Wealth: a functional definition (as global credit trends shift)

Wealth: a functional definition

Regarding one’s most valued resources, long-term control of access to those resources is wealth. Let’s consider how this functional definition contrasts with less precise definitions.
Imagine a couple who is nearing retirement with typical finances for a middle-class baby boomer. They have their own house, but also a huge mortgage on it (owing more than the home is worth). They have a nice car (on a lease that costs them $500/month). They have excellent credit and recently counted $40,000 in credit card debt available. They have a 401k account, a small savings account and also a few debts owed to them: $100,000 in inheritance from the estate of a recently deceased family member, a CD from a bank, a bond from the local school district, plus an annuity from a life insurance company.
Mutual Benefit Life Insurance Company building...

Mutual Benefit Life Insurance Company building at 300 Broadway in 1915 (Photo credit: Wikipedia)

That sounds pretty good, right? Well, in the 1990s, that may have been great. Today is different. (Note that they do not legally control access to any of their resources; they are quite dependent on other people keeping promises to them.)
Wipe our Debt

Wipe our Debt (Photo credit: Images_of_Money)

Let’s contrast it to their neighbors. They are basically debt-free and their credit is horrible because of a medical crisis which resulted in a job loss and bankruptcy several years ago. However, they have over $50,000 of liquidity (cash) in a sheltered trust (tax-exempt) which also protects their indirect ownership of three economy vehicles (owned free and clear).
Through another trust (which was set up to avoid probate complications for their descendants), they own two cheap mobile homes in a rural area, one of which they rent to their daughter and one that they use occasionally for vacations. They also pay a modest rent (month-to-month) on a place in the city where they live (a few cities away from their daughter).
They also own a steady business with dozens of steady clients, all of whom pay in advance on monthly retainer contracts. Their daughter and 5 other people are employed by their small company. Most of their employees have taken small paycheck advances which they owe back to the company (or else the debts can be taken out of future paychecks).
That’s a radically different situation, right? For instance, everyone who owes them money is their employee, which creates a HUGE incentive to pay the debt back on time; these neighbors are the main source of income for their own debtors and have asserted a contractual right to garnish wages without even going through a court proceeding. Their debtors want to pay on time for lots of reasons, but “looking good” for other future creditors is not a big concern for them. They simply want to pay back their debts out of personal loyalty and gratitude.
UNIVAC I at Franklin Life Insurance Company

UNIVAC I at Franklin Life Insurance Company (Photo credit: Wikipedia)

Contrast that with the institutional debtors of the first example: the companies that owe those folks money do not have any personal affinity for the creditors. The life insurance company has made the same extreme promises to many thousands of people, all of whom may get little or nothing if the life insurance company has taken too much risk in their massive ponzi scheme of expecting new premiums to cover all prior liabilities (contractual promises). 
Canyons School District

Canyons School District (Photo credit: Utah State Library)

The local school district where they live (in Greece) is also notorious for recent budget excesses, so the $5,000 of face value of the bond that the school district owes them has just been re-rated as a junk bond. After the bankruptcy proceedings of the school district are complete, they expect to eventually receive at least half of the original amount they risked in lending that money to their local school district.
As for the $100,000 inheritance, there is some controversy. Their probate lawyer is saying that unless they can quickly come up with $10,000 cash for a retainer to pay her,  they can expect the delay in receiving anything to be at least 2 years. In that time, a pending lawsuit against the estate of the deceased may eat up some or all of the $100,000.
So, they are facing a cash crunch while the second couple is has lots of surplus cash plus a very stable cash flow. However, their cash crunch is easily resolved because they have $40,000 in credit card balance available, right?
Well, they “recently counted” that much credit line available. However, when a global credit bubble collapses and many debt repayments fall delinquent, that can suddenly reduce the credit lines that lenders are willing to extend (able to extend). For instance, if the most aggressive lenders run in to trouble and file for bankruptcy protection, then they cannot make any new loans at all. They must withdraw all offers to extend credit.
So, the couple checks their available credit. Bad news: their child in college has a card for one of their accounts and has recently put a full semester of tuition and dorm residential fees on one card, eating up $12,000 of credit. Two other cards dramatically reduced their available credit, so now they only have $8,000 of credit available (all on one card). They also have been talking about the two $500 air travel tickets which they could get refunded at a cost of $100 in lost deposit for each ticket. 
Unfortunately, this month their paycheck cycle and the fist of the month are a few days apart in the “wrong” sequence, so they immediately need a few thousand dollars for their mortgage and for some annual fees that are lumped together since this is the anniversary of when they bought their home when interest rates were low and they thought low interest rates were a good thing for future home values. Now they realize that rising interest rates reduce demand to buy, and reduced demand to buy results in falling prices. So, they are paying a low interest rate on a $300,000 loan for a home currently worth $200,000 and falling.
Largest Bankruptcies

Largest Bankruptcies (Photo credit: Adam Crowe)

With the stress of all that, the husband got a ticket for drunk driving and expects the costs of that ticket to be at least $3,000. That will also raise their auto insurance rates.
Last week, the wife was so upset about her husband’s arrest that her heart specialist gave her a referral (more like an ultimatum) and then she set up their first appointment to go meet with a therapist about preserving their marriage. The co-pay for the therapy sessions is only $50 per session, so they think it will be a good investment.
Who is their therapist? It’s the husband of the other couple’s daughter (their son-in-law).
He’ll be teaching the stressed couple some yoga exercises to relax their bodies and improve their ability to sleep. As the reality of the risks of their prior financial choices has become clear to them, sleeping has not been as easy as it used to be!
The other couple has been sleeping quite well. Their fourth grandchild is on the way soon. 3 of their most senior employees are negotiating to buy half of their company from them so that they can fully retire from operating the business and just be “silent” owners. They plan to focus their time in the future on raising chickens full-time (plus raising grandkids during the summer).
One couple is in control of their resources. They may not look very wealthy on paper- for they personally do not own much in their own names. However, they look wealthy in person… because they are laughing with their grandchildren.
dump the debt

dump the debt (Photo credit: Friends of the Earth International)

The other couple is desperate, tense, and argumentative. They blame politicians and institutions for operating according to the same business models that the couple glorified and celebrated in the 1990s.
“The media should have informed us that it was foolish and risky to practice the investment behaviors promoted by their commercial advertisers and protected by government regulators! The public schools should have informed us that their curriculum was unfairly influenced by central government lobbyists who spent millions of dollars to create those programs to govern the attention, perception, and behavior of the masses. What about the UN? Greece should rescue us from economics by bailing us out. We deserve help also from Japan and Iran and China and Arabia and of course the Aztecs. They owe it to us because we deserve it more since we are clearly better people than they are- more intelligent, more responsible, more humble, more mature….”
English: Atlanta Life Insurance Company est. 1...

English: Atlanta Life Insurance Company est. 1910-20 (Photo credit: Wikipedia)


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