October 08, 2009

Assets, liabilities and Federal debt... a tempest in a teapot

Much has recently been made of our collective debt and the rapid increasing of it by the current government. It's odd how so many debt hawks have come out of the woodwork recently and loudly... my only question of them is WHERE THE FUCK HAVE YOU BEEN, ASSHOLES? See, many of us have been worried about Federal debt levels for a while, especially since when we were running huge deficits to give tax cuts that did nothing to grow the economy because, at the level of taxation from which the cuts were made, there was no marginal utility from them.

In other words, we cut taxes by a dollar and that ended up creating no additional economic activity... other than giving Treasury the opportunity to sell more debt. People like me were worried about this because, naturally, you only want to take on debts when you're

A) Using it to grow assets that will earn income at a rate that exceeds the coupon on the debt. Basically, if I buy a business for $2 mn and it's earning 200k per year, if I finance the purchase with debt then my interest rate really can't be more than 5% which would give me enough to service the debt and pay it down. SIMPLISTICALLY.

B) As a government, in economic distress and even then you want to spend the money by basically giving it to people to get the economy producing maximum tax revenues. Again, you want to grow the economy at a rate which exceeds the interest you're paying.

The reality the debt hawks are unwilling to acknowledge is that the debt is largely a tempest in a teapot. In general, you don't want debt to exceed four times your annual income. In the case of the United States, we're still a long way off...

debt graph.jpg

What really irritates me is that they're double counting mortgage liabilities in household debt, then again with the GSE's. So, functionally, we're at 263% of GDP in total debt. As for the other really scary columns that represent future entitlement spending, it's really simple... they disappear with a few minor changes. Like increasing the retirement age which should have been done 30 years ago.

Now, assets are also important... As of 2008, US citizens and non-profits have around $51 trillion in assets. This doesn't include local, state and federal assets or infrastructure. Which would likely add another $20 trillion to the party. I point this out because a good rule of thumb is that the absolute maximum debt that's reasonable is about 100% of assets. And we're no where near that point.

Don't take this as me saying 'hey, let's spend, bitches!' The point is that while we're in an economic hole, we should be spending. A lot. We also need about $2 trillion in infrastructure investments. And we CAN afford it.

Posted by mcblogger at October 8, 2009 09:23 AM

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