Is our national debt so high that it’s a major issue to American’s? Is America going bankrupt? In this article I’ll try and put our national debt into perspective that most people can understand.
First let’s understand what debt actually is, it’s the rental of money. The rent payment is like interest. Almost all American’s have experienced this, they take out a loan to buy a house or car. Maybe they use credit cards. Corporations too have experience here, they borrow money, through RLOC (Revolving Line of Credit) loan’s and bonds. If you generate enough income, debt can easily be handled. Some debt is very long term, like a home loan, say 30 years. Without debt our economy would come to a screeching halt.
The primary issue in measuring debt is, how healthy is the payer and how does the debt compare to the assets. People usually don’t think about the assets involved. Corporations track their Debt to Equity (shareholders equity). This is also known as Leverage Ratio. Debt can also be measured as compared to Assets (accounting period). Let’s take a look at Apple, Dec 2015 Apple had a Debt/Equity ratio of 129%, $171 Billion in Debt, $119 Billion in shareholder equity. However, in the same accounting period, Apple had 59% debt ratio (debt to assets). Would we all admit that Apple is a pretty health company, you bet!
Saying that the US Government debt is $20 trillion is a worthless piece of information. Why, because what is the US debt being compared to? Let’s keep in mind that the “US Government” is all of us and more. The US Government has a lot more flexibility that any family or corporation, they control the currency, interest rates and the ability to raise money. Some people will indicate that the national debt represents 102% of US GDP, sounds pretty scary, right? It shouldn’t. Let’s look at an average USW household with a $168,000 mortgage and $55,000 in income, their debt to “personal GDP” would be more than 300%! So the main issue isn’t necessarily the amount of the debt, but the ability to make payments.
Last year the US total interest payments on the national debt was about $225 Billion, but the government pulled in $3.2 trillion in revenue. Therefore the debt payment was about 7% of revenue! That doesn’t sound so bad, right!
Furthermore, some of the $19 trillion in debt is owed to the US Treasury and other parts of the government. For example, Social security buys Treasuries, the Federal Reserve holds about $2.5 trillion of the $19 trillion of total debt. However, the vast majority of US debt is owed to American institutions and us citizens. Pretty much all of us hold US debt through bonds held in our retirement and stock funds. By comparison, the Chinese ONLY hold about $1.4 trillion of our debt, yet we all hear how dangerous this is. If China was to further dump US debt (they have been sellers in 2016) they would take a huge hit as most bond investors well know.
The government loans money to itself and us American’s. We love US debt as does the rest of the world, that’s one reason why the dollar is so strong. Our bonds pay a very safe, higher yield than the rst of the world.
Think about it this way, if the government spends $1 billion more than it receives in taxes, that money doesn’t just disappear. It flows into the hands of workers or companies or institutions. Even if you think this is wasteful spending, the fact is these dollars are moving from the public to the private sector.
All things being equal, many economists believe it’s preferable to have rising government debt and private-sector surpluses than the other way around.
US debt is an important issue but make sure you put it in prospective!