Delusions
Human being are well known for their gift of self delusion. Be it that the “love of our life” can do no wrong until they finally can and we realize just how badly mistaken we were. I am pretty sure there are very few people out there in this world who did not fall into this trap.
Or the delusion that we need to do something out of reason X, where said reason is purely made up in our mind to justify our choice.
The list of course could go on and I am sure if you think for ten minutes about your life you will find a handful of examples as well.
While all of this can be emotionally tragic or have tragic realities on a personal level over the last 30 or so years we have witness a much bigger delusion with much more risk to all of us.
Take this headline for example:
Canadians’ net worth growsSoaring household debt dampens effect
Now this reads good, doesn’t it? We’re all better now, and wasn’t it just a hard time this 2008 / early 2009? But now it’s all better according to this headline, even though the subheadline tries to dampen the mood a bit.
But is this really the case? Are we really better off now? The articles has this little nugget in it:
The bank’s economists looked at another measure of debt, the ratio of assets to liabilities. Before the recession, households held from $5.6 to 5.8 worth of assets, for every $1 of debt. Currently, households are holding a record low $5.1 of assets for every $1 of debt.
Ah, now here’s the rub. The problem is that the net worth is wishful thinking only, you know, like the guy or gal you had a crush on high school from afar until they opened their mouth and you realized that they had the voice of a chipmunk. The problem with this whole headline and statement is simple: This isn’t real money.
Let me try to explain.
The way the networth is calculated is: Your Liabilities (e.g. your mortgage) vs. your assets (e.g. your paid off car). Well, that’s how it should be done. The problem is that they do not do this. They actually take the price they think your house will fetch on the market and count it as an asset. So they deduct the perceived house value from your mortgage and give you the difference as an “asset”.
That’s just delusional.
Think about it. They take a value that only exists on paper and has no real world application and make it out to be real so that you can feel better about the hundreds of thousands that you own to the banks. The problem with these house prices is that they aren’t set in stone. Sure, the papers were rife earlier this year and late last year of people getting into a bidding frenzy and paying more money than asked, but this can also go the other way if you suddenly have nobody able to afford / wanting to buy property, it always cuts both ways. Hence why you shouldn’t count your chickens until all the eggs have hatched.
Furthermore, the one thing they do not take into account in this calculation is interest.
When you go and get a mortgage in order to finance the purchase of a property (let’s be clear, getting a mortgage is not buying a house, it is getting a loan) you not only pay the principal (the sum you borrowed) but also the interest on it. In most cases (current artificially low interest rates ignored) this amounts to almost doubling the purchase price over the course of the average loan (of course if you pay it off faster you pay less interest and you’re better off. But people who could do this would not go for a 0/40 or 5/35 mortgage, and even at just 25 years you still pay a hefty sum in interest).
What this means though is that you are probably in negative equity, meaning you actually lost money on that “investment”.
And yet, if you talk to your bank they will continue to tell you that you are actually building equity on your house, they will look at your credit rating and tell you that you are actually doing well etc. It is smoke and mirrors, not to outright say you are delusional and the bank is doing it’s best to keep you that way.
Here’s another example from a message board:
Who cares if prices come down 20% when they already went up 30%?
Someone who can do a bit of math?
Say, you have $100 and magically they become 30% more (== $130), then drop by 20% (130 x 0.8) you are left with $104 or just a 4% increase (which will be eaten up by associated costs like closing costs, interests paid, repairs, taxes etc.).
Meanwhile, presume you only started out with $70, they then increased in value again by 30%, you now have $91, now it loses it’s value by 20% and you’re left with $72.8, or again 4% in “profit”.
The reason I point this out is because it exemplifies the utter lack people seem to have when it comes to finances and money and just how delusional we as a society have become.
The reason why this is all not so good for all of us is simple and answered in the CBC article from above as well:
TD said liabilities increased four percentage points faster than income last year and interest payments remain high, despite low interest rates.
You may want to chew on that for a bit and come to your own conclusion what this means for Canadian networth.
And by the way, this isn’t the only place where things like this are happening, it seems to be a global phenomenon and not only limited to the world of finances and real estate. Remember the whole “We’re going to use Ethanol in order to remove ourselves from the need of oil”? Yeah, similar scam, they conveniently forgot to mention that most of the corn is grown using fossil fuels, that the refinery / distillery is run on fossil fuel etc. But in the end it made people feel good at the pump, because it was ethanol, plant based, renewable and so much less CO2, fill her up.
Welcome to the age of global delusion, anybody want to guess how the crash landing will look like?
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