Every financial asset is also a liability. Let's read that again:
Every financial asset is also a liability. What does this mean?
Suppose you have a bank savings account, or a bank CD. You regard them as assets, but for the bank they are liabilities. If the bank goes bankrupt, they no longer have the liability, and you no longer have the asset, unless your account is insured by the FDIC.
What about insurance policies? You have homeowners or renters insurance, auto insurance, health insurance, life insurance and/or long-term care insurance. You may think of them as assets, even if they have no cash value. But to the insurance company or companies, they are definitely liabilities. And what happens to these policies if the insurance company goes bankrupt?
Corporate bonds, preferred stock and common stock are assets to you, but liabilities to the corporation that has issued them. And what happens to the value of your assets if the corporation goes bankrupt?
If you own a home, with a mortgage, the home is your asset, and the mortgage is your liability (but it is an asset to the finance company holding the mortgage). If you go bankrupt, or your home is foreclosed, what happens to the value of the mortgage?
The point is that every financial asset is also a corresponding liability. But what about real assets that are unencumbered, that have no corresponding financial liability? If you own your home free and clear, with no mortgage, it is a real asset without a corresponding liability. Any real property or personal property asset that is not leveraged, that has no lien or mortgage or encumbrance, is an asset without a corresponding liability.
What about currency... is it a real asset, a financial asset or neither? Prior to 1971, when the U.S. was on the gold standard, our currency was backed by gold, and could be redeemed in gold. So one could argue that currency was a real asset. Today there is no backing for our currency. It is worth only what it can be exchanged for in goods and services. It is not
backed by anything of value. If we try to redeem currency at the U.S. Treasury, they will give us an interest-bearing U.S. Treasury security of some denomination and maturity.
The conclusion we must come to is that our currency is only worth what it brings in the marketplace. As the U.S. government prints and circulates more currency, we will have more money chasing fewer goods and services... this is the definition of inflation. At some point nobody will want U.S. dollars... this is the definition of hyperinflation, and it could happen gradually, or very, very quickly.
At that point we will enter a barter economy, trading goods and services directly. Nobody will trust paper money; it will have become worthless.
This is why it is good to have a portion of your wealth in real, physical assets.
