Thursday, February 17, 2005

To paraphrase Clinton: It's the debt burden, stupid!

Two men buy houses and get mortgages. Man A earns an annual salary of 150K, and gets a mortgage for 400K. Man B has an annual salary of 15K, and gets a mortgage for 60K. Man B’s debt represents a sum that is 4 times his annual salary. Man A’s debt is a larger sum, but it is only 2 2/3 his annual salary. So, although technically Man A is in deeper debt than Man B, Man B’s debt (coupled with the fact that he has less disposable income) is more of a burden than Man A’s debt burden. This makes sense, right?

So when everyone is yelling about America having the biggest deficit in history, they are completely disregarding the fact that our Gross Domestic Product is higher than before, and thus our debt is, relatively, lower. In fact, our national debt may be higher than many other countries, however their debts represent a larger percentage of their GDP. The Skeptical Optimist has made some great graphs illustrating just this: America’s national debt burden history and America’s current national debt burden compared to other countries' national debts.

Also worth reading, is his post, Rethinking the Surplus.


Blogger Chris said...

Yes, usually the debt amount is nonsense. I have always argued that. But, the debt is a reality, which in time can lead to serious consequences. Debt shouldn't be shrugged off completely. Look at the USSR.

If you look at debt as something that's unimportant, then third-world countries are in good shape financially.

But I do agree with you about debt.

7:09 PM  

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