Resistance Begins at Ohm!

Saturday, February 14, 2009

National Debt vs Deficit

I thought the deficit in 2008 was $455 million? Well, no actually, that was just the shortfall between revenue (what came in) and expenditures (what went out). The annual deficit includes off-budget commitments for things like federal emergency aid or much of the costs for the wars in Iraq or Afghanistan. It doesn't include things that were authorized but not yet spend like TARP, or money the government borrowed and guaranteed in prior years.

The national debt includes the shortfalls from 2008 and all of the prior years. It also includes the $4.5 trillion or so that is held by the public in securities such as Treasury bills, savings bonds, state and local government securities. Neither the deficit nor the national debt reported by the Congressional budget office take into account entitlements due in future years. They do not include the potential liabilities for Freddie Mac, Fannie Mae, pension benefits guarantee or Federal deposit insurance corp, beyond what has already been explicitly funded. One reason is because the liabilities are not actually known.

Just for the heck of it, let's put this in terms that represent a more or less typical American family.

Let's say in 2008, you earned $100,000 and you owed $75,000 not counting your 30 year mortgage of $650,000. At the end of 2009, you make about $97,000 and you owe about $95,000. Your interest rate is going to increase a couple of percentage points, let's say from 8% to 10% and your loan repayment plan is for 10 years (e.g., a 10 year T-bill) Your monthly loan payment is $1321.00 and your mortgage is $3691.00. Together, your loans are $5012. Your monthly income is $5254 after 35% in taxes. You have $242 to live on (food, utilities, gas, healthcare, entertainment) per month, meaning you will be running a deficit again this year, probably about another $10,000 on your credit cards.

(Oh, and you are obviously not putting any money aside for your retirement. Plus your house is now worth about $500,000, meaning you couldn't sell it if you wanted to.)

Do you see a problem with this trend? What is your answer, spend (borrow) another $20,000? Do you think anyone would lend it to you?

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