Posts Tagged ‘debt’

The BIG Debt Picture

June 5, 2012

I hear so much “garbage” on TV primarily from super-PACs that is simply misleading or even false, I just need to rant for a minute. Here goes:

What is the “Big Picture”? How bad is it? How much worse has the National debt gotten over time? How much worse is Greece than England than the US, for example? Than Japan? In network management terms, is this a minor alarm, a major alarm or a critical alarm (a yellow, orange or red alarm light)?

Here’s an interesting chart from the CIA:

CIA – The World Factbook – Country Comparison – Public Debt

In terms of percent of GDP, the US is number 32, fairly far down the list of indebted countries.

Another interesting link or two from Wikipedia – these are not entirely consistent, and I haven’t looked at the citations to understand why:

United States public debt – Wikipedia, the free encyclopedia

Government debt – Wikipedia, the free encyclopedia

I want a little more insight, and a slightly different view of the statistics. Some more meaningful numbers would be helpful to understand the “Big Picture” rationally:

1) Incremental Debt to GDP – more specifically, the annual addition to accumulated debt (the budget deficit) compared to the value of all goods  and services produced. This is a key ratio to look at for the National economy, but try to find it reported… This is a common business measure of the ratio of addition to Long Term Debt and Income – a relative indicator of how prudent your debt is by considering that it is an investment in future revenue growth. If this ratio shrinks, your investment in future growth is “paying off”.

This ratio is essentially captured in your “credit score”. When your credit card debt growths faster than your salary, your credit score drops.

What is the Incremental Debt to GDP ratio for the US over time?  I’ll find out, and try to make a nifty chart to add to this post.

2) Accumulated Debt to National Income – more specifically, total debt compared to the total wages paid to all American workers. This is another key ratio to look at for the National economy, and it is occasionally reported. This is analogous to a business measure of the ratio of Total Long Term Debt to Gross Profit – a relative measure of how affordable your debt is by considering that it is serviced with principle and interest payments made from money that remains after paying for the direct costs that support the mission of your company. From a National perspective, this is a measure of the ability for tax payers to service the National debt through taxes on their income – ultimately, this is how the National debt is repaid.

When you apply for a mortgage loan, the lender calculates a similar ratio of your total long term debt (including your new mortgage principle) to your household income, and there is a cap on this ratio greater than which they will not consider your loan because it is unsustainable debt.

If this ratio shrinks, your ability to perpetually sustain your debt improves. In an industry, this measure is convenient to gauge the relative health of different companies, and this ratio is useful to understand which countries are the least financially stable. There is probably a “cap” – a critical value for this measure for countries in the world greater than which their National debt is unsustainable. This critical number probably changes a bit with the prevailing interest rate and with the risk-aversion of the lenders. I wonder what that critical value is for Western nations? 1.2:1 or 1.5:1? I wonder…

This is another nifty chart for me to post – a clever 3D chart would compare countries over time.

An aside: What are the “credit scores” for the Western nations – calculated with the roughly the same methodology as my credit score or yours – that would put things into a convenient perspective for Congress and for voters. Hmmm… I’ll ask Ali Velshi at CNN and see if he’ll present a chart or two sometime soon.

So, facts trump lies, and I don’t see enough facts – I’ll dig!