Balance Sheets Should Help Backstop Income Cycles

The Keynesian thesis is that central banks and governments can help smooth financial cycles by adding liquidity and enabling spending when downturns come and then working to rebuild savings and reduce debt through the economy when times are good.

Suffice to say, for many years now, politicians and policymakers have focused on just half of this equation, increasing debt to support spending, but not the opposite.  Thanks to this destructive mindset, today we have households, corporations, and governments who pay out all and more of their income during good times so that they have little savings and high levels of debt when times turn rough.

Moreover, any savings most do have is mindlessly funneled into securities, real estate, and collectibles at every price, under the auspices of ‘investing’, with little care for the critical importance of maintaining principle security and liquidity.

Hence, when personal and economic strains inevitably arise, not only are most vulnerable on the income and cash flow side but whatever savings they do have are held in subjectively-priced assets that fall in concert.  This accelerates the rush to raise cash and sell as prices slide into a self-fulfilling avalanche.  It also leaves few with the ability to buy once prices have become advantageous once more.

Realty, corporate debt, equities and commodities, art and other collectibles–everything that rode the tidal wave of ‘easy money’ up the past 8 years–are now coming back down together.

Holding the bulk of our net worth in highly correlated asset classes is a dangerous way to manage a financial cycle.  While banks and other big corporations may count on taxpayer-funded bailouts for their mistakes, individuals and smaller businesses bear our own financial risk.

Take a look at your balance sheet.  If most of your assets have been falling in 2018, you are structured poorly and vulnerable to unnecessary financial trauma.  It’s not too late to fix that.

Disclosure: None.

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