With all the current discussion regarding Debt in the United States (including national, mortgage, and credit card debt), I feel it is time to add some clarity to our Debt situation and try to put it into terms that everyone should be able to understand.
As I do this, I will first explain the “good news” regarding our debt, then I will follow that up with the “bad news.”
As a starting point, let us agree on some baseline numbers regarding the major components of our American Debt. Our National Debt today is $14 Trillion and growing; our mortgage debt is approximately $10 Trillion and now with housing prices somewhat stagnating settling in around that figure; and our credit card debt is a little less than $1 Trillion. Add them together and we get a total debt of $25 Trillion.
Now here is the good news first.
Based upon U.S. Census 2008 data for a population of 78.9 million American families, the average income per American family was $79,634—the median income, $65,589. Now given that information, let us take the above $25 Trillion in Debt, treat it like we would a long-term mortgage debt obligation, and do some back-of-the-envelop calculations.
First, if you divide the $25 Trillion of Debt by the population of American families, the average debt per family comes out to be $316,961 ($25 T / 78.9 m). Seems like a lot, doesn’t it? But if you treat that $316,961 average family debt like you would a long-term 30-year fixed mortgage with an interest rate of 5.0%, the yearly principal and interest payments due over the next 30-years calculates out to be $20,618 per year per family.
That may still seem like a lot, but in terms of the average family income, the $20,618 annual debt payments only represents 25.9% of the family income and in most cases would be considered low enough to pass generally accepted underwriting standards for awarding debt.
At this time I would like to point out that Census data also tells us that over the past 30-years (the period of time we accumulated the vast majority of our current $25 Trillion Debt), the average income per family in constant 2008 dollar terms, increased by approximately $20,000—enough in effect to cover the yearly principal and interest payments calculated above.
So in other words, the good news is that America should be able to or seemingly has the means to pay off its current debt obligation.
Now here is the bad news. Our Debt is growing, and especially the largest component of that debt—our national debt. And instead of paying off our debt (like in the scenario above), we are adding to our debt while average American family salaries stagnate or fall during this period with 10 per cent unemployment.
What is the basis of our growing national debt? There are two major factors: (1) growing federal deficits resulting from government spending exceeding federal revenue receipts; and (2) robbing “Peter to pay Paul” as we spend monies set aside for future social security payments to cover shortfalls in current non-social security federal spending.
Using data from the Financial Report of the United States (Fiscal Year 2010), Exhibit 1 shows our growing national debt and how the two factors mentioned above have changed over the past 50-years (1962 – present). The difference between the two lines represents the amount of Debt we owe our own social security fund.
Photo: Jim Boswell
In order to put our current national debt in perspective, it is also useful to show how the national debt has changed in relation to the U.S. GDP over the same 50 year period. Exhibit 2 shows this relationship.
Photo: Jim Boswell
To put our current 94% Debt to GDP ratio in perspective, the reader should know that there has only been one time in the history of the United States when the Debt in relation to our GDP was higher than it is today—and that period was during and immediately following World War II.
Over the past 50-years, federal government outlays have averaged 20.8% of our GDP, while federal government revenues (receipts) have averaged 18.1% of our GDP—a gap that represents a consistent yearly 15 per cent (20.8/18.1 – 1) over-expenditure above revenues. If you back out the amount of the 18.1% of revenues that come in the form of social security payments meant for future social security outlays, the true gap between annual expenditures and revenues has been more than 25% over the past 50 years.
Our national Debt problem has been ignored by Presidents (who submit budgets to Congress and manage the Executive Agencies that do the spending) of both parties and by Congresses (who appropriate spending levels) of both parties for 50-years and probably more so in the past 30-years. And if we are going to fix our problem, I believe it best that we look at our Debt situation as an “American” problem and not something to blame on one political party or the other.
We have a problem, America. And if we want to face up to our “American” problem, we can fix it.
What needs to be done does not take rocket science, but honesty and American will. Believe it or not, the truth of the matter is this: We can actually reduce the currently high 94% level relationship between our Debt and our GDP even while continuing to run deficit budgets. But to do so, we need to at least begin reducing our Deficits below the growth in our GDP. Now how difficult should that be?
Well, based upon the numbers from the most current Financial Statement of the United States, it must be harder than you might otherwise think because over the last 10 years (2001–2010) we managed to grow our National Debt by $7.5 Trillion while raising our level of GDP by $5.0 Trillion.
So wake up, America, here’s what we need to do starting with this upcoming new budget cycle. Don’t worry about “balancing the budget” right now, but at a minimum, let’s do the following two things.
First, let’s quit fooling ourselves about how we are using “future” social security funds to cover “current” federal expenditures. That is fool’s gold, false advertising, and simply a sham. Any expenditures of this matter need to be counted as part of our “true federal deficit”.
Then second, let’s establish a goal and do whatever it takes to reduce current and future year “true federal deficits” so they represent no more than 40% of the projected growth in our GDP. Debt does not necessarily have to be a bad thing, but we do need to begin proving that we are taking at least a modicum level of responsibility in controlling our Debt. That is the least we can do for our future generations of Americans.
For those readers who are interested in following the numbers relating to the upcoming budget cycle, feel free to visit the website at quanta-analytics.com where we will be presenting the programmatic details that make up the federal receipts and expenditures for 2011 and beyond—as we continue to track the “true federal deficit” against our GDP.