It is a staggering amount in and of itself, nearly equaling our current-dollar GDP and representing around 25 percent of all goods and services produced annually by the entire world. Put another way, national debt increased from around $20,000 per head in 2000 to $46,000 currently — meaning this is the share of the total U.S. debt for which each person is responsible, every man, woman and child in America.
Compare this to the median household income of around $50,000 (prior to withholding of tax). True, incomes also rose during the same time period, but they certainly didn’t double. In fact, the increase was only about 20 percent.
Since the average household consists of 2.6 individuals, debt per household measures $120,000, or 240 percent of gross annual income. Incidentally, mortgage bankers consider it prudent if the total mortgage taken out by homebuyers equals two to 2.5 times their annual income. In other words, national debt is like a second mortgage for the American family — and one which, unlike the conventional mortgage, only keeps increasing.
The story of the debt-to-income ratio seems worrying, but the situation with debt-to-assets seems a little brighter. Household net worth, the value of assets minus total debts, more than doubled from 2000 to 2008, and measured $68.2 trillion by 2008. However, it dropped to almost $50 trillion by 2009 and recovered to just $56.8 trillion by end-2010.
This overall figure can be deceptive. For example, members of the middle and lower middle classes typically have their primary residence as their most important asset, and accumulated equity in their homes makes up the bulk of their wealth. The 2008-09 financial crisis hit the stock market and real estate market equally hard. But the stock market recovered a substantial portion of its losses by mid-2011, whereas residential real estate prices have continued to fall, hitting a new cyclical low in mid-2011. Home values are down around 30 percent from their peak. The share of owner equity in private homes declined from over 60 percent in 2001 to around 38 percent at the start of this year.
In fact, the value of owner equity in homes has dropped to $6 trillion, the lowest level since the late 1990s. It is less than half of the $13.5 trillion level it reached in 2006.
So, if you believe that we’re saddling the average American with the $14.3 trillion debt, think again. The average Joe has neither the income nor the assets to assume this debt, and probably can’t afford to service this debt even at current historically low interest rates. Even with the average rate across maturities of around 1.75 percent, the U.S. government pays over $400 billion in annual interest charges, which adds up to over $1,300 or so per individual, or around $3,500 per household.
As far as the average American is concerned, this country is already bankrupt.
Saving the Country
During the recent nationwide debate about raising the debt ceiling, many Americans told opinion pollsters that they were strongly opposed to the idea. They didn’t want to pass the debt burden down to their kids. Leaving aside the question what our children and grandchildren will think of the current generation, which got from their parents the most prosperous and successful economy the world has ever known and left it to them effectively in bankruptcy, it should be noted that recent graduates in the U.S. are doing even worse than their parents.