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wedrifid comments on Rational Romantic Relationships, Part 1: Relationship Styles and Attraction Basics - Less Wrong
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Why would people downvote this? Isn't it both correct and obvious? It also has fairly significant implication as to the extent of the applicability of the simplified model.
It depends on what is meant by "debt" and "net value", and as those words are usually used, it is false.
If I borrow money to buy a house, the house being security for the loan, then I am "in debt" by the ordinary use of those words -- I owe money to someone -- yet if my net worth includes the house, it should still be positive (if the lender was prudent). If I borrow money, secured only against my expectation of future income, then again assuming a prudent lender, the present expected value of that future income will exceed the value of the loan. In that case, I am "in debt", and my net worth will be positive or negative depending on whether expected future income is counted or not.
The more usual word for someone whose net worth is negative, measured by the whole of their debts and assets, is "bankrupt".
To be precise, it's "insolvent." "Bankrupt" means that a particular kind of legal decision has been made about how the assets and liabilities of the insolvent party will be handled.
Also, there's the issue of one of the more spectacular and shameless rhetorical scams of the modern age, in which certain kinds of insolvency get to be described as "illiquidity," whereupon such insolvent parties get to claim a blank check on the rest of us to fix their problem.
To be more precise it is "balance sheet insolvency". "Insolvent" also commonly refers to the inability to pay debts when they fall due ("cash flow insolvency').
Grrr. Yes. I am not a fan! I'd be even more averse to the idea when the blank check was coming from me.
Frankly, I think this "cash flow insolvency" stuff is already in the territory of self-serving obscurantism. If you are balance-sheet solvent, you can always pay debts when they fall due by selling your assets or borrowing money against them. I don't see any good reason why such a simple, clear-cut, and bullshit-free notion as "insolvency" should be complicated and obscured this way.
(Of course, here I assume that the goal is to arrive at an accurate understanding of reality, not to master the present language of finance and various related areas of economics, which has a lot of such self-serving obscurantism built in, often quite intentionally. I certainly agree that if one wants to speak this language like an insider, one should be careful to make such distinctions.)
I'm with you on keeping things simple and free of bullshit but I've got to say in this case it is the cash flow insolvency that is the core of the matter. Insolvency, if it is to be described in a simple one liner, is "is the inability of a person - an individual or a corporation - to pay all their debts as and when they fall due."
Having negative net worth just isn't a big deal so long as you can keep paying the payments on your loans, keep buying the stuff you need to run your business and keep paying the employees. In fact large business often merrily operate that way and everybody is happy. It becomes a problem when they can't make the payments they are obliged to make - then they may be forced into liquidation (or bankruptcy depending on the naming convention in the jurisdiction.)
You are right. I have no problem if a business that is balance-sheet insolvent argues that it is still cash-flow solvent and should therefore be allowed to operate in hope of achieving balance-sheet solvency. (Of course, only as long as this doesn't involve defrauding the long-term creditors by lying about how likely that actually is.) This basically means borrowing money against the optimistic possibilities opened by the uncertainty about the future. (Without such uncertainty, balance-sheet insolvency would imply a predictable future point of cash-flow insolvency, so allowing the business to operate normally would mean favoritism towards shorter-term creditors.)
What I do have a problem with, however, is claiming to be balance-sheet solvent while being cash-flow insolvent. There is simply no good reason to grant anyone that status in any circumstances. Either money can be readily borrowed against the positive net assets, or the accounting on which the claim about the positive net worth is based is fraudulent one way or another.
I actually have no problem with a business operating in a perpetual state of balance sheet insolvency. If the creditors are happy and getting the payments they desire, the employees are happy and the owners are happy then there just isn't any issue. No expectation of, desire for or hope that that particular number to be positive is required. It just isn't an important number.
It does seem like being balance sheet solvent but cash flow insolvent should be impossible in an efficient market with optimal laws in place. And I agree that usually a discrepancy here implies dubious accounting.
Of course things being this neat essentially requires the balance sheet assets to exactly track (or never fall below) the value at which a creditor would loan money based on that asset. Yet it becomes complicated when I, as a potential creditor, expect the business to fare poorly in the future. In that case the amount I would pay to purchase the asset is greater than the amount that I would loan because of the asset (unless I can get some sort of shifty deal where I am paid back first.) Since some assets are essentially the core of the business and cannot realistically be sold while still maintaining the business at all this puts them in a position that can legitimately be described as cash flow insolvent but balance flow solvent. This is a rather strong sign that is time to disband the company and sell the pieces!
This may be of interest here (it corrects this earlier analysis, which would really have been apropos here if it hadn't been flawed).
In at least some jurisdictions, those are different.
And are thrown in a mix with liquidation, administration and various deals where they get official help wrangling their way out of some of their debts while being restricted or get partially nationalised or somesuch thing. Whatever rules the government has made up to forcefully remedy cash flow insolvency propblems.
That's not the word either. Obviously simple 'debt' isn't the word: someone with a million dollars in cash who owes his mate ten bucks for the meal the other night. But 'bankrupt' means a different thing again. If you have a $1m mortgage on a house and the property prices have fallen then the value of your assets may well have fallen below that needed to cover your debt but you still aren't bankrupt. At least, not yet and not while you can keep up the payments. Unless your lawyers and accountants recommend it as an option.
I would have guessed the word for what Hugh was referring to would be "net debt" but that is a bit off too (since it doesn't take into account long term assets, just liquid assets). Just plain "deficit net worth" is the simplest description I know of but it seems to be something that deserves a word of its own. Anyone know of one?
It is slang but the convention is "underwater".
Ahh, thanks.