Clown-Free Zone... sorry, no clowns allowed Message Board

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Pastimes : Clown-Free Zone... sorry, no clowns allowed

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To: TobagoJack who wrote (96835)	4/20/2001 12:11:50 PM
From: GraceZ	Read Replies (2) of 436258

Jay- Appreciate your perspective enormously. The one thing that complicates matters when talking about household debt is that some prefer to talk about it in terms of cash flow (ability to service debt) and others prefer to talk about it in terms of debt to assets or net worth. I've been in the position of trying to help friends and clients trying to get their financial houses in order so I've had to explain these two approaches extensively. Some people are highly cash flow oriented, they only think in terms of whether or not the debt can be serviced in terms of the income they receive and others want nothing of that approach, they want to know that their net worth is rising while their debt levels are shrinking proportionately. I'm decidedly in the net worth camp, as I'm sure most on this thread are. Unfortunately most Americans are cash flow oriented, if they can make the payments they don't care if their net worth is stagnant or declining. Mostly they don't know that this is happening because they don't do net worth statements over time and compare their situation year to year the way a business would. They just got rewarded for this approach with these rate cuts because it will make their debt more serviceable. Unfortunately these are the same people who if they don't take this opportunity to get religion are going to be totally screwed if inflation picks back up and the FED finds itself in the position of having to raise rates again. Truth is when you take on debt you are counting on future flows and incomes that may or may not be there. In a worse case scenario you can sell off assets to pay down debt if things run against you. This only works if your assets are actually higher than your debt. After seeing the market implode over the last year we all know what happens to asset prices when everyone decides to do this at once.

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