qwertydude's blog

According to White House budget director Peter Orszag, the United States must tackle its deficits quickly to avoid the kind of debt crisis that hit Greece.  Let’s see if I can make sense of the details from this article and put it into the perspective of someone earning, say, $50,000/yr.  Granted, my analogy will quickly break down as I can’t account (pun intended) for many of the details here.  Nevertheless, it helps me to better understand the nature and magnitude of the current deficit when the numbers are put it into the context of one earning $50,000/yr.  References to the article are bolded while my comments below are the bullet points. 

As was stated, the government has now posted 19 consecutive monthly budget deficits, the longest string of shortfalls on record.

• This is obviously bad. 
• Let’s put this in the context of an annual budget over 19 years to help make the point.  Our working stiff earns $50,000/yr.  For grins and giggles let’s just assume that our working stiff spends 2% more than he takes in.  In reality then, he spending $51,000/yr [50,000*1.02].  Multiplied out, our working stiff is conceivably ‘in the hole’ by $19,000 over the last 19 years.  [1000*19]. 

The first seven months of fiscal 2010 has a cumulative budget deficit of $799.68 billion

The first seven months of fiscal 2009 has a cumulative budget deficit of $802.3 billion

• Assuming the same amount of income as the previous year, our budget deficit isn’t growing as fast in 2010 as it did in the same period of 2009.  However, that slower growth in the deficit only equates to a 0.33% reduction from 2009 to 2010 [1-(799.68/802.3)]. 
• So, if our working stiff was spending $51,000/yr one year ago, now he’s only spending $50,831/yr. 
• Alright, this is better as the rate of the deficit is slowing – albeit rather slowly. 
• Still, that extra $831 has to come from somewhere – can you say borrow?  Assuming a favorable simple interest rate of 5%, the interest alone to service that $831 of debt will require an extra bit of outlay to the tune of $42/yr.  Granted, that added interest payment isn’t much in the scheme of things.  At least for the first year.  However, it’s a cumulative added expense for each year that money has to be borrowed.  And we haven’t even attempted to pay off the principle. 

Receipts in April 2010 were $245.27 billion. 

Receipts in April 2009 were $266.21 billion. 

• In essence, that means our working stiff has taken a 7.87% pay cut [1-(245.27/266.21)]. 
• So, our working stiff isn’t making $50,000/yr right now.  In fact, he’s only earning $46,065 [50,000*(1-0.0787)]. 
• This then exacerbates the overall debt our working stiff is dealing with.  He’s still spending $50,831/yr but with his income reduced, he needs to borrow $4766 [50,831-46065]. 
• So, for this last year, instead of paying $42/yr in interest, our working stiff will pay $238/yr [4766*0.05]. 

Consider, too, that over the last 19 years, our working stiff has amassed a cumulative a total debt of $19,000.  Our working stiff could have reasonably expected that there would have been a total debt of $20,000.  However, because of his reduced income, his total debt is actually $23766.  And, now our working stiff is at an 47.5% debt:income ration [23766/50,000]. 

How much longer can our working stiff continue to spend more than he earns.  At some point no one will loan him any additional money – the risk of him not paying back anything eventually becomes too great.  Unless, of course, he lives in Greece.  So, what if our working stiff decided to live within his means?  Well, he now has to reduce his spending to the point that he’ll also pay off his obligations.  He currently owe $23766.  Using a simple interest of 5% and paying off the loan over 10 years would mean a payment of $3565 [(23,766/10) + (23,766*0.05)]. 

Even if our working stiff should earn his old income of $50,000, the inclusion of the loan payoff gives him a net income of $46,435 [50,000-3565].  In other words, our working still will need to reduce his overall expenditure by about 7% just to repay the loan. 

The obvious implication is that the longer our working stiff waits to begin reducing his spending and start paying back the loan, the more difficult it will become to deal with his overall debt load later.  Mr. Orzag is correct; the United States must tackle its deficits quickly to avoid the kind of debt crisis that hit Greece.