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Date: Thursday, April 05, 2012

The Nonsense of Numbers That Frighten

Its tax time and everyone is faced with frightening numbers. Television news programs, newspapers,

and radio shows will be hammering away with really frightening numbers. Lets get some facts out there

for you to have some perspective: As of April this year, we have a national debt (meaning money the

government has borrowed mostly from Americans like you in the form of treasury bonds) that is

hold on to your seat - $15,579,852,946,457. Lets call this 15 trillion dollars to make it easier.

Wow! you say. Whos going to pay that back? The answer is that no one person is going to pay it

back. It will get paid back (as it was just 12 years ago) by a prosperous economy (and no war).

Lets see what that huge figure really means to the man in the street. According to the IRS there are

over 135 million personal taxpayers currently covering about 41% of the tax burden. According to the

census there are only 116 million households. So some households have more than one person filing

tax. This usually means they are making more money than the average wage earner and it pays them to

file separately. So, lets assume that the 135 million taxpayers have to repay 41% of this national debt.

Each personal taxpayer will have to repay only $47,073. Thats not so bad really, some will pay more,

some will pay less.

Then there are 27 million businesses in the US that pay around 51% of the budget every year. Each

business would have to repay about $293,000. The rest comes from other taxes (banking, import and

other revenue).

Somehow, it is not so frightening when you consider your household only owes $47,073 in

government debt. Thats about a car or so bought over, say, the next 10 years. And when you look at

overall debt government, business, household debt and banking debt - compared to some other

countries, as compared against our gross domestic product (what we make and sell as a nation is called

GDP), it seems we are doing really well, with a ratio of debt to GDP of around 3 to 1. What does that

mean?

Lets pretend you are going to a bank and getting a mortgage. The bank will loan you money based

on your earning capacity less your debt (credit cards, payments, etc.). If you are a normal risk, they will

lend you as much money at prevailing interest rates so that your payments do not exceed 33% of your

income for the next 20 years. And guess what, spread over 20 years, the US has a debt ratio of 15% for

every dollar we owe household, credit cards, government and businesses. For every dollar this nation

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earns every year, we collectively adding everything up - owe only three dollars. Spread over, say, the

term of a mortgage, we can afford that. The bad news is that in the past 12 years our debt ratio has

climbed from a normal 200% to 300% in 2010 and not to 333% of GDP and unless we get a handle on it,

we may borrow more than we want to repay. I only say want to because there is no way this nation is

going bust as some people pretend.

So how does the US stand internationally? Lets take a quick look at the top 14 economic countries

polled in 2010: which nation has the largest debt to GDP ratio? Great Britain with 466%. This is followed

(in order) by Japan (471%), Spain (366%), South Korea (333%), France (323%), Switzerland (313%), Italy

(315%), USA (296%) Germany (285%), Canada (259%), China (159%), Brazil (142%), India (129%) and

finally Russia (71%).

And when you look at government debt or business debt, the US is the middle of the pack (at 65%

and 79% respectively). Our household debt is third highest 97% (with only Switzerland and Great Britain

having much more) but that included leveraged mortgages and that figure is dropping as people

refinance and housing prices drop. When it comes to banking, were in the bottom third of the highest

debtors, which is good news (although puzzling as to why our banks are so incapable of financing a

business turnaround).

So, how will it all end? When the economy picks up a full head of steam, providing we can stay out of

costly wars, the national debt could be repaid by taxpayers and businesses in as little as 10 years. The

upward trend has to be slowed or reversed, but some of that will happen as more money comes in.

More people and businesses earning means more money in the treasury which lowers that 300% ratio.

Part of the problem were facing as a nation is that the numbers are so frightening, and

electioneering people can frighten you with them, blind you with words like trillion and generally

make the whole thing seem too darned confusing. Just relax, put your head down, work hard and realize

that America has had a much worse debt ratio before and we survived that. Heck we didnt just survive

the Civil War, WWI, the Depression, WWII, and the Vietnam War... we grew, prospered and won a

lifestyle that is still the envy of most people on this planet. Were on that road to recover again. Dontlet the scaremongers put you off.