Tuesday, October 24, 2006

Debts and GDP

While I was driving home last night, I had the Diane Rehm show on NPR, who had two supposed "experts" on the deficit and debt. And yet, they were stunningly ignorant when it came to some issues, or maybe they had a political agenda? There was one caller who complained about the public debt approaching $9.6 trillion dollars, close to our GDP and the crisis it entailed, and the experts "concurred".

Stop right there! I dislike the deficits too, but cannot allow the propogation of falsehoolds! So I thought I'd try my lay-man's explanation of debt and deficits. (I'm not an economist, so if you think I'm wrong, please correct me!)

To simplify the issue, I am going to shrink all the numbers by 300 million, the population of the US. So we consider John Doe, making about $44,000 (source of 2005 GDP), having a debt of about $28,500 ( source), some investment-oriented e.g. mortgage on a home, loan for a small business) and some unproductive (credit card). A problem? Not exactly. The debt is not what is owed annually but the sum total of liabilities. The former number is the interest expense - about $1,350 a year( source). Turns out Mr. Doe's credit rating is so great that he will probably never ever have to pay back his debt - he could always borrow from another bank to return his debt from the present, the Banks of Japan and China. The interest expense is small compared to the annual pay hikes of about 3% post-inflation (so currently 6%), whereas his debt is currently accruing interest at about 4.5%, so compounding works in Mr. Doe's favor.

Another way to compare numbers is to match up the debt of $28,500 with Mr Doe's total assets, over $300,000 if I remember (I couldn't find my original source for this) - a debt to equity of under 10%. Nothing to lose any sleep over.

I will soon post why then I brood over the deficits, but for now, rest easy in the realization that we are not going to have the Chinese confiscate our properties!!

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