Assets and liabilities

Last summer's credit crunch and financial market debacle seems to still be going on and volatility seems to be back once again. I guess this, in a sense, is healthier in the long run when compared to the scenario where the bull market would've just continued on and on. Of course it's also annoying in the sense that you can't really make money as easily in a bear market as you can in a bull market. But such is life.

Anyway, the entire credit crunch situation got me thinking about assets and liabilities. And an uneducated feeling would be that very many people can get these two concepts mixed up very easily. Or if not entirely mixed up, at least the focus and perspective on things gets distorted easily. Is a house that is financed with a mortgage considered an asset? According to some definition, and asset is the sum of liabilities and equity. And an asset should generate some sort of value for the holder in order to be considered an asset in the first place. In light of these definitions, a house is of course an asset in rising markets; it keeps on increasing its value and then when you utilize other mechanisms by, for instance, selling it, you can make a nifty profit. Do that, take the money, and then buy a bigger house and start the cycle again with a bigger loan. And as long as things go up, you keep making money and can keep on upgrading houses. But the assumption was that bull markets continue and that thanks to the decrease in volatility and thus risk (via the central banks' recently learned mechanisms of interest rates through which inflation, for instance, can be controlled) leads people to underestimate the impact of the associated liabilities. Credit dries up, rates go through the roof and voilá, liabilities kill you.

And why am I thinking about assets and liabilities? I'm in the midst of a crisis; I've been looking at used cars for the past couple of days and I just want a car. A used Audi A4 or something. But as an investment it's incredibly bad, as cars notoriously only lose value (if you forget some exceptions like some rare vintage cars). Not only that, but buying a car would also require me to finance it partly via debt. And as much fun as a car would be, I'm too afraid of the liabilities and the extent to which they tie me down. Things are going decently well for me right now, but who knows how long this'll last...

Oh, and as an additional note, this is also my 150th blog entry in this blog. Hurray!