The Current Financial Leverage of the Earth.
Theory
This essay examines the Current Financial Leverage ratio of the Earth to establish if it can be regarded as a company that is in financial weakness, financial stability or financial profit.
Method
The essay examines the definitions of the terms involved in Financial Leverage, it then examines data on the current Debt, Assets, Liabilities, Net Worth, Debt Ratio, Total Equity and the Financial Leverage Ratio of the Earth.
Conclusions are then drawn.
Definitions
Financial Leverage
‘Financial Leverage can be aptly described as the extent to which a business or investor is using the borrowed money. Business companies with high leverage are considered to be at risk of bankruptcy if, in case, they are not able to repay the debts, it might lead to difficulties in getting new lenders in future. It is not that financial leverage is always bad. However, it can lead to an increased shareholders’ return on investment. Also, very often, there are tax advantages related with borrowing, also known as leverage.’
Source: https://www.readyratios.com/reference/debt/financial_leverage.html
‘Financial leverage indicates the reliability of a business on its debts in order to operate.’
Source: https://www.readyratios.com/reference/debt/financial_leverage.html
‘If the financial leverage ratio of a company is higher than 2-to-1, it indicates financial weakness. If the company is leveraged highly, it is considered to be near bankruptcy. Also, it might not be able to secure new capital if it is incapable of meeting its current obligations.’
Source: https://www.readyratios.com/reference/debt/financial_leverage.html
‘A leverage ratio is meant to evaluate a company’s debt levels. The most common leverage ratios are the debt ratio and the debt-to-equity ratio.’
Source: http://www.investinganswers.com/dictionary/leverage-ratio
Leverage is the borrowing of money to increase the outcome of a business deal.
Data. Debt
‘Debt is an amount of money borrowed by one party from another.’
Source: Google Search
Global Debt has been calculated as $233 trillion.
Source: https://www.bloomberg.com/news/articles/2018-01-05/global-debt-hits-record-233-trillion-but-debt-to-gdp-is-falling
Data. Assets
‘an item of property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.’
Source: Google Search
The United Nations definition of inclusive wealth is a monetary measure which includes the sum of natural, human, and physical assets.
Source: https://en.wikipedia.org/wiki/Wealth
The total wealth; assets; of the Earth has been calculated as $280 trillion.
Source: https://www.credit-suisse.com/corporate/en/research/research-institute/global-wealth-report.html 2017
Data. Liabilities
‘a thing for which someone is responsible, especially an amount of money owed.’
Source: Google Search
If the total world debt is taken as the total liabilities of the Earth.
Global Debt has been calculated as $233 trillion.
Source: https://www.bloomberg.com/news/articles/2018-01-05/global-debt-hits-record-233-trillion-but-debt-to-gdp-is-falling
Data. Net Worth
‘Net worth is the value of all assets, minus the total of all liabilities. Put another way, net worth is what is owned minus what is owed.’
Source: https://www.bankrate.com/calculators/smart.../personal-net-worth-calculator.aspx
The Net Worth of the Earth can be calculated as
$280 trillion - $233 trillion
$47 trillion
Data. Debt Ratio
A debt ratio is simply a company's total debt divided by its total assets.
Source: http://www.investinganswers.com/dictionary/leverage-ratio
The Debt Ratio of the Earth can be calculated as
$233 trillion / $280 trillion
0.83 or 83%
This means that for every dollar of Earth assets, Earth had $0.83 of debt.
This is not above 1.0 so that the Earth has more Assets than Debt.
The net worth of every dollar can be calculated as
1 – 0.83 dollars; 0.17 cents.
Data. The Total Equity of the Earth
Equity: ‘the value of the shares issued by a company.’
Source: Google Search
Shares: ‘a part or portion of a larger amount which is divided among a number of people, or to which a number of people contribute.’
Source: Google Search
‘There are 60 major stock exchanges in the world with a total value of $69 trillion.’
Source: http://www.visualcapitalist.com/all-of-the-worlds-stock-exchanges-by-size/
$69 trillion for a population of 7,442,000,000 (2016)
Source: Google Search
Source: World Bank
Data. The Financial Leverage Ratio.
The Financial Leverage Ratio can be expressed as
Financial Leverage Ratio = Total Debt / Total Equity
This is the same as the Debt-to-Equity Ratio.
Therefore Financial Leverage can be considered as Debt.
Debt-to-Equity Ratio = Total Debt/Total Equity
Source: http://www.investinganswers.com/dictionary/leverage-ratio
The Financial Leverage of the Earth can be calculated as
$233 trillion / $69 trillion
3.37 to 1
This is more than 2 to 1 and so the Earth is financially weak and near bankruptcy. It has a lot of debt relative to its assets.
This means that for every $1 of the Earth owned by the shareholders; population; $3.37 is owed to someone else in the population.
Conclusions
Leverage is Debt.
The Financial Leverage Ratio of the Earth is currently 3.37 to 1.
This means that for every $1 of the Earth owned by the shareholders; population; $3.37 is owed to someone else on Earth.
This is an abstract incentive forced on human society to keep humans working to survive.
It can be suggested that since no external planetary economy can be used as a reference that the ratio is not a clear description as to the potential trading ability of the population of the Earth.
It can be suggested that only ratios calculated at a company level; between companies; are of use since they describe everything around a universal scale of forced economic activity.
A current view; in the context of climate change and population increase forcing environmental, resource and energy depletion; suggests that the Earth should examine this ratio against a context of depletion.
In this context the use of Financial Leverage cannot be sustained since the environment, resources and energy of the Earth are considered finite and not infinite.
As human populations increase the demand for environment, resources and energy to survive will increase driving depletion of the Earth.
As environment depletes it will become so scarce as to become the only leverage available; beyond money exchange.
As resources deplete they will become so scarce as to become the only leverage available; beyond money exchange.
As fossil fuel energy is phased out the ability to inject higher energy into a depleting economy will decrease. This follows the Laws of Thermodynamics. High level energy will become so scarce as to become the only leverage available; beyond money exchange.
Renewable environment, resources and energy cannot solve this finding since they are currently reliant on fossil fuels; the higher energy input; to be created and sustained.
The final form of the renewable economy coupled with increasing populations must inevitably be one of adapting to ongoing depletion of leverage per person on the Earth.
Leverage in a depletion context is therefore not passive it is intrinsically destructive.
It may be determined that the initial dislocation from the fossil fuel economy to the renewable economy was reached in the global credit crisis of 2007. Its effects on countries, companies, families and individuals can be outlined.
Leverage effects for a country can include.
A stimulus to the private enterprise economy.
A fall in currency exchange rates.
Sale of natural resources increases.
Political instability.
Government spending not being covered by tax gathered from its population.
Credit increases.
Increases in investment; external money; purchasing parts of the country.
The population becomes more reliant on loans to maintain their lifestyles and social position.
Parts of the population lose all of their assets and become reliant on welfare.
The welfare economy increases.
The countries administration hierarchy collapses and adds to the instability.
Source: https://bizfluent.com/about-6123058-effect-debt-country.html
Source: http://www.debtbombshell.com/consequences-of-national-debt.htm
Leverage effects for a company can include.
Leverage; from the above data; is equal to debt.
All companies to create and maintain their offices, work list, suppliers, manufacturers and sales must first go into debt before they get paid.
An example would be the architecture and construction industry where the architect, consultant, and builder have to create and maintain not only their skills but also the offices, insurances, pensions, transport, plant, tools, workforce, administration before they get any work offered them.
Once they bid for and successfully obtained work they have placed themselves in a process of increasing debt balanced against stage payments from the client.
Rather than use their existing capital most architecture and construction companies take out loans to cover the cost of each project.
Once repaid by the client stage payments the architect, consultant and builder retains the profit from the work carried out.
The ability to get a bank loan depended; before the credit crisis of 2007; on the amount of potential work that the architect, consultant, and builder had to carry out. In this context the priority of any new architecture or construction company was to get a list of work and to stagger when the work would be carried out. This maintained a large list of work, the ability to get ongoing bank loans, the ability to invest the money borrowed in other banks and assets. This was reviewed each year to allow the company to increase its capital and continue repayments.
This created companies that had; on paper; a large amount of work, the backing of financial institutions and a large capital. These types of companies were considered secure. The reality of each company was however that debt; leverage; was controlling their existence.
If the economic situations; mortgage rates, wages, interest rates; changed, then the company assets; in the case of architecture and construction; its work list; reduced in value and so could not be re-valued each year to get further bank loans to live off or invest.
Source: http://smallbusiness.chron.com/debt-financing-impacts-companys-balance-sheet-61685.html
Countries are made up of companies, families and individuals so the effect of debt; leverage; infected all areas with the same philosophy. Debt; leverage; allows wealth expressed through assets. Debt is also expressed through the quality of lives of human beings.
Leverage effects for a family can include.
Loss of social status outside the family.
Arguments and break-up of the family.
Effects on the quality of life of children.
Source: https://apertureiva.com/2016/06/13/the-impact-of-debt-on-families-the-debt-trap/
Source: https://www.childrenssociety.org.uk/what-we-do/resources-and-publications/publications-library/debt-trap-exposing-impact-problem-debt-ch
Leverage effects for an individual can include.
Isolation through lack of finance from peer groups.
Loss of social status in the community.
Unemployment.
Willingness to work for low pay.
Reduction in self-esteem.
Poor physical health.
Poor mental health.
Source: https://blogs.citizensadvice.org.uk/blog/the-impact-of-debt-on-peoples-lives/
They become less likely to start a business, study, retrain, move location or to change jobs.
Source: https://www.citizensadvice.org.uk/about-us/policy/policy-research-topics/debt-and-money-policy-research/a-debt-effect/
The Current Financial Leverage ratio of the Earth can be regarded as a company that is in unsustainable financial weakness and bankruptcy moving from a self-deceiving, infinite asset, infinite leverage, context to a realist renewable, finite asset, finite leverage, depletion context.
Ian K Whittaker
Websites:
https://sites.google.com/site/architecturearticles
Email: iankwhittaker@gmail.com
09/02/2018
14/10/2020
1743 words over 4 pages