Debt
I didn’t watch Obama last night. I wasn’t protesting per se; it’s just that I knew what he was going to say, and I knew what everyone’s reaction was going to be. He bolstered his support; he made no new converts, and he changed very little. These kinds of speeches have become something of a Kabuki ritual – everyone knows what part to play, and the whole thing is stylized to the point where there’s no room for spontaneity. The lefties are ebullient; the conservatives are panic-stricken, and the media mock the right with barely-concealed contempt.
So, in commenting on this, rather than rehash the same old lines, I thought I’d try to find a position that you might not expect me to have. And here it is:
The national debt is not as big a deal as you think it is.
Understand what I’m saying, please. I’m not saying it’s not a big deal. I’m saying it’s not as big a deal as you think it is. To illustrate, I take you back in time to the summer of 1990, just a few short months after I had self-righteously arrived home from Scotland and ended my service as a full-time missionary. I was traveling with my family through Mesquite, Nevada, and we were staying at the Peppermill Resort and Casino, an oasis of decadence in the middle of nowhere.
My cousin Norm invited me to accompany him to the craps tables to watch him gamble. I consented, mainly so I could look down my nose at him for his evilry. But I got caught up in the excitement, especially when Norm started winning. After a few rolls of the dice, Norm tossed me a five-dollar casino chip.
“Here,” he said. “Do what you want with it.”
Well, I was too righteous to actually gamble with my own money, but this was Norm’s money. In fact, it was a chip, not really money at all. What would be the harm in using this to have a few laughs? With that chip, I started mirroring Norm’s bets, and I found myself up about twenty dollars! So I stepped away from the craps table and over to a blackjack dealer, where I proceeded to lose a hundred and forty bucks of my own money over the course of an hour or so. (That doesn’t count the huge ATM fees charged by my bank as I feverishly withdrew twenty after twenty so I could keep playing “just until I broke even.”)
I learned something that night, which is that I’m a lousy gambler with an addictive personality, and I need to steer clear of the games of chance at all costs. To this day, I have the urge to gamble every time I pass through Nevada, and I’ve resisted the urge for fifteen years or so, but it hasn’t gone away completely.
But as nice and Ensigny as that lesson is, I learned something else, too – a hundred and forty bucks can be a lot of money.
I say “can be” because in my current life, a loss of a hundred and forty bucks would be annoying but hardly devastating. But back then, it felt like the equivalent of my annual salary. I was working part-time in the warehouse of the company that is now FranklinCovey, and I was making about five bucks an hour. I was living at home, so my expenses were minimal, but that hundred and forty bucks was practically a full paycheck. If I lost a full paycheck now, which, thankfully, is much more than $140, I’d probably feel now what I felt back then. Thankfully, I’m in a much, much stronger financial position now.
Yet consider this. My financial debt in 1990 was $0. My debt almost twenty years later is over $200,000. My debt has skyrocketed! So why am I not panicking?
It’s not rocket science.
I owe no credit card or student loan debt; my wife’s car is paid for, and my car will be paid off within the next few months. That will leave me with only one debt – my mortgage, which we just refinanced to be able to pay it off in 15 years instead of 30. That mortgage is collateralized by a house that, even in this depressed market, just appraised at a value much, much higher than I paid for it.
Debt doesn’t operate in a vacuum. It has to be considered against assets.
So what does this mean for the country? It means that the highest our national debt has ever been was in 1946, at the end of World War II. How is that possible? Even adjusted for inflation, the debt was nowhere near the trillions of dollars we’re looking at today.
But in comparison to our gross domestic product – our national income, if you will – the 1946 debt was close to 150% of GDP. Even as the dollars grew, the debt/GDP ratio fell dramatically until the Carter years, when it started to creep back up again. But even at the end of George W. Bush, we were only up to about 75% of GDP – half of where we were in 1946.
Post-WWII America, then, was an awful lot like post-mission Stallion. $140 was a lot of money.
So, yes, Obama’s massive spending is growing the debt at a ridiculous rate – we’ll easily hit 100% of GDP in his first term, and if the spending doesn’t slow down, we could start getting close to WWII levels. But if the economy starts growing again, we’re going to get through it. In addition, our national debt is rolled over on a daily basis. The idea that our children or grandchildren are going to wake up one morning and find a multi-trillion-dollar bill in their mailbox is alarmist nonsense. As long as the economy keeps pace with the debt, which, historically, has always been the case, then future generations will be just fine.
That’s not to say it’s not a big deal. And, indeed, with the retiring of the Baby Boomers, our entitlement programs are expanding far more rapidly than out shrinking economy, and we could be in serious trouble.
So, yes, it’s bad. But perspective is a wonderful thing. Which, to come full circle, is why I didn’t bother watching the president’s speech last night.
So, in commenting on this, rather than rehash the same old lines, I thought I’d try to find a position that you might not expect me to have. And here it is:
The national debt is not as big a deal as you think it is.
Understand what I’m saying, please. I’m not saying it’s not a big deal. I’m saying it’s not as big a deal as you think it is. To illustrate, I take you back in time to the summer of 1990, just a few short months after I had self-righteously arrived home from Scotland and ended my service as a full-time missionary. I was traveling with my family through Mesquite, Nevada, and we were staying at the Peppermill Resort and Casino, an oasis of decadence in the middle of nowhere.
My cousin Norm invited me to accompany him to the craps tables to watch him gamble. I consented, mainly so I could look down my nose at him for his evilry. But I got caught up in the excitement, especially when Norm started winning. After a few rolls of the dice, Norm tossed me a five-dollar casino chip.
“Here,” he said. “Do what you want with it.”
Well, I was too righteous to actually gamble with my own money, but this was Norm’s money. In fact, it was a chip, not really money at all. What would be the harm in using this to have a few laughs? With that chip, I started mirroring Norm’s bets, and I found myself up about twenty dollars! So I stepped away from the craps table and over to a blackjack dealer, where I proceeded to lose a hundred and forty bucks of my own money over the course of an hour or so. (That doesn’t count the huge ATM fees charged by my bank as I feverishly withdrew twenty after twenty so I could keep playing “just until I broke even.”)
I learned something that night, which is that I’m a lousy gambler with an addictive personality, and I need to steer clear of the games of chance at all costs. To this day, I have the urge to gamble every time I pass through Nevada, and I’ve resisted the urge for fifteen years or so, but it hasn’t gone away completely.
But as nice and Ensigny as that lesson is, I learned something else, too – a hundred and forty bucks can be a lot of money.
I say “can be” because in my current life, a loss of a hundred and forty bucks would be annoying but hardly devastating. But back then, it felt like the equivalent of my annual salary. I was working part-time in the warehouse of the company that is now FranklinCovey, and I was making about five bucks an hour. I was living at home, so my expenses were minimal, but that hundred and forty bucks was practically a full paycheck. If I lost a full paycheck now, which, thankfully, is much more than $140, I’d probably feel now what I felt back then. Thankfully, I’m in a much, much stronger financial position now.
Yet consider this. My financial debt in 1990 was $0. My debt almost twenty years later is over $200,000. My debt has skyrocketed! So why am I not panicking?
It’s not rocket science.
I owe no credit card or student loan debt; my wife’s car is paid for, and my car will be paid off within the next few months. That will leave me with only one debt – my mortgage, which we just refinanced to be able to pay it off in 15 years instead of 30. That mortgage is collateralized by a house that, even in this depressed market, just appraised at a value much, much higher than I paid for it.
Debt doesn’t operate in a vacuum. It has to be considered against assets.
So what does this mean for the country? It means that the highest our national debt has ever been was in 1946, at the end of World War II. How is that possible? Even adjusted for inflation, the debt was nowhere near the trillions of dollars we’re looking at today.
But in comparison to our gross domestic product – our national income, if you will – the 1946 debt was close to 150% of GDP. Even as the dollars grew, the debt/GDP ratio fell dramatically until the Carter years, when it started to creep back up again. But even at the end of George W. Bush, we were only up to about 75% of GDP – half of where we were in 1946.
Post-WWII America, then, was an awful lot like post-mission Stallion. $140 was a lot of money.
So, yes, Obama’s massive spending is growing the debt at a ridiculous rate – we’ll easily hit 100% of GDP in his first term, and if the spending doesn’t slow down, we could start getting close to WWII levels. But if the economy starts growing again, we’re going to get through it. In addition, our national debt is rolled over on a daily basis. The idea that our children or grandchildren are going to wake up one morning and find a multi-trillion-dollar bill in their mailbox is alarmist nonsense. As long as the economy keeps pace with the debt, which, historically, has always been the case, then future generations will be just fine.
That’s not to say it’s not a big deal. And, indeed, with the retiring of the Baby Boomers, our entitlement programs are expanding far more rapidly than out shrinking economy, and we could be in serious trouble.
So, yes, it’s bad. But perspective is a wonderful thing. Which, to come full circle, is why I didn’t bother watching the president’s speech last night.
posted by Elder Samuel Bennett | 11:06 AM
5 Comments:
Student loans blow chunks.
The problem with comparing our current debt to the WWII debt is that, first, we had something to show for the debt, a victory over two near-mortal threats, and we were one of the few standing industrial powers, so we could reduce the debt rather quickly. What's more, we had a growing population of young, skilled workers.
That's not the case now.
The only thing Commander Hopey Changey is offering is the possibility of an alternative fuel, but that doesn't require trillions. We'll also get some roadwork done. Nice, but not needing trillions. The rest of that cash will be spent on social programs that will balloon like credit card interest.
Meanwhile, what is this country making that any other country can't? Not so much stuff anymore, and we're in hock to a lot of those countries. The debt we incur now will take longer to work off.
Further our population is aging, and the only way to counteract it is through immigration. But the immigrants we're bringing in are ill-educated and many can't even speak the language proficiently. More often than not, they use more in social services than they pay in taxes.
Look at it this way, you're mortgage debt is no big deal because you have something to cash in: a house. Even in this market, you still have something to show, and, anyhow, you have to live somewhere.
But what if that $200,000 grand was credit card debt, spent on trips to Tahiti and Vegas. You could find just as serious-sounding justifications for that stuff, too. You needed a break. It helped your self-esteem and made you a better worker, but that wouldn't help your situation.
Now add on one more consideration: You got your mortgage when you were at your most productive. You found your life's work, and you have many years to go. Try incurring that debt in your late 50s, when you're looking at retirement in a few years. All a of a sudden that debt becomes a much bigger concern.
I HATE ECONOMICS. It is complicated, boring, and often totally wrong. If you ask five economists the same question, you might get five different answers. I have always adhered to the theory that if you laid all the economists of the world in a row end-to-end, they still wouldn’t reach……………… a CONCLUSION! It is a pseudo-science.
Still, it’s all we have.
I found your story informative, entertaining, generally accurate, and very educational from a morality standpoint. (The teaching profession lost what would’ve been a good one when you got away.) Although I mostly agree with your analogy (I think I’ll call it “The Parable of the Five Dollar Chip”), there may be a few elements of the comparison that don’t directly apply.
You used money that you had, not money that you borrowed!! If you had borrowed the $140 and then paid only interest on it for 70 years, it would be comparable to the national debt. It would be even more on the mark if you were actually borrowing more money to make the interest payments.
The ratio of debt to GDP (when and why did it change from GNP? must be because of the multinationals) is an excellent measuring stick, and much more important than the raw total of the debt at any given time. However, since we will NEVER pay off the national debt, isn’t the ratio of interest payments (that “service the debt” without paying it off) an even more accurate measure?
Personally, I agree with (what seems to be your position) that the idea of a balanced budget for the government is NOT the same as for a family. Politicians and simplistic “talking heads” in the media exploit people’s lack of understanding on that distinction. However, the percentage of the budget that has to be spent on interest (servicing the national debt) is money that cannot be spent on other things we need. If we spend $400,000,000,000.00 each year on INTEREST payments, that’s a lot of money we cannot spend on health care, education, defense, transportation, law enforcement, etc.
The real fear is what will happen when the interest rates return to more traditional levels. If the prevailing interest rate we have to pay doubles (from say 5% to 10%), the cost of servicing the debt (reminder: NOT paying it off…just paying interest) will double also. That would bust the budget and destroy the national economy.
I offer at this time……… NO SOLUTION. Sorry.
P.S. Oh yeah, since you missed it, Obama didn’t talk about the national debt…. When you are in a major recession the government needs to SPEND money, not pay down debt. If you are in a recession the GDP is shrinking, so that must be remedied first. And if the financial markets collapse, the economy of the WORLD stops in its tracks. AND I STILL HATE ECONOMICS!!
POUNDS
I actually looked into getting a teaching credential after I first got married, POUNDS. The prognosis was 2 1/2 more years of school to get a starting salary of 23 grand a year. Yick. I did end up teaching two drama classes at a charter school in St. George. I began the year with big dreams and goals, and by the end, I just tried to slog my way through every 45 minute session.
And you're spot on about kickstarting the economy. The sheer size of Obama's stimulus may be helpful, but it would be nice if it were aimed at more stimulative projects. What happened to "shovel ready" infrastructure stuff, for instance? That was supposed to be half of the whole bill. As it stands, it's now only a tiny fraction.
Polichinello, your comments on the changing dynamics of the workforce make sense, but comparing the good stuff we got with our WWII debt to the fluff we're getting with Mr. O is comparing what economists call "sunk costs." Going forward, it really doesn't matter how the money was spent.
As for the analogy about borrowing money in your 50s, it doesn't quite work unless the country, as a whole, is going to retire in a few years. (Which, given the actuarial tables for Social Security, may actually be the case.)
SC, have you any comments on our rising national debt-to-income ratio?
I measure this (unscientifically) as the percentage of US households whose household earnings fall below the level for sustaining a typical 30-year mortgage in a given year (sub-sustainable earnings).
By my calculations, our national DTI ratio was at about 10% in 1975 and will reach 50% within 15 years.
The national DTI burden is as much caused by upperclass consumer debt as by lowerclass consumer debt. As a nation, not as a class or subgroup, we are overspending. We are all going to suffer, wretchedly.
Solution: The bulk of the burden rests on the example of those adults who influence children (parents, teachers, public figures, etc.), in both understanding economics and applying principles of balanced budgeting to their household expenses. (If you didn't "get it" in high school, how are your kids going to "get it"?)
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