Sunday, March 1, 2009

The Numbers

Everyone is throwing around the recent budget numbers as well as the total stimulus/bailout package amounts. These numbers are so big it reminds me of when I was a kid bragging about how many baskets I could make in a row in basketball. The conversation would start something like this: Boy 1, I can make 10 baskets in a row. Boy 2, oh yeah I can make 20. Boy 1, I can make 100. Boy 2, I could make a million. Boy 1 well I can make a billion. Boy 2, infinity! I win. Like the playground banter, the budget numbers have equally gotten out of touch with reality. Let me take this time to put some clarity in and shed some light on the numbers. First, millions and billions and trillions are very big numbers but let me put them into perspective. To count to a million would take 2 weeks, to count to a billion would take 35 years and a trillion would take you back to the caveman days.

Let’s look at some numbers. This is not a statement pro or con for or against the stimulus/bail out plan, as that is forth coming. This exercise below is just to put in some perspective.

  • The total work force in the United States is about 150 million people. The number of employed is about 126 million.
  • The total value of the stock market is about $9 trillion.
  • The total value of housing market is about $15 trillion.
  • Total GDP (amount of all goods and services) is $14 trillion.

Summing that up, 126 million people make $14 trillion dollars of stuff and own $24 trillion worth of housing and stocks.

Now let’s look at debt. The total government debt is $10 trillion and the total mortgage debt is about $9 trillion. Total debt (not including consumer, credit card debt) is about $19 trillion.

So looking at these numbers, it appears that total debt is $19 trillion (government plus mortgages not including consumer debt) total income is $14 trillion or about 135% total debt to income. That doesn’t sound that bad. Would you borrow $200k if your annual income was $150k?

Now the asset side. Total assets of stocks and houses is $25 trillion with total debt at $19 trillion. Not bad as debt to equity of 76%. Would you borrow $190k on a house worth $250k? Lastly, do you think the impact of borrowing another $1k if you already own $19k is a big deal? Well I guess the answer is it depends. It depends on your job, if your assets continue to grow and your income remains stable. Well that is something I do have an opinion about. Capitalism works! And it works IN SPITE of the plans and ideas coming out of Washington. This economy will grow again and we will get through this. And it won’t be because of any plan that comes from politicians. I just hope that doesn’t create too much of a drag. You see, the 125 million working Americans are waking up everyday going to work and trying to figure out a way to grow. To be more productive, make more money, and move the ball forward. And we will. And it will have nothing to do with the stimulus plan. Let’s just hope it doesn’t make it too much harder.

Now back to the numbers. If GDP gets back to growing at a 3% trend and assets appreciate at an 8% average in 14 years, the debt as a percentage of assets will be less than 15%, or could be paid off with just one month worth of income. The economy will grow, income levels will increase, and assets will appreciate. We will also have inflation which will make today’s debt worth less. I am not saying we can spend our way out of the recession, or that the current plan is the solution. I am just putting the numbers into perspective. Since the burden will fall on the 125 million Americans working (one way or another) and we will have to pay I thought I would shed some perspective on what the numbers look like. So let’s stop analyzing what the politicians are saying, turn off the TV and get to work. After all, we have an economy to save.