Worried to Death about Debt

George Barna, the pollster who specializes in comparing the attitudes of evangelical Christians in the U. S. to those of Americans in general, has released some new research.

What does it tell us? It tells us that Americans, both believers and unbelievers, are worried sick about debt.

The Barna survey asked respondents to rate the seriousness of ten problems facing the nation. Personal indebtedness was tied for first with 78% of all those surveyed ranking it as a “major problem”. Evangelical Christians share this perception with 79% of them ranking personal indebtedness as a major problem for the country.

No wonder. The fear-mongering media regularly run stories about the “debt crisis”. Consumer debt of all kinds is at an all time high, we are told. Americans owe almost a trillion dollars on their credit cards alone. And the federal government has put over $9 trillion on its VISA card! (Wouldn’t you like to have those frequent flyer miles?)

But stop and think about this for a minute. Debt, in and of itself, is a meaningless number.

Trying to ascertain the financial health of a family or company or nation by knowing its debt alone is like trying to tell if a man is obese by knowing only his weight.

My friend John is 187 pounds. Is he overweight? You don’t know. You don’t have enough information to make a judgment on this matter. You need to know his height.

Well set your mind at ease about John. At just over 6 feet tall, he is quite slim and trim and fit. However, if he was only 4’ 7”, you might think it was time to get a court order to put him on Weight Watchers (although even then there might be other factors such as genetics or medical history that would need to be known before labeling John as a lazy slob).

Just as you can’t assess physical health based on weight alone, you can’t assess financial health by looking at debt alone. You need to know something about the income or assets that offset that debt. If you stop and think about it for a moment, you know this intuitively.

Would you rather be Jane who owes $300,000 on her house or Mary who owes $100,000 on her house? If Jane’s house is worth $700,000 and Mary’s house is worth $80,000, you’d rather be Jane even though she has three times as much debt as Mary.

Would you rather be David with monthly debt payments of $2,500 or Sam with monthly payments of only $500? If David makes $15,000 per month while Sam only makes $1,000 per month, you’d rather be David even though his debt payments are five times higher than Sam’s.

So we need some information on the assets and income of Americans if we want to evaluate the seriousness of the debt that Americans owe. What do we know about this topic?

One resource we can turn to is the Federal Reserve. Those nice people keep track of the net worth of the American people. Net worth is simply the difference between the value of everything you own after subtracting the value of everything you owe. In the example above and based on her home alone, Mary has a net worth of $400,000 (the difference between her home’s $700,000 value and the $300,000 she owes on it). Jane’s net worth is -$20,000.

Here are the data on the net worth of Americans:


The net worth of Americans is at an all time high! Net worth went up by almost $20 trillion just since 2002.

And here is an even better way of looking at the same data. The graph below (also from Federal Reserve data) shows trends in the net worth of households in real (inflation adjusted) dollars:

Of course, we have a lot more households in the country in 2007 compared to 1947 and a dollar does not buy as much in 2007 as it did in 1947. Both of these factors have been accounted for in the chart above. In other words, households could actually purchase over five times as much "stuff" with their household wealth in 2007 as they could in 1947.

How can this be? We have a housing bubble. Home prices are going down. But keep in mind that the estimated value of all residential real estate in the U. S. is about $20 trillion (so I've been told but I need to verify this and find a source for it). The national median home value declined 1.4% in 2007 compared to 2006 and this would only lower net worth by about $0.3 trillion if everything else stayed the same.

Of course, everything else does not stay the same. Even though 2007 showed a slight decline in home values, the value of stock market investments rose in 2007 and this more than offset the small loss in home values.

In fact, here are data from the Investment Company Institute on retirement savings in the United States:

As you can see, the value of retirement accounts went up by $0.9 trillion in 2007 and this more than offset the loss in home values.

So Americans have plenty of assets to cover their indebtedness.

But what about income? Are Americans making enough money to pay their debts each month? Here are some data (again from the Federal Reserve) on debt service as a percentage of income over the last few years:


People are spending about the same percentage of their income on debt service in 2004 as they were in 1998. (By the way, this study is being updated by the Federal Reserve thru the year 2007 and it will show trends from 1989 to 2007 but the study will not be available until Feb. 2009).


Bottom line: Any way you look at this, personal debt does not seem to be a significant problem.

But what about that national debt? It is $9 trillion! Certainly, this is not good.

The best way to evaluate the federal debt is to compare it to the Gross National Product (GNP) which, roughly speaking, is a measure of the value of all the goods and services produced by the U. S. Here are those data:


As you can see, we've been in serious trouble before with the national debt. It was more than 120% of the GNP right after World War II. The percentage declined pretty steadily until the 1980s. It then increased until about 1995 and it has bumped around in the 58% to 66% range since then.

So the national debt does not look like an overwhelming problem from an historical perspective. I'm not suggesting that we should not be addressing this issue. We need to get that trend line going down again. I'm just pointing out that current debt levels do not represent a crisis in terms of the amount of the debt.
.
[By the way, I hear a lot about the issue of who holds the national debt -- that so much of our debt is being financed by China and that this could allow them to crater our economy. This is a separate issue from the amount of debt and I know nothing about it. I'll just point out that the fear over the China/debt issue is something I hear about repeatedly in the main stream media and, since those rascals are so often biased and slanted and wrong in their reporting of other matters, I would not be surprised to find that they have overblown the China issue also.]
.
So stop worrying about debt. The stories you hear about this issue in the main stream media are sloppy journalism at best and largely propaganda.
.
Okay. I feel better now. I've just solved a problem that 78% of the American people rate as a major concern. If only I could get the word out to all of them!
.
As always, your thoughts and comments are welcome.