accept 2 simple trends and prosper

Accept the trends as they are: a flow toward cash and away from non-cash assets (like US real estate since 2006  and US stocks since 2007) and a flow of affluence toward private legal creations and away from the middle-class….”

Stock Market Game, Goodwill, 02/14/09
Stock Market Game, Goodwill, 02/14/09 (Photo credit: photophonic)

A comment from a reader (and partner in conversation for about 10 years):

[regarding] the one Blog we talked about,  I found the syntax so convoluted that I understood the ideas Less than when you had explained them to me [on the phone].

I understand and agree. I often find that after writing ideas out, I can then deliver them much more simply in a spontaneous conversation. Also, new conversations sometimes spark a coherent, concise writing process.

However, there is often a phase in which leaving something as an unpublished rough draft  could be appropriate. But let’s imagine that we may be past that stage in regard to the 2 following simple distinctions, both of which relate to major financial trends that recently reversed.

Regarding my favorite introductory issue of cash vs. non-cash assets, the distinction is simple enough. Non-cash assets are any contract negotiable for some amount of cash that is indeterminate (but often estimated), such as mortgages, court judgments, stock shares, paychecks, etc.

Unlike cash, non-cash assets may or may not be worth any listed face value. A check written on an account without sufficient funds can “bounce.” Many debts can be discharged in a bankruptcy court.

Non-cash assets can have things like assessments and appraisals and bids and asking prices, though the only price that matters ultimately may be an actual transaction. (Ask most anyone who has had a home listed for sale for over 6 months.) People do not know what a non-cash asset is really worth until they have a qualified bid (including for barter)- and the inherent uncertainty and fluctuating value of non-cash assets remains… no matter what anyone assumes about it’s current or future “cash exchange value” AKA price.

So, the basic trend of transactions has been away from cash toward non-cash assets for a very long time. In other words, people have been chasing non-cash assets faster than they had been chasing cash.

Note that two investment markets that have been heavily favored by political interventions (including the tax code in the US and elsewhere) did quite well for much of the last 30 years, especially most of the 90s : the overall stock market and the real estate market. In particular, relatively new interventionist programs like the FHA and HUD and Fannie Mae have favored real estate (and related industries) in historically unprecedented ways.

However, while the long-term trend has been away from cash toward non-cash assets, that trend has clearly been decelerating (in the US, for instance) for the last 30 years. That is reflected in overall interest rates (for things like  savings accounts and secured debt) going down in percent from the upper teens or mid-teens (in 1980) to as low as four or even two percent.  In other words, those with cash are less and less willing to lend it and- here’s the really big issue- less and less willing to spend it at all.

In the last few years, for most investments, including the overall US stock market and US real estate market, the cash/non-cash trend has already reversed. That is, people are recognizing that the cash value has already been declining for many of their non-cash assets, like stock shares or silver ounces or oil wells or homes or second mortgages- of course with evident variations across various markets.

By the way, to the best of my knowledge, the various “hyperinflationist arguments” have been consistently wrong for basically the last 30 years (while government deficits have been multiplying all along- one of their favorite arguments). However, 30 years of clear evidence is apparently not enough to counter the “emotional investment” that some may have in the issue(s).

[Regarding the original comment that a phone conversation was more clear for him than a blog,] I do not know what other blogged issue you might have in mind, but another one that I have vastly simplified in my language is this: the private legal creation as distinct from the public legal creation. The default “public legal creation” is what I call the “citizen estate.”

I use the term estate because, when a creative person dies (like a musician or poet), we know that their estate continues to collect royalties legally. The estate is a legal creation quite distinct from the natural organism. From the perspective of an accountant, the estate is the citizen, not the natural organism.

Civil courts do not deal with natural organisms per se, but with accountings in commerce created by natural organisms (including bureaucrats). You may know that the commercial jurisdiction (“citizenship“) of a citizen estate can change, and that is a totally distinct legal status (and accounting issue) than the physical residency/domicile/location of the natural organism.

Anyway, a private legal creation would be something like a trust. In the absence of someone taking explicit responsibility for their finances by making private legal creations such as trusts, then the court system provides the service of resolving disputes between natural organisms who have not exercised that freedom of conducting their commerce using private legal creations. Thus, many court cases involve “citizen estates” by default (by the “failure” of natural organisms to operate using private legal creations, such as trusts and corporations, which generally are fully recognized by courts as the rights of the natural organism who choose to use them).

So, many people may complain antagonistically about these issues. Typically, reactive antagonism is not a sign of comprehension. You may think that traffic lights are a personal insult to you and contrary to your constitutional liberties, but if everyone else is following them and you are driving on the same roads as everyone else, you may be interested in noticing the patterns of traffic and lights and then just going with the flow. Consider what works practically as more relevant than your own ego- at least sometimes.

Anyway, there has been a shift of trend in regard to both of the above distinctions. In regard to the distinction of cash vs. non-cash assets, the trend of increasing demand for non-cash assets has reversed with a chase for cash… as over-exuberant debtors (including many corporations) seek to avoid foreclosure, bankruptcy and so on. In regard to the distinction of private or public legal creations, there has been a huge overall flow of finances toward public legal creations (citizen estates) which loosely has corresponded to the rise of a historically remarkable phenomenon called a middle class. However, that trend has reversed, too.

Corresponding to the middle class “addiction” to debt, the debt bubble grew “too large too fast,” and so a corrective deflation is underway. Further, with the deflating of the financial bubble, those in the middle class who abdicate by default to courts and governments are in the process of losing their assets, homes, and so on. They are most exposed to civil litigation, ballooning taxes, and so on. They tend to respond to fear with antagonistic blame, rather than personal adaption such as forming a private legal creation to isolate their assets and even sometimes their revenues from their liabilities.

Are there other valid ways of framing the above issues? Certainly. You may find that these are simple and quite practical, though.

Those who can, accept the trends as they are: a flow away from non-cash assets toward cash and a flow of affluence toward private legal creations and away from the middle-class “commercial citizen” estates, which are legal creations initiated by default through public bureaucracies (for the explicit purpose of  underwriting public debt). Those who are accepting will be inspired to make practical adjustments personally, such as the use of private legal creations as financial shelters and the prudent revision of any outdated investment strategies.

My function here is to bring these trends to the attention of people like you and to assist them in making the relevant personal adjustments, from sheltering one’s finances to negotiating discounted settlements on credit card debt to investing in alignment with actual (profitable) trends. Thank you for letting me know when you are interested in my assisting you, such as now.


Published on: Apr 20, 2010

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