<p>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.</p>
<p>For example:</p>
<p>Auto loan balance: $10,000
Actual market value of auto: $6,000</p>
<p>Credit card balance: $5,000
Street value of stuff purchased with credit card: $300</p>
<p>home mortgage: $250,000
Auction value of house: $200,000</p>
<p>Student loans: $50,000
Market value of education: Not applicable, as it cannot auctioned off or securitized</p>
<p>I would stick with the tradtional Fair Market Value for a house, not auction value:</p>
<p>The price that a given property or asset would fetch in the marketplace, subject to the following conditions:</p>
<ol>
<li><p>Prospective buyers and sellers are reasonably knowledgeable about the asset; they are behaving in their own best interests and are free of undue pressure to trade.</p></li>
<li><p>A reasonable time period is given for the transaction to be completed.</p></li>
</ol>
<p>What do words like “typical” really mean without more data? I personally don’t know many people who would fall into this category, actually I can’t think of any! Few of my family/friends need to take on big debt these days, we all make healthy down payments on cars, have a lot of home equity, and some retirement assets. So what the author calls “typical” may not really be the average American family but maybe a decade or two younger than my 45-55 set. Of course, most of us were raised with the “yankee” mantra…use it up, wear it out, make it do, or do without!</p>
<p>Solvency means you can pay your bills. Insolvent means you can’t. </p>
<p>As long as the hypothetical person in the OP is paying that mortgage, car payment, credit card, and student loan, we shouldn’t call him insolvent.</p>
<p>I agree with DougBetsy. Furthermore, it doesn’t make any sense to calculate resell value of assets that the owner doesn’t intend to sell. </p>
<p>I pay off my credit card every month–but even if I had a balance of $1,000 during the month, it doesn’t make sense to say I’m insolvent because the street value of my new clothes is less than that or because my groceries don’t have a high resale value. I’m wearing my clothes and eating my groceries, not selling them to someone else.</p>
<p>You might also add that each american’s share of the national debt is a whopping number.</p>
<p>On the other hand, it might also be argued that each american indirectly owns the assets of America, as they benefit directly or indirectly from them. Such as:</p>
<p>Roads, tunnels, bridges, universities, parks, space technology, military equipment, etc.</p>
<p>If some country today, like Uganda for example, had to build all that stuff from scratch, it would cost an almost infinite amount of money.</p>
<p>I’m happy & sleep well as long as the amounts we owe are less than the amounts we have; there’s a lot to be saying for spending LESS than you make on a regular basis. That’s one of the guiding principles of “tightwad” living and I have lived this way when I was growing up, when I was a student & continue it now as an adult. I expect to continue to live this way, as do my parents and many people I know. HATE borrowing and debt; did make an exception for the home mortgage. If that makes us “not average,” fine.</p>
<p>The common definition is the inability to service debts which is more of a liquidity issue than a balance sheet issue. A less common usage is negative net worth.</p>
<p>^^^ Floridadad, now I know why I shouldn’t have bought that bridge in Brooklyn, I already own it! </p>
<p>Anyway, for my 2 cents, when people stop living large when they can’t afford it, then they won’t have the inability to pay. I have had clerical employees who drove up to the office in Mercedes Benz autos. Since I employed them, I knew they weren’t affording the cars on their salaries. It was predictable that down the road they might have problems. Others had a liking for luxury goods that they couldn’t afford…
Fortunately, they were not the norm.</p>
<p>anothermom, how did you know they could not afford their cars? A school nurse at one of the schools D attended used to drive a very nice, shiny luxury Eropean sedan. I suspect that would not be a typical car for a school nurse, but her H was a Sr VP and bought the car for her as a birthday gift.</p>
<p>Agree with bunsenBurner, perhaps as a couple they make more money YOU and your spouse…Just because you know what you pay her ,doesn’t mean her spouse doesn’t make significant dollars</p>
[quote]
If some country today, like Uganda for example, had to build all that stuff from scratch, it would cost an almost infinite amount [/unquote]</p>
<p>Now that’s an interesting thought and another thread…</p>
<p>What Uganda? How is it relate to your insolvancy?.. Well, of course I know Uganda, but Africa is a different story and we cannot equate.</p>
<p>Home price goes up and down, you just cannot call some one insolvant because he has a strategic default position in his mortgage. Many ppl grit their teeth and hacking it, perhaps only 10% of the American household is in forclosure, but not everyone do.</p>
<p>I know someone who is office help at a MD’s office; she drives a nicer car than the MD. He figures she must just work because she likes the office & him because he doesn’t pay her nearly enough for the car payments. :)</p>
<p>Some folks really enjoy “living large.” Personally, I am uncomfortable with conspicuous consumption. I really like living well below our means so we will have LOTS for the tough times. It’s a good thing because we have a lot of older cars & an old house; all need quite a bit of maintenance & I am glad that we have saved up enough so that we pay without taking out loans.</p>
<p>Sorry: I can not link the source, but it is in the internal Goldman Sachs documents that are for not for public. It is listed on other bank internal sources too but I am afraid I can not provide links as this material is not on the web pages. This document is realted with risk management that bank rely on. How do I have access well I can not say. Watch for Greece and in few years …</p>
<p>I am not into groundless bashing of the USA as this is the land of opportunity that is not avialable any where in the whole world on this earth. My family is very greatful to this country and indebted to this country forever.</p>
<p>No one is gonna tell you what to do, you are free to do whatever you want to. But look at the RMBS bonds and … talk to me in four to five years.</p>
<p>Market is a bet and I could be wrong or could be right…</p>
<p>It’s a lovely thing that you “live beneath your means”. Why do you think you’re so unusual? It just seems as if you’re assuming anyone with a nicer car or home or clothes is not living beneath their means. In fact, no one really knows the financial status of anyone. </p>
<p>At this moment in our troubled nation, I’m happy to see conspicuous consumption. We need people spending money.</p>
<p>Regarding the OP, I believe I’ve seen a number of reports that American household debt levels have, in fact, been declining. That is actually one of the issues holding back our recovery.</p>
<p>All that really matters is cash flow, what comes in must exceed what goes out. It doesn’t matter what happens to the value of purchases. Taking your example to the extreme, anyone who spends money on food is insolvent. After all, that bag of groceries gets consumed and what’s left over is worth s (four letter word for excrement)</p>
</p>