From the enemy’s heartland comes a piece of brilliance by Robert Samuelson. Mr. Samuelson is a big time economist and political writer who has worked at the heartland since 1969. From today’s column on the explosion of federal debt…
Until recently, the borrowings, though usually undesirable, were not alarming. But the recession and an aging population signify that we have crossed a threshold where actual and prospective borrowings are so huge that no one can foresee the consequences. The best measure of debt burden is its relation to the nation’s annual income, or gross domestic product. The same approach applied to a household with $25,000 of debt and $50,000 of income would produce a debt-to-income ratio of 50 percent.
Now then, for those of you who don’t know me from a hole in the wall, I’ve been a mortgage banker for the last 15 years or so and before that I worked as an M&A operations specialist for a long time (about 3MM air miles worth). OK, so I will claim to know something about finance (I’m no blackhedd) and I absolutely know what a “debt to income ratio” is. It is a very well defined term in banking, finance, investing and in law and the definition has been consistent since I had hair (a LONG time).
If you make $5,000 per month and your debt service looks like this: mortgage PITI $1,500; car payment $300; credit card payments $400 for a total debt service of $2,200, your DEBT TO INCOME RATIO is 44% – [total debt service] / [total income]. The actual principle amount of your debt has nothing to do with the calculation, and based on the interest rates of your various debts is absolutely misleading.
In addition to not understanding a fundamental economic term, the example Mr. Samuelson uses is, well, stupid. Or idiotic. Pick one. No other choices. The household in question makes $50,000 and he’s projecting a $25,000 debt. Guess they don’t have a mortgage, huh? Probably not a car loan either. I don’t know if my “numbers” are right, but I do know they’re closer than BobbyBoy’s. A household with $50K income probably has a $200,000 mortgage and car loans totaling maybe $25,000. And credit card debt of maybe $5,000. That would be $230,000 of debt v. a $50,000 income and using BB’s formula, the “debt to income ratio” of 460%.
Oh, and for the “national” figure with your own stupid, meaningless formula BB, you might want to divide the debt by the tax revenue instead of using the GDP.
All I can say was originally said by Gary Larsen and rather perfectly at that…