Another way to think about the US debt problem is looking at it from a balance sheet perspective (using 4Q09 numbers):
Liabilities = $14.6 trillion in Federal Debt*
$ 2.3 trillion in State and Local Debt
$18.1 trillion in Private Debt**
Equity = $37.5 trillion
[2010 GDP will be roughly $14.5 trillion)
* Excludes Social Security and Medicare because we have total control over how they get financed. That is, we can choose to cut benefits or increase taxes if we want to.
** This is NET private debt, which excludes the double-counting of certain financial debt that we see in the oft-seen chart that puts gross US debt at 350% of GDP (actually, total debt is closer to 250% of GDP)
So, what we have is an entity with a debt-to-equity ratio of about 1 to 1. Not ideal, mind you. But not about to keel over, either. For perspective, recall that most LBOs take on debt-to-equity ratios of 3 or 4 to 1. The average debt-to-equity ratio for companies in the US is .5 to 1; that is, there is twice as much equity as debt. So, the US is leveraged more than a truly healthy company should be, but well below the levels of a company that’s just gone through an LBO. So, if I’m a Director of US, Inc., I’m definitely concerned. But I’m not about to jump out of the window. Also, I remember that US, Inc. can print money if it wants to (at a cost, of course!).
