For quite some time now (most recently here) I have been a lonely voice from the hills of Nevada County trying to convince people that our country’s financial crisis is not measured or reported properly. Hyperventilation on the impending disasters of debt and deficits are presented as debt to GDP and deficit to federal budget ratios, and so published by economists and finance mavens through their foundations/blogs/websites. This incomprehensible gibberish leaves people yawning.
The critical measure that will make it all clear is the national debt service to GDP ratio. That is because this ratio represents the country’s stark cashflow problem and impacts us immediately year-to-year. Since no one seemed to understand or care, I modestly suggested that this little orphan ratio should be called the Rebane Ratio.
Yesterday an RR reader sent me a link to a video of a Peterson Institute for International Economics presentation given by Harvard historian and business school professor Niall Ferguson. Here the good professor goes through the arguments already familiar to RR readers on the coming financial brick wall toward which the US and other nations are heading. Dr Ferguson cites recent IMF and OECD analyses that point to the Rebane Ratio as being the telling metric that informs us of the proximity and magnitude of the calamity. This comes off as financial rocket science when it really isn’t. The surprise is that no one has talked about it, and no one in the media publishes a chart or graph of this metric. Let me explain.
Now suppose that the monthly mortgage payment were only $200. By any measure, this situation is totally tolerable; in fact, such a payment would not be a burden at all. But you would still have a 167% debt to income ratio. However, this obviously much friendlier scenario would yield a Rebane Ratio of 4% that correctly represents the absence of the day-to-day burden on your budget. In short, it wouldn’t matter if you owed a million dollars, having a 4% ratio of debt service to income would keep you smiling indefinitely.
But we have not been given such information about our nation’s finances and future. It is only now, that in the halls of some arcane Washington geo-economics think tank we hear of the significance of this ratio as it is introduced and touted. And significant it is indeed as the astute reader can surmise from the nearby graphic. Unless the current Obama policies and wealth killing legislation are stopped and reversed, in 30 years the nation’s Rebane Ratio will be about 23%. What does this mean?
Well, the total federal take has historically been about 20% of GDP for as long as old people now can remember. That has been the missed target of balanced federal budgets for the same interval, a target that we are now planning to overrun by at least 30% for the unforeseeable future according to CBO estimates, liberals' dreams, and conservatives' nightmares. If the 23% estimate is anywhere near correct, then in 2040 we will be using ALL of the federal tax receipts just to service national debt. Yes, you got it right, there will be nothing left over for anything else from Medicare to missiles. Can you spell U-N-S-U-S-T-A-I-N-A-B-L-E? If that’s too hard for some of our friends on the left, maybe BLOOD IN THE STREETS is a more accessible concept that will communicate. It seems that only we bloggers are able to hoist up these kinds of reality for people to consider.
(My apologies for the self-aggrandizing hubris of this post.)