One of the best aspects of the book is its ability to explain complex economic principles in a simplistic fashion. This allows the book to communicate to a wide range of audiences – especially novice investors. This allegorical tale sheds light on topics that are so frequently discussed but so poorly understood.

From the Back Cover of the Book

• Why governments can spend without ever seeming to run out of money?
• Why some countries are rich while others are poor?
• Whether spending or saving is the best cure for a bad economy?
• Where inflation comes from?
• Why it’s so hard to catch a fish with your bare hands?

Coming off his popular book, Crash Proof 2.0, Schiff compares the United States economy to a small island economy. He describes how an economy that was once on top of the world, is now burdened with unfunded liabilities and massive deficits. Moreover, he presents a case for the United States no longer being the engine of the global economy, but the caboose.

“The conventional wisdom is that foreign economies depend on Americans to buy their exports. This is false. The global expansion of the past decade has created new demand everywhere, and people and businesses in all corners of the world are spending. However, in America, spending has largely been achieved through a massive vendor financing scheme. Foreign supplied credit has allowed Americans to continue buying, even while American income and savings have dropped. As this credit goes bad, the losses are landing on the bottom lines of foreign financial firms. In other words, the global pain is not resulting from American contraction but from having financed our preceding expansion. This is a critical distinction few have been able to make, and it is vital to appreciating the decoupling that has already occurred beneath the surface.”

The lack of education on the difference between assets and liabilities is why many people struggle financially. Although some areas of the subject can become gray in nature others are black and white. Always remember, assets will put money in your pocket while liabilities take money from your pocket. One of the worst mistakes you can make in your financial life is thinking that liabilities are assets. With that being said here are some examples of common liabilities.

Liabilities

• Homes
• Cars
• Boats
• Clothes
• Electronics

Contrary to popular belief a house is not an asset. As many people found out during the recent crash of the real estate market in 2008, houses do not put money in your pocket. Houses have more expenses than most people think. They do not generate positive cash flow for the owner. A home mortgage is the first major expense associated with owning a home. Most Americans think they own their own home – in actuality the bank does. A typical 30-year fixed mortgage at 5.5% will incur nearly 100% interest on the principal. In other words, you will pay $100,000 in interest for a $100,000 loan.

If you are fortunate enough to have enough money to purchase your home outright you will still have monthly liabilities associated with your home. Property tax is a universal expense associated with home ownership. Homes in the city are usually subject to higher taxes than those in the county. Varying with climate, homes need energy for heating and air conditioning. A house in cold regions would obviously need to be heated for comfort and to prevent water pipes from cracking. Homes in southern regions with high humidity need air conditioning both for comfort and to prevent mold damage. Maintenance expenses may also contribute to your home as a liability. Will you need to repair a worn out roof? What about replacing an old water heater or furnace? Over the course of time maintenance expense can really add up.

Cars are another heavily misunderstood liability. One of the worst financial decisions made by people today is purchasing a new luxury automobile. Vehicles rapidly deteriorate in value when going from a new to a used condition. It is said that many vehicles drop 10-20% in value within the first week of use. Not only that, automobiles have associated expenses like fuel costs, maintenance and insurance. Although having a reliable car for commuting to work and back is a good idea, cars are not assets.

Assets

• Rental Property
• Dividend Paying Stocks
• Patents/ Inventions
• Royalties

When are houses considered assets? Although rental units incur many of the same costs as homes, rental property puts money in your pocket. Rental units that generate positive cash flow are assets. A typical single family rental property in the midwest  can reasonably demand around $700 per month in rent. Expenses for that same rental property usually cost around $500 (electric, water, cable etc), leaving $200 in positive cash flow. Because rental units have the ability to put money in your pocket, they are usually assets.

Just like houses, not all stocks are considered assets. Shares of stock in publicly traded companies are actually liabilities until you sell them at a profit. However, some stocks provide monthly payments called dividends to their shareholders. These dividend payments turn stocks into assets because they generate positive cash flow for their owner. Finding stocks that you think will increase dividend payments in the future is a great way to invest in the stock market.

In order to get out of the “rat race” you must generate enough cash flow to cover your liabilities. The best way to achieve this is to accumulate assets instead of liabilities. Once you accumulate assets with positive cash flow you can use that money to buy even more assets. Reinvesting your profits to buy more assets is one of the only ways to achieve wealth. The rich buy assets, while the poor and middle class buy liabilities that they think are assets.


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The dramatic rise in college tuition might have you asking a lot of questions. Costs associated with obtaining a college degree have gone out of control.  Surprisingly, the trend of increased college tuition hasn’t decreased during the worst economic downturn in recent history. With the unemployment rate currently standing at 10.20% tuition has still managed an  increase of 6.50% in the fall of 2009. Worst of all, many of the reasons students have been given for rising tuition simply aren’t accurate.

In a free market college tuition prices are a product of supply and demand. Unfortunately, these free market forces aren’t allowed to play out because of government interference. All of the programs designed to help students pay for college have caused prices to skyrocket. Grants and guaranteed federal student loans are the main reasons for out of control tuition costs. That’s right, the very programs designed to help students are actually hurting our pocket books.

Guaranteed Student Loans

If students couldn’t borrow money through government guaranteed loan programs fewer students would have money for college. Private institutions would never loan this money out for fear of going broke from loans in default. When more students have access to guaranteed financing through government loan programs, demand for college placement increases. This results in a situation where students compete for a fixed amount of college positions with federal money.

Universities know this is taking place and can increase prices accordingly. They no longer have any incentive to control costs and reduce wasteful spending. Consequently, the gap between actual teaching faculty and administrators has shrunk. Along with the ever growing amount of Assistants, Directors, Deans and Heads comes supporting staff and office facilities. Throughout history the answer has always been increasing tuition prices, but never eliminating non-core expenses. This process starts a cycles of wasteful and unnecessary programs.

At public colleges, tuition has generally been driven up by rising spending on administrators, student support services, and the need to make up for reductions in government subsidies, according to a report issued by the Delta Cost Project, a nonprofit based in Washington, D.C. – Kim Clark

The chart above shows the ratio between average incomes and tuition at Stanford University at various points in history. The data shows a clear deterioration to just 1.53 in 2009. The average college student must work more than two thirds of a year (full time) to pay for just one year of tuition at Stanford. This is compared to just one-fifth of a year to pay for one  year of tuition in 1960. With increased government sponsored loan programs and other entitlements no reason exists for this trend to change in the future. Adding to that Ben Bernanke and the Federal Reserve sponsored inflation and you have rapidly rising costs.

Anytime our government interferes with free market systems costs go up and quality goes down. This is caused by moral hazard through guarantees and decreased competition. Colleges know they can charge higher tuition prices because of guaranteed loans. At the same time a greater amount of students are pursuing higher education so colleges don’t compete for enrollment as much as they use to. Instead prospective students fight for acceptance at universities. This is a recipe for skyrocketing tuition costs and a massive burden of debt for young academic Americans. The average college student is $20,000 in debt by graduation. Worst yet, many acquire consumer debt through credit cards and mortgages soon after. This certainly doesn’t sound like a good start to achieving financial security.

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