolvent: its debts exceed its assets. There is nothing fancy about calculating insolvency: if debts exceed assets, the enterprise is insolvent. By this measure, most American households are insolvent, if their real assets are marked to actual market.
For example:
Auto loan balance: $9,000
Actual market value of auto: $6,000
Credit card balance: $6,000
Street value of stuff purchased with credit card: $300
home mortgage: $250,000
Auction value of house: $200,000
Student loans: $60,000
Market value of education: Not applicable, as it cannot auctioned off or securitized
And so on.
The typical American household is thus in service to its debt, not to its assets, and to the holders of that debt. This is debt-serfdom: serfdom in service to the owners of debt, debt that may well always exceed the value of the household's assets. This is debt-serfdom for life.
If we look at the American household as an enterprise, then we have to differentiate between unproductive, trapped capital, assets held in a house or retirement account, and productive, free capital which can be moved in and out of productive assets to earn a return which increases free cashflow income in the present.
By this standard, most of the typical American household's assets are trapped and therefore unproductive. In this sense they do not even qualify as capital. Let's say a household owns a house with a real-world market value in today's depressed market of $250,000, and the house carries a mortgage of $150,000. On paper, the household holds a net asset value of $100,000.
But this asset is not actually productive; it produces no income and exposes the household to the risks of declining real estate valuations. The asset provides the value of shelter, but if similar shelter could be rented for less than the costs of servicing the mortgage debt and the many costs of ownership, then sinking the entire household's net worth/assets in a house does not "pencil out" as a productive investment of assets.
In a practical sense, this $100,000 is inaccessible and thus trapped; housing is highly illiquid and has transfer costs of up to 10% in realtor and escrow fees. In most cases, the sale proceeds are simply reburied into another mortgaged home. The asset is trapped and thus not deployable capital.
The same can be said of many retirement accounts that are routinely counted as assets on household balance sheets. the assets are trapped in the account until retirement, and their deployment is often restricted to a handful of risky options (investing in Wall Street, for example). The purchasing-power value of the assets might decline considerably by the time the funds can actually be withdrawn, and in this sense their present value is chimerical.
Since these funds are trapped, they also don't qualify as capital: they cannot be used to start or buy a business or other assets which return free cashflow in the present.
Trapped assets are not capital. They cannot be moved into more productive uses that yield income streams that add to current income, which is the definition of capital. Borrowed money that is sunk into trapped assets is not borrowed capital; it is simply debt that must be serviced.
If we set aside assets trapped in real estate and retirement accounts, a truer picture of the American household's actual productive capital emerges: most households have essentially no productive capital, and their debts far exceed whatever meager free capital they do own.
In a very real sense, the non-cash, non-small-business assets of the typical American household are invisible, unuseable, inaccessible and thus illusory; they exist as entries on the balance sheet but not as real-world productive capital.
Wealth and income do not flow from servicing debt incurred by trapped assets, it flows from productive free capital.
Thus the typical household toils not to increase productive capital that can be deployed to increase household income but to service their crushing debts. How else can we describe this situation other than debt-serfdom?
Tomorrow I will discuss the slow and largely misunderstood transmogrification from a free people with limited access to borrowed capital/debt to a nation of debt-serfs.
10-18-2011, 10:45 AM
#2
Gets Weekends Off
Joined APC: Jul 2010
Posts: 363
Jungle-
Completely agree. Also why income inequality becomes skewed over time, different types of assets producing different types of income, not some evil plot by 1% of the world, just a fact of life.
Personally, I think debt is what has kept real wages so stagnant in this country and also why the recovery is taking so long. Balance sheets take a long time to fix.
But all of the OWS protestors want to completely look past any of this and instead burn the whole house down.....
Completely agree. Also why income inequality becomes skewed over time, different types of assets producing different types of income, not some evil plot by 1% of the world, just a fact of life.
Personally, I think debt is what has kept real wages so stagnant in this country and also why the recovery is taking so long. Balance sheets take a long time to fix.
But all of the OWS protestors want to completely look past any of this and instead burn the whole house down.....
10-20-2011, 05:07 AM
#3
Libertarian Resistance
Joined APC: Feb 2007
Position: 757 FO
Posts: 1,057
Jungle,
I agree with the overall premise of the article you posted. I think we are in the midst of a transformation of the economy where debt and credit will exist, but will become much less conventional.
Having said that, I'd add that I disagree with some of the absolute assertions made above. The writer dismisses student loans, which have "no market value" because they cannot be "auctioned off or securitized". That may be true insofar as it goes, but useful education and training can be seen as value added by an employer. A degree, license, or certificate in an economically productive field, or a field that is in demand, can be exchanged for higher wages. Accreditation in a field that has little or no economic value is truly bond servitude.
The area studies majors down at the OWS protests have figured this out. As have their geological engineering classmates who are hard at work in the oilfields of North Dakota.
WW
I agree with the overall premise of the article you posted. I think we are in the midst of a transformation of the economy where debt and credit will exist, but will become much less conventional.
Having said that, I'd add that I disagree with some of the absolute assertions made above. The writer dismisses student loans, which have "no market value" because they cannot be "auctioned off or securitized". That may be true insofar as it goes, but useful education and training can be seen as value added by an employer. A degree, license, or certificate in an economically productive field, or a field that is in demand, can be exchanged for higher wages. Accreditation in a field that has little or no economic value is truly bond servitude.
The area studies majors down at the OWS protests have figured this out. As have their geological engineering classmates who are hard at work in the oilfields of North Dakota.
WW
10-20-2011, 06:37 AM
#4
With The Resistance
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Joined APC: Jan 2006
Position: Burning the Agitprop of the Apparat
Posts: 6,191
Originally Posted by Winged Wheeler
Jungle,
I agree with the overall premise of the article you posted. I think we are in the midst of a transformation of the economy where debt and credit will exist, but will become much less conventional.
Having said that, I'd add that I disagree with some of the absolute assertions made above. The writer dismisses student loans, which have "no market value" because they cannot be "auctioned off or securitized". That may be true insofar as it goes, but useful education and training can be seen as value added by an employer. A degree, license, or certificate in an economically productive field, or a field that is in demand, can be exchanged for higher wages. Accreditation in a field that has little or no economic value is truly bond servitude.
The area studies majors down at the OWS protests have figured this out. As have their geological engineering classmates who are hard at work in the oilfields of North Dakota.
WW
I agree with the overall premise of the article you posted. I think we are in the midst of a transformation of the economy where debt and credit will exist, but will become much less conventional.
Having said that, I'd add that I disagree with some of the absolute assertions made above. The writer dismisses student loans, which have "no market value" because they cannot be "auctioned off or securitized". That may be true insofar as it goes, but useful education and training can be seen as value added by an employer. A degree, license, or certificate in an economically productive field, or a field that is in demand, can be exchanged for higher wages. Accreditation in a field that has little or no economic value is truly bond servitude.
The area studies majors down at the OWS protests have figured this out. As have their geological engineering classmates who are hard at work in the oilfields of North Dakota.
WW
Spending six years on a masters thesis on Transgender Midget Colonialism may not pay off in the long run.
Education is possibly one of the biggest bubbles out there, and it seems the buyer's remorse is fairly large for many who chose an impractical course of study.
The arts may always be studied at a later time.
10-20-2011, 06:46 AM
#5
Libertarian Resistance
Joined APC: Feb 2007
Position: 757 FO
Posts: 1,057
Originally Posted by jungle
I agree, but as you have noted, the relative value of education is highly dependent on the practical value that it brings.
Spending six years on a masters thesis on Transgender Midget Colonialism may not pay off in the long run.
Education is possibly one of the biggest bubbles out there, and it seems the buyer's remorse is fairly large for many who chose an impractical course of study.
The arts may always be studied at a later time.
Spending six years on a masters thesis on Transgender Midget Colonialism may not pay off in the long run.
Education is possibly one of the biggest bubbles out there, and it seems the buyer's remorse is fairly large for many who chose an impractical course of study.
The arts may always be studied at a later time.
Actuaries can tell, with great accuracy, when you are going to die based on your situation in life and how you live it. That is how insurance companies make their money.
A similar procedure would improve our system of higher education. Engineers, scientists--anything where math is not just a diversity requirement for graduation would get low rates and large loans. Others could pay their own way.
WW
10-20-2011, 08:02 AM
#6
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Joined APC: Jan 2006
Position: Burning the Agitprop of the Apparat
Posts: 6,191
It is often said that strippers know the price of everything and the value of nothing.
Perhaps this maxim applies to other groups as well.
Even in countries with "free" education, the available slots for higher education are both limited and extremely competitive.
Price is never an indicator of value and value is difficult to price. The loans that the taxpayers support will have to suffer low value without careful consideration of quality by system operators. This quality is clearly absent.
Perhaps this maxim applies to other groups as well.
Even in countries with "free" education, the available slots for higher education are both limited and extremely competitive.
Price is never an indicator of value and value is difficult to price. The loans that the taxpayers support will have to suffer low value without careful consideration of quality by system operators. This quality is clearly absent.
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