Let me set a scene.
There is a young couple who are college educated, both have jobs and
together, they make about $150,000 a year – not bad. They have professional careers and expect
their incomes will rise in the future.
They have been saving and their immediate goal is to save enough, about
$60,000, to put toward a down payment on a house – they’ve been renting until
now. They think that a house valued at
about $300,000 would be wise; they plan to have children and they want to put
down roots in a community with good schools and amenable recreational
facilities nearby. So, a couple with
that income wants to take on a debt – a mortgage – of about or just under 150%
of their income. Is that smart? What would you recommend?
I would say that given their assets – some tangibles such as
their cars, furniture, a healthy “rainy day fund,” and the like – and some non-tangibles
– such as their education – this is a reasonable and prudent plan and if you
resemble these two, good luck to you. Of
course, all of this is contingent on having reasonable interest rates, a job
market for their type of skills that is stable, and many other factors. Let’s just say that all those factors are prevailing
at levels or rates that are not outlandish but within reasonable historical
parameters. So, having 150% of income
debt can be seen as, at least, manageable and given the long term benefits such
an investment will most likely accrue, I feel safe in saying that most people
would find such an undertaking worth the risks entailed.[1]
Now, I will admit that making family budgets analogous to
national finances is a hazardous thing to do.
But for those who feel aghast at the numbers associated with the national
debt and prone to make such comparisons, let me chime in and add some numbers
from Wikipedia. The financial position
of the US includes a total assets valuation of $269.6 trillion or 1576% of GDP
(or for our purposes, another way of seeing our national income). I don’t know if that counts some public
assets such as our national parks or all that territory the US government owns
throughout the country, but most concentrated in the western states. On the other side of the ledger, the US has a
total debt of $145.8 trillion. I assume
that combines the public debt, both at the national and state levels, with
private debt which would include household debt such as our couple’s pending
mortgage to corporate debt that reaches about $30 trillion dollars. There are other sources such as non-corporate,
business debt. In terms of Uncle Sam, he’s
in hock for about $14 trillion. But all
of that debt, public and private, pales in terms of our assets; that is, our
net worth (assets minus debt) is $123.8 trillion dollars or 723% of GDP. That’s a net worth figure at a per capita
rate of $386,875. Do you have your
share? If we are no longer great, which
the Trump campaign intimates, it’s not because we are poor as a nation. Our economy is run in a sea of money and, by
the way, is not struggling like the vast majority of nations are. They are still suffering from the aftermath
of the financial crisis of 2008-09.
Such numbers indicate to me that we can afford our debt. Want to get rid of it anyway? There are two obvious ways: cut spending and/or raise taxes. It is not hard to find a solution, but it is
politically difficult to apply it.
[1]
Let me state the obvious: I am not a financial adviser of any kind and
this is not, in any form, advice.
