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Macro Economics
Would You Loan to This Guy?

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By SuaSponteMark
January 12, 2009

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Sam walks in to your financial institution. Doesn't matter what kind of loan product he is seeking or you are offering for now. You ask for the numbers after introductions.

Sam makes about $145k a year. Looks good so far - respectable salary. Sam's salary has been increasing fairly steadily for a long time as well. Now you get to his credit card debt. He's carrying $106k of it. You try not to raise your eyebrows.

Would you loan to Sam? I don't think I would, even before the events of the past year. Now of course that's still not the entire picture. Sam has some debt that is not short term (I think of everything like a balance sheet - forgive me). His mortgage is significant. About $550k. Most of you wouldn't touch Sam. Well, soon, perhaps the rest of the world won't either.

Add eight zeros to these numbers.

Sam is Uncle Sam. GDP is about $14.5 trillion. Yes, it may be higher or lower depending on your source but that doesn't matter. This figure serves to show the problem we have. GDP is a rough correlation to salary. Current debt is about $10.6t. Rough correlation to CC debt. Future obligations are about $55t. Social Security and Medicare/Medicaid primarily. Other stuff but really it's just noise. Rough correlation to a sizable mortgage.

I use this to illustrate where we are as a nation. It's not a perfect correlation but it puts it in terms that the average person can understand. I have a very hard time wrapping my arms around the concept of a trillion.

Thoughts/discussion points...

1. What happens if "salary" falls? Is GDP going to expand as we have high unemployment and high underemployment?

2. Entitlements are the third rail. When are we going to grab this?

3. Raising taxes won't solve this. At the end of WWII the highest marginal tax rate was 94% or so, for about a year (think it was 45-46). Tax revenue was almost 21% of GDP then - the highest percentage the republic has ever endured. This is probably a realistic ceiling for how much we can possibly extract out of Americans for government use. So, what do we do when SS and Medicare exceed this threshold alone? Nothing left for DoD, NASA, HHS, education, highways?

I'm tired of looking at my daughter and feeling like I'm handing her a huge bill that I keep appending and increasing.