Pushing Granny off the cliff

Granny 2

Margaret Thatcher once said that anyone who can manage a household budget can manage the national budget.

Now, we keep hearing about the US national debt expressed in terms of the ratio of Debt to GDP which at around $16T, is now about at the 100% mark. But the Debt is owed by the US government and it does not have the entire GDP running through its coffers, what it has are tax receipts which are considerably less at currently around $2.1T and ongoing spending of about $3.2T. The interest that the US pays on this debt was $454 billion in 2011 and since it is increasing rather than paying down its total stock of debt each year it can be viewed as akin to an interest only loan. US unfunded liabilities are around $238T

bushchart

So, let’s follow Maggie’s advice and convert these figures to layman’s terms by lopping eight zeros off the end so that they look something like a household budget.

The annual income is now $21,000 which is about what someone on minimum wage would earn. The members of this household are having a tough time at the moment and their annual outgoings are currently $32,000 and they are making up the difference by bunging $11,000 on to one of those ‘low teaser rate’ credit cards every year. So they are borrowing over half as much as they are earning.

They have been in the habit of borrowing to subsidise their lifestyle for many years now, though it’s gotten a lot worse these last few years. The end result is that they now owe $160,000. This means that their debt to income ratio is 762%. They are paying about $4,540 each year out of their earnings just to cover the interest on this ever increasing loan which will go up another $11,000 or more this year. Their effective interest rate is around 2.8%.

For now.

But the looming problem on the horizon is that granny is about to enter a nursing home and has no savings, so the bill for her living and medical expenses are going to be about $2,380,000 over the course of her remaining life.

This profligate family’s lenders are one day going to pull their heads out of the sand and work out the math on this situation. As we have seen with the PIGS, this realisation can happen very quickly and when it does, the interest rate demanded can rise very sharply indeed.

PIGS-10-year-chart

That nice Stavros family down the road saw their interest rate go from 5.5% to 12.5% in the space of a year and it is currently at 17% one year later. Their own family got in a spot of bother back in 1981 and saw their interest rate spike to 15%. But their total debt at that time was at a much more manageable level and they were able to placate their lenders with promises to mend their ways.

chartind1CRU

If it were to go to that level again, their annual interest payment would go up to $24,000 which is $3,000 more than they currently earn.

Yes, every penny they earn would be used to cover interest and they would still be $3,000 in the hole. So no money to pay little Johnny’s tuition, no money to pay the ongoing medical bills, no money to pay for the security company, no money to give to uncle Fred who has been out of work for a few years now. And as for granny, well, I hear the view up on Lovers Leap is great this time of year…

And you thought that it was that nasty Paul Ryan who was going to shove her off the cliff, what with his outrageous plan to “balance the budget”, pffffff.

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