Pajamas Media

37 Comments

Brian H:

Well done; it’s nice to see Brains Baffle Bullshit instead of the usual reverse.

Feb 21, 2008 - 12:21 am the_ancient:

Why are you comparing National Debt vs GDP?

Unless we are in a Socialist Country, we the people do not “share” GDP, however every tax payer “shares” the government debit, so the governments “balance” sheet is NOT GDP but only tax revenue, where is where the comparison should be done.

Doing the comparison based on GDP would be like me comparing my personal debt against my employers revenue

Feb 21, 2008 - 2:55 am mac:

Looking at the US Real Adjusted Net Worth per Capita in terms of the US Real Adjusted Net Worth per Capita in US dollars is a myopic viewpoint.

One of the major impacts of the growing US debt and war is the fall of the US dollar.

When you factor in that the dollar is worth less that 70% less, in terms of Euros, than it was when the war started, then the US Real Adjusted Net Worth per Capita had dropped significantly in the past five years.

Feb 21, 2008 - 6:16 am Byron:

The fact that the curve rises during the Iraq war does not mean that national wealth is not being sapped. What would the curve look like without those war expenditures? But the only question worth asking is whether those war expenditures are wise or unwise. I think they’re a hugely good investment in our future. Time will tell.

Feb 21, 2008 - 6:30 am sharinlite:

Unless Paul Krugman says it, writes it or draws it, it doesn’t mean a thing to to left side of the aisle. The left cannot say anything without putting down the Iraq War…talk about myopic! Folks, this is just another treatment about money. The glass is either 1/2 empty or empty…with social security and medicare it isn’t even 1/2 empty…it is empty…let us deal with that!!

Feb 21, 2008 - 7:46 am Ten:

What the ancient said. Obscuring what the fiat money mentality has done to what had been productive Americans is the height of folly. It’s a desperate attempt to hoorah 40 years of horrific Fed experimentation in Keynesianism probably just because there’s a Republican in charge.

This isn’t Bush’s deal, Martin. This is the endgame of fiat currency, as the entire globe unhinges from the dollar to some extent and everything gets revalued, as it should and must.

Remember, every dollar in circulation is an instrument of debt — every dollar in circulation was lent there as an entity, not as a unit of value, making it physically impossible to pay down that debt (the interest is a construct, much the same as the dollar itself is.)

There is simply nothing conservative about the country’s monetary policy; some 40 years ago we simply started growing the debt by staggering amounts, not knowing where it leads but calling it growth.

In that context, paper is not money; it does not grow on trees, something we’ve yet to learn and demand the Fed observe with us, it being our servant. To say we’re sitting pretty because we share in (paper dollar-inflated) national wealth is absurd.

If your view were political, it’d be hyper-progressive bordering on nationalist/collectivist. Why do ostensibly conservative PJM readers swallow this stuff?

Feb 21, 2008 - 8:49 am Fat Jolly Penguin:

Interesting. Thanks for bringing this up — God knows the MSM never would. It just stands to reason, though, that GDP would increase during a war, doesn’t it? You have several rather important sectors of the economy, most notably manufacturing, that need to increase their output to keep the war running, which will stimulate the economy (far better than anything Congress can do, I might add).

Regardless, though, the national debt is increasing. Bush’s tax cuts were good, but they were only half of the story; if you want to lower the debt, you have to cut spending AND taxes. As it is now, you have the government spending more than it ever has, but the tax cuts rolled back the amount of tax revenue so there’s less money present for them to spend. This means they have to keep borrowing money against the future to fund all their blessed little programs, which is what has run up the national debt.

Feb 21, 2008 - 8:49 am Charlie (Colorado):

Uh, Mac, are you buying lots of things with Euros? I’m not.

Ancient one, I’m sorry that wasn’t clear; that was my point in mentioning it. GDP is, to quote my anonymous economist, a flow, not static. Or in my simple-minded terms, it’s an income-statement item, not a balance sheet item like debt. Well, if we’re going to look at the balance sheet, we should look at both liabilities and assets.

Byron, I’m not arguing that the purpose of the war was to add national wealth. But notice that the slope of the line — the rate of increase — is about the same before 1997 and after 2003. That slope it in some sense the “return on investment” in the national debt. Now, maybe that slope would have been better without the war; it’s just difficult to claim, with that curve in evidence, that it’s hurt much.

Feb 21, 2008 - 8:55 am Charlie (Colorado):

Oh, Brian, thanks for the kind words. It’s too easy to spot the criticisms and forget the praise.

Feb 21, 2008 - 8:56 am Charlie (Colorado):

FJM: Regardless, though, the national debt is increasing. Bush’s tax cuts were good, but they were only half of the story; if you want to lower the debt, you have to cut spending AND taxes.

That’s not strictly true, except in the peculiar Washingtonian sense that not increasing at the rate someone asks for is a “cut”. If we could simply reduce the rate of spending increase to be less than the rate of increase in tax receipts due to positive GDP growth, both deficit and debt would eventually disappear and rather faster than you’d imagine.

Feb 21, 2008 - 9:28 am jaybo:

This article is misleading because it fails to include our financial obligations to our entitlement programs (medicaid, medicare and social security). If you add that in it doubles the financial debt per person.

Secondly, because we continue to spend more than we have that debt will also continue to increase every year.

Feb 21, 2008 - 10:11 am Charlie (Colorado):

Jaybo, you’re not reading the chart. Even though we’re spending more than we take in, national net worth is increasing. Not only can we continue doing that for as long as we like, we’re actually getting national-net-worth richer while we’re doing it.

Feb 21, 2008 - 10:29 am jaybo:

Before you buy this article as being credible, I suggest that you listen to the video at the link I am posting here. It is an interview of our Comptroller General, David Walker.

Things may actually be worse than you thought……..

http://tinyurl.com/2nhsrq

Feb 21, 2008 - 10:57 am jaybo:

Charlie,

Keep in mind that those “net worth” figures are historical numbers and can easily reverse themselves in a different economic climate. The debt figures that I am referencing are “forward looking” and will be there regardless of any economic conditions.

Are you willing to guarrantee to us that we will continue to trend positive in our cumulative net worth in the future?

Feb 21, 2008 - 11:04 am AJ:

well done, charlie

i think it is funny but typical that mercedes driving housewives ask me “how do you like paying for that war?”

not only do i usually say “it keeps me safe” but now i can tell them the facts—they wont listen though since there’s yoga class to get to.

Feb 21, 2008 - 11:11 am Ten:

Are you willing to guarantee to us that we will continue to trend positive in our cumulative net worth in the future?

Sure he is, provided the fiatdollar remains the benchmark.

Will it?

I see signs of unhinging all over the world. Stands to reason when you export mostly debt.

Feb 21, 2008 - 11:20 am Charlie (Colorado):

Ten, check the trade deficit, which is declining.

jaybo, of course not. But as Damon Runyon said, “The race is not always to the swift, nor the battle to the strong, but that’s the way to bet.”

Feb 21, 2008 - 11:54 am Andrew:

Lets ask a real world question. Do you posters feel that Americans on the whole are getting richer? And how much has the Iraq war put in your pocket? This is one of the most remedial posts I have read. It doesn’t pass the eye test and upon close inspection offers no facts to support this dubious claim.

Feb 21, 2008 - 11:56 am Charlie (Colorado):

Andrew, you might want to follow the links, read the sources, and by the way, look up the word “remedial”, as it doesn’t mean what you think it means.

Feb 21, 2008 - 12:55 pm Moonage:

“Lets ask a real world question. Do you posters feel that Americans on the whole are getting richer?”

Yes, they are. Every single economic indicator you can find will tell you things are MUCH better than they were ten years ago, twenty years ago, or any point in time you want. People complain about the cost of health care these days, 20 years ago most people didn’t even have it. People complain about the cost of gas because there are now more cars in the US than there are people. Twenty years ago the average tv was lucky to get ten channels, some even had color. Now we have HDTV with 150 channels on a five foot screens. Where do you think all that comes from? Just because people are spending themselves into bankruptcy doesn’t prove we’re worse off than any other point in time. It just means credit is way too easy to get these days. The only thing that has stayed static in the last thirty years is media telling us how awful things are and citing one-sided and completely incomplete “statistics” like the National Debt is killing the US.

Excellent Post. I have made the same argument for a while. A few people want to know all the facts, most apparently don’t and would rather get their economic education from Keith Olbermann.

Feb 21, 2008 - 1:25 pm Andrew:

Dictionary terms aside. It doesn’t take a genius to see the errors in this economic theory. Sure the rich get richer and shade the reality of whats really going on in our country. Its ridiculous to sit there and argue that our economy is strong while jobs get shipped over seas, average wages indexed with inflation stagnate, people particularly young people go without health care, the value of the dollar is dropping everyday, and our trade deficits skyrocket. Just look at our housing crises and the dire situation homeowners all across the country are facing. Many of these people are in your own neighborhoods. Is the real wealth with those whose homes are up for sale? I don’t buy that and if you do. Well you must be one of those people profiting at some other poor schmucks expense.

Feb 21, 2008 - 1:26 pm Ten:

Ten, check the trade deficit, which is declining.

Aside from that being a finger in the dike, I fail to see the point.

The fiat dollar, which is debt and thin air, served us well while trust lasted. The globe, however, is necessarily revaluing it. To consider that my personal share of the US economy is something I can cash in above and beyond my personal assets is less than nuts. It’s delusional.

Especially with a hundred billion dollars in credit industry writedowns, the interlinked UK housing industry going near belly up in the last month, real estate resetting by half or less in prime US markets, gold tripling in a handful of years, oil breaking $100 a barrel and the Fed again playing Russian Roulette with plunging rates to appease markets, precisely the problem that got us into all of the afore mentioned fiscal nightmares.

What happens when we’re down to 0% Fed rate because it’s all we can stand to live with fiscally? You simply cannot print huge amounts of cheap credit and call it unlimited growth.

That the trade imbalance is moving a little is relatively irrelevant, although it’s a move in the right direction.

Feb 21, 2008 - 2:20 pm sharinlite:

Charlie, I emailed your article/post to my son in Colorado and this is his response:
“Please, no more skewed reports. Find out what National debt was in January of 2001 and subtract it from the debt today. That will give you a fairly good feel for how much we owe……..no spin.”

What is your response?

Feb 21, 2008 - 2:29 pm dan_b:

There’s backed debt, and there’s unbacked debt - but debt is debt.

I’m not buying the author’s creative accounting that implies that having some form of ‘national wealth’ behind our loans guarantees that the loans are therefore inherently intelligent, let alone the idea that we have head-room to borrow more without consequence.

The fact that you have cash in a bank to back your loans doesn’t mean you aren’t in debt! It only implies that the lender has less risk, which mostly serves to comfort the lender. The borrower still owns the obligation. And the author implies that putting our national wealth out there as collateral against our largess is not only fine, but that we should do more of it!

A foolish loan with collateral is still foolish. The wisdom required to decide between “borrowing to consume” vs “borrowing to invest towards growth/profit” doesn’t change with the existence of substantiating assets, and further, the notion that “just because I have more to leverage, I should leverage it” is a recipe for disaster.

I’m not buying the premise that we have so much “stuff in our closets” that we can disregard common-sense fiscal responsibility. For one thing, it usually turns out that the loan collectors usually don’t want the junk in my closets either, but rather they prefer the nice new furniture in my living room. Witness the Saudis - rather than buying chemicals from us, they’re buying Dupont (or are trying to).

We, as consumers, and as a country, have received ‘units of value’ from the international market (TVs, cars, cameras), in return for dollars, which are essentially a loan against some future ‘units-of-value’ of our making. We’ve received a value, and now we owe an equal value back to them. Having that debt be justified against the collateral of our national wealth (e.g. companies, buildings, museums, airplanes, etc.) does not, in my opinion, make the magnitude or justification of our current borrowing behavior any less obscene.

Feb 21, 2008 - 4:24 pm gcblues:

andrew,
you have zero understanding of money and wealth creation. the amount of money others have has no effect on the amount of money you have. wealth, or money is not a zero sum game. it is possible for all to be well off, or all to be poor. govt debt has nothing to do with that.

indeed the poor are getting richer, the rich are getting richer faster. i suggest you do what the rich do and stop whining. for the record, there is no such thing as an american job. we outsource as well as insource on balance it is a plus. jobs, or labor displacement has become world wide, and will only become more so. deal with it. it is not a plus if u do not educate yourself or wish to retire into a make work union or public sector job. there is no future in that thank god.
as to the health of the country. i paraphrase someone smarter than all of us posters, the late milton friedman. we should be so lucky personally as to have the debt to income ratio the usa has. it is a sign of health. history shows greater growth with relative to the time higher national debt than lower. the last eight years have been fantastic for anyone that wished to engage, invest, become self employed or otherwise innovate. if you are a bump on the log, or go with the dumb bunny flow, you get what you earned and deserved. not much. like my dad said, look at the people you wish to be like, and do what they do.

Feb 21, 2008 - 4:36 pm Jim:

Finally someone has recognized the critical distinction beween a balance sheet and an income statement!

Two critical points. First, about half of the debt is held by the Social Security trust fund which gives a false picture of the real debt owed to real people, banks, and companies. In other words it counts as debt money it owes to itself. Not exactly GAAP.

Second, you vastly underestimate the national balance sheet. Here again one has to eliminate almost all debt (owed internally) as an “intercompany transaction.”

1. Stock Market Value - $16 Trillion
2. Real Estate Value - $45 Trillion
3. Small/Priv Business Value - $10 Trillion
4. Other Priv Assets $5 Trillion
5. Public Land Infrastructure $10 Trillion
6. Other Govt Assets $15 Trillion

Total: $101 Trillion

Would you lose any sleep lending $4 Trillion to a $101 Trillion company? I didnt think so.

Feb 21, 2008 - 4:49 pm Kurt Brouwer:

Good post. We hear lots about the national debt, but almost never do we hear about national wealth or assets.

Feb 21, 2008 - 5:16 pm Charlie (Colorado):

Sharinlite, ask your son about the national wealth. If he says that’s not important but national debt is, ask him why.

Jim, thanks for the kind words. I don’t disagree with your idea, but that figure for national wealth was the best I could find. But 300K for 300 million people is 90 trillion, we’re on speaking terms. Can you give me a link or a source for yours?

Dan_b, it’s not creative accounting to compare assets and liabilities. You may not buy it, but it’s the part of accounting 101 that comes right after “Good Morning, I’m professor so and so.”

Feb 21, 2008 - 7:11 pm jaybo:

dan_b,

Very good explanation of the real issues facing us.

Charlie,

Did you take the time to listen to the video I posted? It is an interview with someone that has more credibility than anyone else here including Charlie Martin!

Feb 21, 2008 - 8:27 pm Skeptic:

If for most normal people, the house is the largest asset and here housing is not a large part of national wealth, isn’t there a disconnect somewhere? They call it real estate, partially because it is REAL, not paper assets that can disappear in a heart beat.

Feb 22, 2008 - 4:29 am jaybo:

Skeptic,

A home is a “paper asset” just like all of your other possesions. While it does have an “assessed value”, the actual price that someone is willing to pay depends on the economic conditions at the time of sale.

What is most important to understand is that our personal wealth can vary from time to time depending on personal circumstances and economic conditions. Our national debt, however, will remain the same regardless of the economy.

The chart that was provided with this article proves the point I’m making as it shows decrease in wealth from 2001 to 2003.

Now ask yourself this, did our national debt go up or down during this same period?

Feb 22, 2008 - 7:10 am dan_b:

Charlie - With the numbers you’ve been given, and your technically accurate accounting :^), I concur that your conclusions merit consideration. To re-articulate, I suppose my real issue is that I personally don’t completely trust the numbers we are all being given, and therefore am nervous about the conclusions. And you are correct, that’s not an accounting process issue.

Looking at Enron’s ‘numbers’, you can see how it’s not a completely unfounded angst.

My concern is that the comfort this particular perspective might inspire could lead to unwarranted complacency. As an analogy, it feels to me like we’re buying big pleasure-boats using the apparent equity in our homes, in a very uncertain housing market. More important than *my* risk, is when our banks *multiply* this exposure across their base, there’s the obvious fallout that may occur.

For What it’s Worth, it’s not an inherent aversion to borrowing - I’d feel much better about the loans if we were using them to buy new ‘printing presses’ and investing in growing our productivity.

I hope that’s more clear.

Jim - If accurate, your numbers lend a comforting perspective. That said, after owning stock in Lucent, Hayes and DEC, and watching Enron and WorldCom… Clearly, the value of any entity is largely based on its management vs its capital value/earnings.

Right now, I wouldn’t make that 4 trillion loan :^), both because of the current management, as well as momentum of the Democratic candidates (future management).

Whether or not we have a tough couple of months/years ahead, I believe most of us will come out of it fine. Can responsible fiscal conservation prevent/temper some of this potential stress? - I think so, and look to our leaders to err in the conservative during this volatile period. I think they are denying the problem even exists (lowering interest rates, etc.). I hope I’m wrong either way!

Feb 22, 2008 - 12:59 pm Larry:

Charlie,
The comparison of debt to net worth is only valid if you consider who is making the decisions, creating the wealth, and doing the borrowing. Individual Americans create the wealth, but we have nothing to say when an irresponsible government pulls out the credit card and negates half of that wealth. Stop supporting the spend mentality of our elected officials, democrat or republican, they’re all guilty as hell.

Feb 23, 2008 - 3:37 am Charlie (Colorado):

A couple of last quick answers:

jaybo, the nice thing about arithmetic is that it’s not a matter of credibility.

Dan_b, the thing about these numbers is that they indicate that we are investing in greater productivity. Whatever the underlying mechanisms are, the net national wealth — assets minus liability — is growing. Could it grow faster? You bet. But, pace jaybo’s video, if the total assets are growing faster than the total liabilities, you can continue borrowing indefinitely.

You are not heading for bankruptcy if you always have more assets than liabilities.

Would it be better to end the deficit and pay down the debt? Sure, as long as that doesn’t kill the increase in net assets.

Larry, that’s not correct. Looking at the increase in national net worth is, if anything, an indication that the current policies, whatever their flaws, are successful. Doesn’t mean they can’t be made more successful, but the “crisis” is being manufactured by people who want to lead us, not inform us.

This is about to roll off the front page; I’ll be posting the original, along with more extensive comments, at my Explorations blog. Let me encourage everyone to come there if you want to continue the conversation.

Feb 23, 2008 - 10:11 am legion:

At least America will still be there in 20 years. Europe doesn’t stand a chance. One Euro could be worth US $100, and it still won’t save them from the Trojan Horse they’ve let in the gates. Too bad.

Feb 24, 2008 - 7:09 pm jaybo:

Charie,

We both know that economics is the study of trends and co-relationships that are more theory than mathamatical fact. That is why the following statement is, frankly, misleading.

“jaybo, the nice thing about arithmetic is that it’s not a matter of credibility.”

It is also why the only “specific data” that you can reference is historical in nature.

The second point that you make is equally weak; “But, pace jaybo’s video, if the total assets are growing faster than the total liabilities, you can continue borrowing indefinitely.”

Notice the use of the word “IF” in the statement above. In mathamatical terms it implies that there is an undefined variable that can change the outcome.

Finally, anyone that has a backround in accounting understands that assests like your home have a value on paper that does not necessarily translate into “cash in hand”.

In truth, there is another variable that determines the “cash equivalent” of your home. It is called the Law of Supply and Demand. This law dictates the actually price that someone is willing to pay for your home today if you had to get your equity in cash.

Charlie has outlined a dangerous theory that is hauntingly similiar to those people that told investors not to worry about the lack of profits when investing in internet stocks back in the 1990s and others that said not to worry about how much you borrow to purchase a home of refinance your home recently.

In both of the examples above, individuals have lost millions of dollars collectively because they ignored basic financial priniples.

They were told the same thing that Charlie is trying to tell us here.

“Don’t worry, the price of your stock will always go up”

or

“Borrow as much as you want because the price of your home will always rise”.

The carnage that has resulted from those that listened to these “snake oil salesmen” is there for everyone to see.

So why do the basic laws of economics never apply to our national debt?

Good question……………

Feb 25, 2008 - 8:41 am dan_b:

and while the snapshot value of our cities, roads, factories, etc. may be worth 100 Trillion+, nobody seems to care exactly how much of that has liens against it… Consider that most of my peers have outstanding loans for their homes and businesses, which tells me that the tidy snapshot of the national wealth has no real bearing on the true *available* value we’re being told is OK to borrow against.

our social security system has had zillions put into it - so it’s worth zillions right now - right? If I read this article correctly, Charlie would have you believe we can happily borrow against those zillions. All I really see there are a bunch of IOUs, with no governmental motivation to collect on behalf of the depositors, who, as a group, will never be able to demand it be payed back. It’s gone. We’re still legally required (extorted) to keep putting money into this silly system that even Charlie’s economics/accounting 101 would tell you never to invest in such insanity… We’ll never see it. Our lawmakers will continue to borrow against it, because it ‘keeps growing faster…’.

clear as mud?

buy gold

Feb 25, 2008 - 5:35 pm

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