The person who bought the house owes a lot of debt, and the person who sells the house also owes a lot of debt, where does the money go?

If you don't sit at the table, you'll be on the menu

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Where does the money you owe go?

Recently, I saw an interesting paragraph:

"The person who buys the house is short of a lot of debt, the person who sells the house is also a lot of debt, the local government that sells the land is also a lot of debt, and the country that collects taxes is still a lot of debt. Where did the money go?"

It does seem strange, but once you have learned a little bit about finance, it is not difficult to understand why.

Every debt relationship is composed of a "debtor" and a "money-lending", and one person's debt is another person's assets, which can be sorted out along the "debt-asset" relationship.

What kind of assets correspond to the debts owed by the people who buy the houses? Of course, they are bank loans, and the loans are the assets of the banks; what are the debts owed by the developers? The main ones are bank loans. In a country like China, where indirect financing is predominant, most of the debt relationships are directly or indirectly related to banks.

Banks themselves are highly leveraged, and their liabilities correspond to the deposits of residents and businesses, that is, the assets of residents and businesses.

This is the most basic set of "asset-liability" relationships: residents and enterprises with surplus money can deposit their money in the bank, and the bank can lend to other residents and enterprises in need of funds.

But there is a common misconception that banks do not use depositors' money to lend to lenders, but have deposits to be eligible to lend to borrowers – because after the depositors' money is gone, the depositor's money does not decrease.

The bank only needs to keep an account to make a loan, and the borrower's bank account has an extra amount of money out of thin air, which is a derivative deposit, and M2 has increased more than 1,000 times in 40 years.

Therefore, the correct statement at the beginning of the paragraph is that it is precisely because those who buy and sell houses owe a lot of debts that there will be more money, and where is the extra money - in the 58 trillion bank deposits.

In modern society, debt and wealth are not opposites, debt is the source of wealth, which is the first characteristic of debt.

Of course, money doesn't really come out, and when God gives you what you want, it will definitely give you a few things you don't want, and this article will go on to talk about several other characteristics of debt in the modern economy.

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Why are rich people rich?

Debt is to spend the money earned in the future, and in costume films, only the poor can't survive, so they borrow money. But this word, which is a bit negative in everyday life, is neutral or even positive in finance and economics. So why do modern people like to borrow money so much?

The root cause of modern liabilities is the imbalance in the time utility of wealth, and the utility of 10,000 yuan in a year is lower than the current 10,000 yuan, as long as the difference is higher than the interest rate, the debt is a worthwhile thing.

This decline in utility is actually long-term inflation, but this long-term inflation is the result of increasing debt (wealth) rather than the cause, so why does the utility of money decrease for a long time?

There is no answer in traditional economics, and behavioral economics has an explanation, that is, the utility discount model, which has been proved by many experiments that people's discount rates for forward losses and forward gains are inconsistent: the forward "gains" are less valuable and the discount rate is higher, and the forward "losses" are more valuable, the discount rate is lower, so people's desire to have now can always overcome the fear of not being able to pay back in the future.

No problem, you can understand it from another angle of "age", most people have less money and more desire when they are young, and more money and less desire when they are old, but after all, life is only a few decades, and no one wants to put money in old age without desire to spend money.

Some people may ask, if people are naturally inclined to go into debt, then why did there not appear large-scale social debt thousands of years before the modern society?

The reason is also very simple, there is interest on debt, and it must be able to find an opportunity to make money before borrowing, and in the past few thousand years, the development of productive forces has been slow, and it is almost impossible for people to change in their lives, so naturally no one wants to go into debt.

The rapid growth of the modern economy is the cycle of "rapid development of productive forces - rapid growth of liabilities - rapid growth of wealth", which also brings a serious social problem, debts need to be supported by the ability to make money, different people's debt capacity is different, as mentioned earlier, one person's liabilities are another person's assets, and the result is that liabilities and assets are unevenly distributed among different groups of people.

We usually say that wealth is concentrated in the hands of a few, but in fact, liabilities are more concentrated in the hands of a few people - including the enterprises they control, and the leverage ratio of the rich is higher than that of the poor, and the rich are rich because they are very good at using debt to absorb the limited assets of the poor to make money profitable.

The most typical example is the house, in fact, the house price has not risen much in recent years, and what really makes the real estate wealth "rise" is the triple leverage brought by the 30% down payment.

If you want to make a fortune, you have to seize the opportunity and use leverage, and the more leverage you have, the more you trust it. Debt is a positive feedback amplifier of wealth, causing the gap between the rich and the poor to widen, which is the second characteristic of modern debt.

Of course, wealth does not really come out of thin air, behind it, there is credit.

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Behind the "magic" is credit

Back to the beginning of the paragraph, in fact, the developer's debt is no longer mainly bank loans, development loans were tightened as early as a few years ago, and now the two largest sources of real estate enterprise debt: one is the advance payment for off-plan housing, which comes from the down payment of residents and mortgage loans from banks, and the other is the money owed to upstream suppliers.

These two liabilities are interest-free liabilities generated in real estate operations, which is a good thing in the rising period of the enterprise, so what are the assets corresponding to these two liabilities?

Some of them are deposits that have not yet had time to be used, lying on their stomachs in the bank accounts of unfinished projects, and the other part is in the form of physical assets of unfinished real estate.

This is the knot that cannot be untied in the real estate debt crisis.

Real estate companies are unable to repay their debts as they fall due, not because they have no money on their books, but because they are frozen by banks and local governments. Why should the banks and local governments freeze it? Because they haven't fully delivered the house, they are afraid that it will not be finished.

The problem is that in the past, real estate development was a fund to develop several projects, and money flowed between different projects, but now the money for all projects is frozen, and the funds that can be used freely are not enough to complete and deliver the houses.

In the past, the solution to this problem was to continue to borrow money to make the project lively, so that the funds could flow, but now banks are reluctant to add new loans, bonds cannot be issued, houses cannot be sold, and suppliers are not willing to take credit. Real estate companies can only watch the money in their accounts step by step towards the end of the road.

Debt is a kind of magic of "turning money" out of thin air, the speed of changing money is the currency multiplier, the currency multiplier is the liquidity of assets, and behind the liquidity is credit, which is based on the belief that "there will be no default". If you don't tell you the issuer of the bonds, you will not buy them if you only tell you the purpose of the bonds, but if you only tell you the issuer of the bonds, even if the purpose is to build a highway on the moon, you believe that you will not default.

I used to think that the credit of private enterprises is not enough, so there will be a debt crisis, but Vanke's recent debt turmoil tells us that things are not so simple, Vanke's major shareholder is Shenzhen Metro, a proper local state-owned enterprise, Vanke's brand exceeds most central enterprises, and its financial stability exceeds that of most private enterprises, and everyone will still be worried.

The credit of state-owned enterprises is high, but it is also limited, and the crisis exceeds a certain level, and this golden sign may not be effective. Now, all urban investment bonds, all state-owned enterprises, are using national credit to endorse themselves, consumer credit without contributing, Rome was not built in a day, and Rome was not destroyed in a day.

The game of amplification in the conversion between liabilities and assets relies on credit maintenance, which is the third characteristic of liabilities.

However, there is another problem here, credit can not be seen and touched, but the house is a real asset, why did the property change from a high-quality mortgage asset to a toxic asset in just a few years?

The root cause of the crisis in real estate companies is that houses are not selling, or more precisely, people are gradually forming expectations that housing prices will fall in the long future - because of the arrival of the demographic inflection point.

So the deeper reason, real estate, as the most durable asset, is the first to face the most fundamental problem of all modern national debts - demographics.

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The wealth grabbing of the next generation by the previous generation

A country's national debt is basically increasing, no one thinks about repaying it, and the facilities that the national debt invests in are basically public projects with little economic benefit, because the national debt is guaranteed by taxes – more precisely, future tax revenues.

So what really makes a country's debt game unbearable is the aging of the demographic structure.

Taking the pension as an example, it is also essentially a debt: when a person is young, he is guaranteed by the state and lends a part of his salary to the retired elderly, and when the person is old and retires, the state guarantees that the young man at that time will borrow (in fact, repay) to him.

The sustainability of this pension liability game depends on two things, one is the credit of the state, and the other is the proportion of young people. Especially the latter, if the proportion of elderly people is getting higher and higher, it is equivalent to lending to an old man when you are young, but when you are old, only half of the young people can lend (repay) money to you, and the game will not be able to play.

The reason for using a pension here is that the pension best reflects the debt relationship between the young and the old, and in fact, the national debt is guaranteed by future taxes, which is essentially the debt relationship between the young and the old.

A country's ability to collect taxes depends on productivity, including labor efficiency, technology accumulation, and capital accumulation, but the core element is the working population. Fewer young people mean that the country's productive forces are not sufficiently secure against debt.

Many people think that as long as they earn enough money when they are young, they can hire someone to serve them in the future, but this idea is too good and has three difficulties:

1. Because there are not enough young people engaged in labor, the price of many service goods far exceeds the purchasing power of your pension;

2. Because there is not enough labor to engage in production, resources cannot be effectively developed, commodities will be in short supply, and relative pensions will become more expensive;

3. Paper money is also a credit currency, and the purchasing power of a country's currency is consistent with its economic strength, so the shortage of labor will also lead to the depreciation of the currency and the cost of imported goods.

The high prices of goods and services here are not "expensive" due to inflation, but relatively expensive due to declining incomes, and the incomes of young people have declined, and the pensions of the elderly have naturally declined.

Therefore, in a country with a long-term aging population, the "asset-liability" structure will gradually deteriorate, and if the population problem cannot be solved, the entire debt scale of the country (that is, the size of the economy) will slowly shrink, or it will be forcibly supported until a large-scale debt crisis occurs.

If ordinary debt is a means of transferring wealth between those with more assets and those with more debts, then the national debt of countries with aging populations is the preemptive wealth of the previous generation to the next generation, and this is the fourth characteristic of debt.

Of course, the process of demographic change is very long, and in this process, if a country is big enough, it will first change its internal debt relationship, which is one of the reasons why local debt is high now.

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Wealth grabbing in less developed regions by developed regions

The mainland's transfer payment is an important means for the central government to distribute a part of the tax revenue from the developed areas to the backward areas, and is an important means for the balanced development of the regional economy.

On the surface, it seems that the transferred payments are at a loss in the developed regions, but if we understand it from the perspective of debt relations, they are actually taking advantage of the fact that the policies of the developed regions lend money to the smartest, most capable and most powerful people in the backward regions, and in the end they always succeed in recovering them.

The reason is very simple, good projects are never short of investment, and transfer payment projects are usually not economic accounts, generally two categories, one is people's livelihood projects, and the other is infrastructure projects.

Most of these people will not return to their hometowns, but will stay in developed areas, where the tax revenue generated by highly educated young people is far greater than the social welfare expenditures required, and the pull on regional consumption will bring the transfer payments back to the developed areas.

The whereabouts of funds for engineering projects, the material engineering business is generally monopolized by large enterprises, and most of the tax revenues of these enterprises are in developed areas; the part of labor costs and profits, there is an uneven distribution, and a considerable part of them are obtained by those who have the ability to get the project and related stakeholders, although the consumption power of these people supports the third and fourth tier cities, and now it seems to be stronger than the first and second tier cities, but the backward areas can not meet the consumption of these people for a long time, and the largest expenditure item real estate collapses first in the third and fourth tier cities, and finally the money will flow back to the developed areas。

The transfer payment is only a part of the project funds, most of which need to be supported by the local government, which is the main purpose of the urban investment bond.

Under the normal economic law, the factors of production in backward areas will always flow to developed areas, and the transfer payment is coordinated with local debts, which actually increases the siphoning of resources in backward areas, and local governments in backward areas often take winning projects as their only goal for the sake of political achievements, completely ignoring the actual needs of the locals, resulting in idle railway stations occupied by square dances, idle bus stations rented by driving schools, highways for residents to walk, and large communities with black lights......

It is possible to set up all kinds of non-trade barriers between countries, exchange markets for capital, exchange resources for technology, and try to keep the factors of productive forces in the localities, but there are almost no real barriers between regions on the mainland under the goal of unifying the big market.

Moreover, when economic growth slows, the flow of capital and human capital to developed regions will accelerate in order to strive for greater efficiency. When Japan entered the bubble economy, the population of Tokyo and other major cities was outflow, but after the bubble economy burst, there was a long-term net inflow, and only the population of the Tokyo metropolitan area increased in the country.

In the modern economy, one person's liabilities correspond to another person's assets, and debt has also become the most implicit way of wealth transfer, between the rich and the poor, between the high and low credit subjects, between the developed and the backward regions, and even between the previous generation and the next generation.

A recent criticism is actually very much in line with the rules of the game: everyone in modern society is deeply involved in the debt game, and if you are not at the table, you will be on the menu - there is no in-between.

So, how do you sit at the dinner table?

This article is nearly 5,000 words, full of complex financial terms, and it will take at least 20 minutes to read the whole text, and if you can read it to the end, at least it means that you are no longer on the menu, but want to sit at the table, which means that you need to have the strength to participate in this game of risk and return.

In the past six months, I have been preparing a small circle to share my thoughts on finance and economics with ordinary people, and the original intention of the establishment of this membership club is that most people understand investment, which is to buy stocks, buy funds, buy wealth management, buy insurance, buy gold...... I hope that this small circle will share my asset allocation direction and investment suggestions in 2024, and focus more on analyzing the laws behind economic and financial phenomena, so that everyone can not only get "fish", but also learn to "fish".

The circle will be officially launched next month, tentatively titled "Gangda's New Thinking of Wealth", which will not only provide daily explanations of economic opportunities, but also more financial knowledge, community activities, interactive Q&A and live sharing. If you have any specific suggestions, you can leave a message at the end of the article.

First published on the WeChat public account of "People and Gods (ID: tongyipaocha)", look at economic phenomena and read wealth passwords.