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I am leveraged (via my mortgage) about 600% of my GDP (yearly salary). This seems realistic for me, why is it not realistic for the government? Especially when

by reedf1 6y ago

I am leveraged (via my mortgage) about 600% of my GDP (yearly salary). This seems realistic for me, why is it not realistic for the government? Especially when the government's spend directly correlates with their future income.

ashtonkem 6y ago
As a general rule, analogies between personal finance and government finance don’t work very well. It feels intuitive, but governments can do things you cannot. You personally lack the ability to cause inflation via your debt, for example. You also can’t raise bonds, adjust taxes, or declare war. Not saying that 356% is bad, I’m not an economist, but just because you’re leveraged higher than that on a mortgage tells us very little about whether or not 356% is bad or not. For certain it matters what that government debt is going to pay for. Debt for infrastructure (and therefore future growth) is quite a bit different than debt to finance consumption, for example.
- maxerickson 6y ago
  The shift to long term mortgages ballooned house prices. If people conspired to pay banks less, houses would cost less (purchases are mostly made based on the monthly payment and perception that the price will go up, not on some more concrete valuation).
  - chii 6y ago
    > If people conspired to pay banks less, houses would cost less and so that one person who would really prefer a particular house/location (because it's a great house/location) would pay just a little bit more and guarantee that he/she gets it. Guess what happens then?
    - robjan 6y ago
      Then it becomes attractive for the neighbour to sell their house. There are two sides to a market.
  - throwaway20875 6y ago
    The line of thinking behind this comment is exactly why we're experiencing rapid decline - zero ability to consider the root causes behind issues and how to address them at a fundamental level. "Hit back at the banks" is the kind of cable-news-hot-takes-style solution that only address issues caused by prior solutions. Every single asset class has experienced significant inflation over the last 50 years. Banks created 30 year mortgages because of demand. Demand occurred as a result of actions by the federal reserve. The FHA, not really a bank but rather a government entity, started the trend.
    - maxerickson 6y ago
      My comment isn't an attack on banks though, it's just where mortgage interest more or less goes, into the banking system. I suppose 'bank' can be bad shorthand for mortgage lenders, but whatever.
  - mschuster91 6y ago
    > If people conspired to pay banks less There will always be people rich and liquid enough to buy houses in cash without ever involving a bank.
- PragmaticPulp 6y ago
  This story is about global total debt, not global government debt. It includes private sector debt as well. If total government debt was 356% of GDP, we would be in huge trouble. Fortunately that’s not what this number indicates.
  - ashtonkem 6y ago
    This makes the mortgage analogy worse. Global debt is not the same as personal debt. It’s even more complex than government debt. Again, maybe it’s good and maybe it’s bad. But we can’t tell that by making analogies to a single mortgage. They’re just different beasts.
  - MuffinFlavored 6y ago
    > we would be in huge trouble Could you ELI5 why? Is it because we wouldn't be able to keep up with interest payments on the debt given the fact that we're actually already cash flow negative as is?
    - nikitaga 6y ago
      Pretty much. You get into such insane levels of debt by borrowing more and more every year, by leading a lifestyle that you can't afford. "Lifestyle" in case of government spending being the levels of healthcare, education, social services, war, tax & tariff rates, capital controls, etc. If you don't want to be crushed by interest payments, eventually you'll need to pay up, and that means inflation, possibly hyperinflation, and a crash of a lot of systems that we take for granted.
      - orwin 6y ago
        I think i will repeat myself in this thread: printing money ALONE does not create hyperinflation. I don't understand where this belief came from. Even standards/orthodox/right-leaning economists agree. Unless the US is suddenly also incapable of producing (and this is impossible), you won't ever have hyperinflation even if the fed did twice the QE they are already doing only to reimburse US gov debt.
- rsync 6y ago
  "As a general rule, analogies between personal finance and government finance don’t work very well. It feels intuitive, but governments can do things you cannot." Can we - all of us - graduate a bit in our sophistication here ? I agree with your statement and don't need any of this explained to me - there is, in fact, a too-simplistic, oft-made analog to personal, household finances. People would do well to understand what governments (particularly sovereign issuers borrowing in their own currency) can do that they, in their household, cannot. Yet at the same time, I grow tired of the pedantic scolding of the "dummies" that don't understand modern finance. I - a relatively sophisticated, learned observer - have a hunch that at the very margins government finance collapses all the way back down to the simple rules of household finance. I hope to never be vindicated in this hunch ...
  - enraged_camel 6y ago
    >> I - a relatively sophisticated, learned observer - have a hunch that at the very margins government finance collapses all the way back down to the simple rules of household finance. On what exactly do you base this hunch? Because it hasn’t held true, ever.
    - rsync 6y ago
      "... because it hasn’t held true, ever ..." Argentina has given us two examples of it just in the last 20 years. Not a perfect example as the Argentine debt was not denominated in a currency they could print ... I would further point to the "Nixon Shock" as an example where a country (the US) that can borrow in its own currency was forced by (global) economic realities to undertake what some would label a "soft default". I am on my way to lunch and am limited by what comes to mind in just this fleeting moment - I beg your pardon for my dearth of examples. [1] https://en.wikipedia.org/wiki/Nixon_shock https://en.wikipedia.org/wiki/Nixon_shock [2] https://www.livemint.com/Money/57inMm5EbLi1soOnOrMk1J/Did-the-US-default-in-1971.html https://www.livemint.com/Money/57inMm5EbLi1soOnOrMk1J/Did-th...
      - jnwatson 6y ago
        Both situations demonstrate almost the opposite of your point. The Nixon shock was abandoning of gold as a base currency. Your household cannot abandon your base currency. If Activision-Blizzard borrowed its debt in World of Warcraft gold, they would never be in default. The same applies to countries that print their own currency.
- 015a 6y ago
  I think the broader point as to why that comparison doesn't work is in situations where its trying to communicate the point "I can't do this, so the government can't do it." In this situation, its "I'm able to do this, so why not the government?"
  - ashtonkem 6y ago
    That’s a fair response. You’re absolutely correct that the personal mortgage analogy is used to argue that governments can’t (or shouldn’t) take on certain debt loads. On the flip side, I’d argue that mortgages and personal finance in general doesn’t tell us much about how governments should treat debt. The nature of government debt, how it’s financed, and what it’s used for is just so different from personal debt that any analogy between the two gives us very little information.
- TheCoelacanth 6y ago
  It's not a perfect analogy, but it's better than freaking out just because the number crossed 100%. What's so special about 1 year that a government shouldn't borrow more than 1 year of GDP? Why not ten years or 1 month?
cjfd 6y ago
Presumably you are young and you hopefully have your whole working life to pay this mortgage back. A country as a whole consists of people of all ages. If they borrow as much as the young could they are enlisting future generations, who get no say in whether they enjoy this, in paying back these debts. One can ask ethical questions about that. On the other hand, one can argue that covid is an exceptional situation....
- notahacker 6y ago
  Much of that 281t debt is private debt payable which the person or organization that took it out has plenty of time to repay though. Many debtors will expect substantial financial returns on that borrowing, and all of them will have borrowed with the expectation (rightly or wrongly) that the share of GDP they earn in a given year will be greater than the share of debt repayment they owe that year. The details of who owes what under what time frame and whether they are likely to be able to repay matter much more than debt/GDP ratio or the absolute size of the debt burden. It is possible for the debt-to-GDP ratio to be sub 100% and a financial ecosystem to be on the brink of collapse because the people borrowing the money earn too small a share of GDP to repay, and it is possible for the debt to GDP ratio to be well over 400% whilst consisting entirely of people borrowing money to make sensible, easily repaid long term investments. The reality is somewhere in between.
alberth 6y ago
Because economists know that if you’re leveraged too high you won’t be able to service your debt. Using your analogy, the rule of thumb in real estate is that a property shouldn’t cost more than 356% of your GDP (yearly salary). Said another way, your mortgage is no more than 28% of tour gross monthly income. https://www.moneyunder30.com/how-much-house-can-you-afford https://www.moneyunder30.com/how-much-house-can-you-afford
- boringg 6y ago
  Said another way, your mortgage PAYMENTS shouldn't be that high. I.e. what the debt repayment terms are of the overall debt of the economy is the important part not the total debt (yes it is important but not nearly as much as the repayment terms).
- fedreserved 6y ago
  Unless you shrink the interest rate to 0. The real danger isn't the debt per se, but the destruction of the currency (for the usa at least)
- andy_ppp 6y ago
  Depends - you could have a very high salary and want a really nice house, that might mean you can't afford three holidays per year, nicest food or the latest technology but it's a tradeoff you could choose to make.
  - lazide 6y ago
    While true - 'traditional' underwriting would not allow that kind of risk, as the lack of slack to be able to take a vacation means another life challenge (6 months without a job?) would likely result in a default at the worst time for selling the asset - when a bunch of other people are out a job. Same with requirements for large downpayments (20% traditionally) - more skin in the game for the buyer, along with more cushion for the bank to make their money back if the market is down when a default happens. Thinner margins, higher leverage happens near the top of debt cycles (typically) as lenders get desperate for return, and amp up risk. The type of leverage it allows also inflates asset prices, as money is 'easier' and people who want asset x can leverage higher to get it, increasing demand.
Someone 6y ago
Government income is lower than GDP, often a lot lower. As an example, the US federal budget is under $5 trillion, US GDP over $20 trillion (getting a good view is extremely difficult, as states, counties, cities, etc. also have income, and borrow money, and that situation differs by country)
rawtxapp 6y ago
What happens if you lose your job and can't find another one in time to make your mortgage payments? Leverage introduces risks, higher leverage means more risk.
maxwell 6y ago
Repayment at the micro level seems dependent on age and health factors. At the macro level, it's not about governments per se, it's about demographics. Govs have some effect, e.g. car seat regulations lowering the birth rate in the U.S., but legislative/regulatory priorities reflect the wider culture.
- no_wizard 6y ago
  For what its worth, the aside comment here about car seat regulations lowering birth rate in the U.S. is a reference to this study: https://poseidon01.ssrn.com/delivery.php?ID=817078078116005001097107072095091068001008007085063041068118116105026031066002121072026035111101049057019018011029099118000114012022021021058028094097015102091069015028023095000000112110007091105093102113097095003004099085092067119119066101020118102084&EXT=pdf&INDEX=TRUE https://poseidon01.ssrn.com/delivery.php?ID=8170780781160050... It's also a correlation study, and I'd hesitate to quote it as fact currently.
- ak217 6y ago
  Even if we take that study at face value (they basically overfitted a model with so many free parameters, they could tune it to give any result they want), car seat regulations have at least two orders of magnitude less effect than any of immigration, healthcare, tax, or labor regulations policies.
Bakary 6y ago
To paraphrase and mangle a certain quote, if you owe a few hundred thousand dollars to a bank to purchase your home, that's your problem. If a government owes 356% of trillions of dollars, that's not just their own problem anymore.
lightgreen 6y ago
You can always sell your property while you have it replayed mortgage yet and get a lot of money. The government has nothing to sell. Better analogy is that you have 600% GDP in student debts, and you don’t have a realistic plan to repay it because you studied liberal arts.
- JumpCrisscross 6y ago
  > government has nothing to sell Governments have assets and the legal right to others’ assets (e.g. taxation).
  - evilos 6y ago
    Also since its debts are in US dollars, it can literally print money to pay off debt.
mytailorisrich 6y ago
For a start, while your annual income can indeed be thought as your "GDP", a country's GDP is not the same as the government/state annual income. Second, a mortgage is a secured loan used for capex: You have borrowed a lot but you used that money to buy an assert worth as much or more so your personal balance sheet still looks fine and the lender can repossess the asset if you don't pay. Basically for debts you need to look at 2 things: balance sheet, i.e. how the debts/liabilities stack up against assets, and cash flow, i.e. whether you can service the interests on the debts. The issue with government borrowing is that it is largely used to finance a level of spending that exceeds income. So instead of a mortgage I think a more apt comparison with personal finance would be if you used your credit card to finance a life style above what your income allowed. The difference is that governments can get away with much more of that than individuals can, but it will still come back and bite them at some point.
lr4444lr 6y ago
You have a re-possessible and appreciable asset leveraged. You also aren't renewing your debt. 600% of your salary in credit card or student or medical debt is dire.
- jopsen 6y ago
  > appreciable asset The fact that a home goes up in value over time does not seem natural to me. In 30 years time, won't people prefer to buy a house that is 10 years old, compared to one that is 40 years old? Why is it normal that housing prices go up?
  - bitshiftfaced 6y ago
    The structure requires repairs and maintenance over time. If the owner keeps up with this cost, there isn't as much reason for the structure itself to decrease in value. Some homes can be outdated and need a remodel, but that gets baked into the price as well. Land is finite, and becomes more in-demand as the population increases. When homes appreciate in value over time, I reckon that's mostly the result in land being more in demand and/or asset inflation.
    - jopsen 6y ago
      But population isn't set to go up in any industrialized countries.
      - bitshiftfaced 6y ago
        But it has consistently grown: https://tradingeconomics.com/united-states/population https://tradingeconomics.com/united-states/population. Don't forget the other part I mentioned: asset inflation (here the asset is the land and structure). Money supply has grown over time: https://fred.stlouisfed.org/series/M2 https://fred.stlouisfed.org/series/M2
      - dharmab 6y ago
        It is when you consider immigration.
ffggvv 6y ago
GDP isn’t equivalent to salary. GDP is the measure of the economy’s production as a whole. not the governments cut. If you compare tax revenues, which is their salary the picture is much more stark. (in this situation GDP is more like the value you create for your company whereas salary is like tax revenue)
sudosysgen 6y ago
Your salary is not your GDP. What you contribute to GDP is significantly higher than your salary.
qeternity 6y ago
There is one correct answer to this: collateral. Your mortgage is secured by the value of your house, which can be repossessed and sold to recoup loan proceeds. Of course, the housing market can decline, but it provides a very real backstop to your ability to repay that loan. You might be inconvenienced to sell your house, but ultimately it can be repaid relatively easily even if you default. Government debt on the other hand is uncollateralized and "secured" by two intangible things: tax receipts and central banks. Taxes are obviously a significant headwind for economic growth, and while necessary, should be as low as possible. So increasing taxes is not desirable. The second way is through inflation vis-a-vis Central Banks (so called debt monetization). Inflation is an implicit tax on everyone, and as we know, like taxes, too much inflation is a very bad thing. Governments have three ways to retire their debt, and all are pretty bad: 1) they can raise taxes which impedes growth and done in the extreme can cause a recession, which then reduces taxable income in a negative feedback loop 2) they can debase their currency causing inflation so that the money they have to pay back is worth less, which is also really bad when done excessively 3) or they can either default which unlike your house, is catastrophic because there is nothing for creditors to repossess And the above is without getting into the topics about utility: your house will provide utility for decades whereas most debt has been accumulated to fund social programs which need continuous funding, unlike your house which is funded once and amortized over decades.
- dragonwriter 6y ago
  > Governments have three ways to retire their debt But very little reason to retire debt; there are arguably good reasons to try to manage the debt-to-GDP ratio within broad parameters over the long term, but mostly that is about trying to constrain the long-term growth rate of total debt below long-term economic growth rate, not reducing debt on an absolute basis.
- MuffinFlavored 6y ago
  > Governments have three ways to retire their debt, and all are pretty bad: What does this mean for our deficit long term? Does the deficit even matter? To what degree? Everything you said is true. It makes it seem like we will most likely never live in a time where the government is cash flow positive (some kind of surplus that is used to pay down debt).
lordlimecat 6y ago
Your mortgage is backed by collateral, which is a pretty big difference.
cbozeman 6y ago
Well it isn't realistic. For about a year I dated a forensic accountant with a Ph.D. whose job it was to untangle and uncook books. We got on the subject of mortgages. She said you should never buy a home that costs more than double your yearly salary. If you make $60,000 a year, as she made when she bought her home, then you can afford a $120,000 home. If you make $100,000, then you can afford $200,000. Entirely too many people, including apparently you, are severely overleveraged on their home loans. There's absolutely no scenario where your situation makes financial sense to people with in-depth financial education, who are also not beholden to what we've come to accept as the "norm" for financial services. The reasons she listed for this are myriad. 1) You have to save for retirement. Most people usually do this in the form of stocks, bonds, ETFs, etc., 2) you have, or should be, putting away a minimum of six months of your income in order to survive a job loss, and she recommends at least one-to-two years for people with advanced degrees (M.A., M.S., M.B.A., etc.) because the average time it takes to find another position for advanced professionals is something along the lines of 8-9 months, 3) you have other expenses such as your auto loan or loans, food, insurance, etc., all of which costs money. Those are only some of the many areas of cost that she and I discussed while we were dating. There's absolutely no amount of money you can make where your 600% figure makes reasonable financial sense... even if you make $1 million a year, you're still in a $6 million home. Hell if you made $10 million, that's a $60 million home. After taxes, there's still no scenario where that makes good financial sense. Lastly, I don't want you to think I'm personally attacking you - there's a lot of people in your boat, but its a boat in which no one belongs. These levels of debt are dangerous... the 2008 financial crisis proved that.
- bradlys 6y ago
  The person likely is dual income. So, it might only be 3x their household income. Which is perfectly acceptable. Getting a home for 2x your household income is basically impossible in this day unless you’re one very lucky remote worker who enjoys living in the middle of nowhere. I’d say the upper threshold of 4x your annual income is where you’d likely want to throttle back. Any higher, you’re in very high risk or can’t afford it. But trying to get a home for below 3x your income? Basically impossible for most people.
- mixmastamyk 6y ago
ejb999 6y ago
>>I am leveraged (via my mortgage) about 600% of my GDP (yearly salary). This seems realistic for me, why is it not realistic for the government? Especially when the government's spend directly correlates with their future income. if you manage to pay of your debt, and then end you own an asset that is presumably worth more than the total of all your payments - so for you that migt make sense. If you owned 600% of your personal GDP and all you were doing was buying food and booze - i.e. current consumption - that would be a HUGE problem. Problem is most of the debt that govt is taking on is of the food and booze variety - i.e. spending money on things that will be consumed today, and counting on future generations to pay for your poor choices.

by reedf1 6y ago

ashtonkem 6y ago

As a general rule, analogies between personal finance and government finance don’t work very well. It feels intuitive, but governments can do things you cannot. You personally lack the ability to cause inflation via your debt, for example. You also can’t raise bonds, adjust taxes, or declare war. Not saying that 356% is bad, I’m not an economist, but just because you’re leveraged higher than that on a mortgage tells us very little about whether or not 356% is bad or not. For certain it matters what that government debt is going to pay for. Debt for infrastructure (and therefore future growth) is quite a bit different than debt to finance consumption, for example.

maxerickson 6y ago
The shift to long term mortgages ballooned house prices. If people conspired to pay banks less, houses would cost less (purchases are mostly made based on the monthly payment and perception that the price will go up, not on some more concrete valuation).
- chii 6y ago
  > If people conspired to pay banks less, houses would cost less and so that one person who would really prefer a particular house/location (because it's a great house/location) would pay just a little bit more and guarantee that he/she gets it. Guess what happens then?
  - robjan 6y ago
    Then it becomes attractive for the neighbour to sell their house. There are two sides to a market.
- throwaway20875 6y ago
  The line of thinking behind this comment is exactly why we're experiencing rapid decline - zero ability to consider the root causes behind issues and how to address them at a fundamental level. "Hit back at the banks" is the kind of cable-news-hot-takes-style solution that only address issues caused by prior solutions. Every single asset class has experienced significant inflation over the last 50 years. Banks created 30 year mortgages because of demand. Demand occurred as a result of actions by the federal reserve. The FHA, not really a bank but rather a government entity, started the trend.
  - maxerickson 6y ago
    My comment isn't an attack on banks though, it's just where mortgage interest more or less goes, into the banking system. I suppose 'bank' can be bad shorthand for mortgage lenders, but whatever.
- mschuster91 6y ago
  > If people conspired to pay banks less There will always be people rich and liquid enough to buy houses in cash without ever involving a bank.
PragmaticPulp 6y ago
This story is about global total debt, not global government debt. It includes private sector debt as well. If total government debt was 356% of GDP, we would be in huge trouble. Fortunately that’s not what this number indicates.
- ashtonkem 6y ago
  This makes the mortgage analogy worse. Global debt is not the same as personal debt. It’s even more complex than government debt. Again, maybe it’s good and maybe it’s bad. But we can’t tell that by making analogies to a single mortgage. They’re just different beasts.
- MuffinFlavored 6y ago
  > we would be in huge trouble Could you ELI5 why? Is it because we wouldn't be able to keep up with interest payments on the debt given the fact that we're actually already cash flow negative as is?
  - nikitaga 6y ago
    Pretty much. You get into such insane levels of debt by borrowing more and more every year, by leading a lifestyle that you can't afford. "Lifestyle" in case of government spending being the levels of healthcare, education, social services, war, tax & tariff rates, capital controls, etc. If you don't want to be crushed by interest payments, eventually you'll need to pay up, and that means inflation, possibly hyperinflation, and a crash of a lot of systems that we take for granted.
    - orwin 6y ago
      I think i will repeat myself in this thread: printing money ALONE does not create hyperinflation. I don't understand where this belief came from. Even standards/orthodox/right-leaning economists agree. Unless the US is suddenly also incapable of producing (and this is impossible), you won't ever have hyperinflation even if the fed did twice the QE they are already doing only to reimburse US gov debt.
rsync 6y ago
"As a general rule, analogies between personal finance and government finance don’t work very well. It feels intuitive, but governments can do things you cannot." Can we - all of us - graduate a bit in our sophistication here ? I agree with your statement and don't need any of this explained to me - there is, in fact, a too-simplistic, oft-made analog to personal, household finances. People would do well to understand what governments (particularly sovereign issuers borrowing in their own currency) can do that they, in their household, cannot. Yet at the same time, I grow tired of the pedantic scolding of the "dummies" that don't understand modern finance. I - a relatively sophisticated, learned observer - have a hunch that at the very margins government finance collapses all the way back down to the simple rules of household finance. I hope to never be vindicated in this hunch ...
- enraged_camel 6y ago
  >> I - a relatively sophisticated, learned observer - have a hunch that at the very margins government finance collapses all the way back down to the simple rules of household finance. On what exactly do you base this hunch? Because it hasn’t held true, ever.
  - rsync 6y ago
    "... because it hasn’t held true, ever ..." Argentina has given us two examples of it just in the last 20 years. Not a perfect example as the Argentine debt was not denominated in a currency they could print ... I would further point to the "Nixon Shock" as an example where a country (the US) that can borrow in its own currency was forced by (global) economic realities to undertake what some would label a "soft default". I am on my way to lunch and am limited by what comes to mind in just this fleeting moment - I beg your pardon for my dearth of examples. [1] https://en.wikipedia.org/wiki/Nixon_shock https://en.wikipedia.org/wiki/Nixon_shock [2] https://www.livemint.com/Money/57inMm5EbLi1soOnOrMk1J/Did-the-US-default-in-1971.html https://www.livemint.com/Money/57inMm5EbLi1soOnOrMk1J/Did-th...
    - jnwatson 6y ago
      Both situations demonstrate almost the opposite of your point. The Nixon shock was abandoning of gold as a base currency. Your household cannot abandon your base currency. If Activision-Blizzard borrowed its debt in World of Warcraft gold, they would never be in default. The same applies to countries that print their own currency.
015a 6y ago
I think the broader point as to why that comparison doesn't work is in situations where its trying to communicate the point "I can't do this, so the government can't do it." In this situation, its "I'm able to do this, so why not the government?"
- ashtonkem 6y ago
  That’s a fair response. You’re absolutely correct that the personal mortgage analogy is used to argue that governments can’t (or shouldn’t) take on certain debt loads. On the flip side, I’d argue that mortgages and personal finance in general doesn’t tell us much about how governments should treat debt. The nature of government debt, how it’s financed, and what it’s used for is just so different from personal debt that any analogy between the two gives us very little information.
TheCoelacanth 6y ago
It's not a perfect analogy, but it's better than freaking out just because the number crossed 100%. What's so special about 1 year that a government shouldn't borrow more than 1 year of GDP? Why not ten years or 1 month?

cjfd 6y ago

Presumably you are young and you hopefully have your whole working life to pay this mortgage back. A country as a whole consists of people of all ages. If they borrow as much as the young could they are enlisting future generations, who get no say in whether they enjoy this, in paying back these debts. One can ask ethical questions about that. On the other hand, one can argue that covid is an exceptional situation....

notahacker 6y ago
Much of that 281t debt is private debt payable which the person or organization that took it out has plenty of time to repay though. Many debtors will expect substantial financial returns on that borrowing, and all of them will have borrowed with the expectation (rightly or wrongly) that the share of GDP they earn in a given year will be greater than the share of debt repayment they owe that year. The details of who owes what under what time frame and whether they are likely to be able to repay matter much more than debt/GDP ratio or the absolute size of the debt burden. It is possible for the debt-to-GDP ratio to be sub 100% and a financial ecosystem to be on the brink of collapse because the people borrowing the money earn too small a share of GDP to repay, and it is possible for the debt to GDP ratio to be well over 400% whilst consisting entirely of people borrowing money to make sensible, easily repaid long term investments. The reality is somewhere in between.

alberth 6y ago

Because economists know that if you’re leveraged too high you won’t be able to service your debt. Using your analogy, the rule of thumb in real estate is that a property shouldn’t cost more than 356% of your GDP (yearly salary). Said another way, your mortgage is no more than 28% of tour gross monthly income. https://www.moneyunder30.com/how-much-house-can-you-afford https://www.moneyunder30.com/how-much-house-can-you-afford

boringg 6y ago
Said another way, your mortgage PAYMENTS shouldn't be that high. I.e. what the debt repayment terms are of the overall debt of the economy is the important part not the total debt (yes it is important but not nearly as much as the repayment terms).
fedreserved 6y ago
Unless you shrink the interest rate to 0. The real danger isn't the debt per se, but the destruction of the currency (for the usa at least)
andy_ppp 6y ago
Depends - you could have a very high salary and want a really nice house, that might mean you can't afford three holidays per year, nicest food or the latest technology but it's a tradeoff you could choose to make.
- lazide 6y ago
  While true - 'traditional' underwriting would not allow that kind of risk, as the lack of slack to be able to take a vacation means another life challenge (6 months without a job?) would likely result in a default at the worst time for selling the asset - when a bunch of other people are out a job. Same with requirements for large downpayments (20% traditionally) - more skin in the game for the buyer, along with more cushion for the bank to make their money back if the market is down when a default happens. Thinner margins, higher leverage happens near the top of debt cycles (typically) as lenders get desperate for return, and amp up risk. The type of leverage it allows also inflates asset prices, as money is 'easier' and people who want asset x can leverage higher to get it, increasing demand.

Someone 6y ago

Government income is lower than GDP, often a lot lower. As an example, the US federal budget is under $5 trillion, US GDP over $20 trillion (getting a good view is extremely difficult, as states, counties, cities, etc. also have income, and borrow money, and that situation differs by country)

rawtxapp 6y ago

What happens if you lose your job and can't find another one in time to make your mortgage payments? Leverage introduces risks, higher leverage means more risk.

maxwell 6y ago

Repayment at the micro level seems dependent on age and health factors. At the macro level, it's not about governments per se, it's about demographics. Govs have some effect, e.g. car seat regulations lowering the birth rate in the U.S., but legislative/regulatory priorities reflect the wider culture.

no_wizard 6y ago
For what its worth, the aside comment here about car seat regulations lowering birth rate in the U.S. is a reference to this study: https://poseidon01.ssrn.com/delivery.php?ID=817078078116005001097107072095091068001008007085063041068118116105026031066002121072026035111101049057019018011029099118000114012022021021058028094097015102091069015028023095000000112110007091105093102113097095003004099085092067119119066101020118102084&EXT=pdf&INDEX=TRUE https://poseidon01.ssrn.com/delivery.php?ID=8170780781160050... It's also a correlation study, and I'd hesitate to quote it as fact currently.
ak217 6y ago
Even if we take that study at face value (they basically overfitted a model with so many free parameters, they could tune it to give any result they want), car seat regulations have at least two orders of magnitude less effect than any of immigration, healthcare, tax, or labor regulations policies.

Bakary 6y ago

To paraphrase and mangle a certain quote, if you owe a few hundred thousand dollars to a bank to purchase your home, that's your problem. If a government owes 356% of trillions of dollars, that's not just their own problem anymore.

lightgreen 6y ago

You can always sell your property while you have it replayed mortgage yet and get a lot of money. The government has nothing to sell. Better analogy is that you have 600% GDP in student debts, and you don’t have a realistic plan to repay it because you studied liberal arts.

JumpCrisscross 6y ago
> government has nothing to sell Governments have assets and the legal right to others’ assets (e.g. taxation).
- evilos 6y ago
  Also since its debts are in US dollars, it can literally print money to pay off debt.

mytailorisrich 6y ago

For a start, while your annual income can indeed be thought as your "GDP", a country's GDP is not the same as the government/state annual income. Second, a mortgage is a secured loan used for capex: You have borrowed a lot but you used that money to buy an assert worth as much or more so your personal balance sheet still looks fine and the lender can repossess the asset if you don't pay. Basically for debts you need to look at 2 things: balance sheet, i.e. how the debts/liabilities stack up against assets, and cash flow, i.e. whether you can service the interests on the debts. The issue with government borrowing is that it is largely used to finance a level of spending that exceeds income. So instead of a mortgage I think a more apt comparison with personal finance would be if you used your credit card to finance a life style above what your income allowed. The difference is that governments can get away with much more of that than individuals can, but it will still come back and bite them at some point.

lr4444lr 6y ago

You have a re-possessible and appreciable asset leveraged. You also aren't renewing your debt. 600% of your salary in credit card or student or medical debt is dire.

jopsen 6y ago
> appreciable asset The fact that a home goes up in value over time does not seem natural to me. In 30 years time, won't people prefer to buy a house that is 10 years old, compared to one that is 40 years old? Why is it normal that housing prices go up?
- bitshiftfaced 6y ago
  The structure requires repairs and maintenance over time. If the owner keeps up with this cost, there isn't as much reason for the structure itself to decrease in value. Some homes can be outdated and need a remodel, but that gets baked into the price as well. Land is finite, and becomes more in-demand as the population increases. When homes appreciate in value over time, I reckon that's mostly the result in land being more in demand and/or asset inflation.
  - jopsen 6y ago
    But population isn't set to go up in any industrialized countries.
    - bitshiftfaced 6y ago
      But it has consistently grown: https://tradingeconomics.com/united-states/population https://tradingeconomics.com/united-states/population. Don't forget the other part I mentioned: asset inflation (here the asset is the land and structure). Money supply has grown over time: https://fred.stlouisfed.org/series/M2 https://fred.stlouisfed.org/series/M2
    - dharmab 6y ago
      It is when you consider immigration.

ffggvv 6y ago

GDP isn’t equivalent to salary. GDP is the measure of the economy’s production as a whole. not the governments cut. If you compare tax revenues, which is their salary the picture is much more stark. (in this situation GDP is more like the value you create for your company whereas salary is like tax revenue)

sudosysgen 6y ago

Your salary is not your GDP. What you contribute to GDP is significantly higher than your salary.

qeternity 6y ago

There is one correct answer to this: collateral. Your mortgage is secured by the value of your house, which can be repossessed and sold to recoup loan proceeds. Of course, the housing market can decline, but it provides a very real backstop to your ability to repay that loan. You might be inconvenienced to sell your house, but ultimately it can be repaid relatively easily even if you default. Government debt on the other hand is uncollateralized and "secured" by two intangible things: tax receipts and central banks. Taxes are obviously a significant headwind for economic growth, and while necessary, should be as low as possible. So increasing taxes is not desirable. The second way is through inflation vis-a-vis Central Banks (so called debt monetization). Inflation is an implicit tax on everyone, and as we know, like taxes, too much inflation is a very bad thing. Governments have three ways to retire their debt, and all are pretty bad: 1) they can raise taxes which impedes growth and done in the extreme can cause a recession, which then reduces taxable income in a negative feedback loop 2) they can debase their currency causing inflation so that the money they have to pay back is worth less, which is also really bad when done excessively 3) or they can either default which unlike your house, is catastrophic because there is nothing for creditors to repossess And the above is without getting into the topics about utility: your house will provide utility for decades whereas most debt has been accumulated to fund social programs which need continuous funding, unlike your house which is funded once and amortized over decades.

dragonwriter 6y ago
> Governments have three ways to retire their debt But very little reason to retire debt; there are arguably good reasons to try to manage the debt-to-GDP ratio within broad parameters over the long term, but mostly that is about trying to constrain the long-term growth rate of total debt below long-term economic growth rate, not reducing debt on an absolute basis.
MuffinFlavored 6y ago
> Governments have three ways to retire their debt, and all are pretty bad: What does this mean for our deficit long term? Does the deficit even matter? To what degree? Everything you said is true. It makes it seem like we will most likely never live in a time where the government is cash flow positive (some kind of surplus that is used to pay down debt).

lordlimecat 6y ago

Your mortgage is backed by collateral, which is a pretty big difference.

cbozeman 6y ago

Well it isn't realistic. For about a year I dated a forensic accountant with a Ph.D. whose job it was to untangle and uncook books. We got on the subject of mortgages. She said you should never buy a home that costs more than double your yearly salary. If you make $60,000 a year, as she made when she bought her home, then you can afford a $120,000 home. If you make $100,000, then you can afford $200,000. Entirely too many people, including apparently you, are severely overleveraged on their home loans. There's absolutely no scenario where your situation makes financial sense to people with in-depth financial education, who are also not beholden to what we've come to accept as the "norm" for financial services. The reasons she listed for this are myriad. 1) You have to save for retirement. Most people usually do this in the form of stocks, bonds, ETFs, etc., 2) you have, or should be, putting away a minimum of six months of your income in order to survive a job loss, and she recommends at least one-to-two years for people with advanced degrees (M.A., M.S., M.B.A., etc.) because the average time it takes to find another position for advanced professionals is something along the lines of 8-9 months, 3) you have other expenses such as your auto loan or loans, food, insurance, etc., all of which costs money. Those are only some of the many areas of cost that she and I discussed while we were dating. There's absolutely no amount of money you can make where your 600% figure makes reasonable financial sense... even if you make $1 million a year, you're still in a $6 million home. Hell if you made $10 million, that's a $60 million home. After taxes, there's still no scenario where that makes good financial sense. Lastly, I don't want you to think I'm personally attacking you - there's a lot of people in your boat, but its a boat in which no one belongs. These levels of debt are dangerous... the 2008 financial crisis proved that.

bradlys 6y ago
The person likely is dual income. So, it might only be 3x their household income. Which is perfectly acceptable. Getting a home for 2x your household income is basically impossible in this day unless you’re one very lucky remote worker who enjoys living in the middle of nowhere. I’d say the upper threshold of 4x your annual income is where you’d likely want to throttle back. Any higher, you’re in very high risk or can’t afford it. But trying to get a home for below 3x your income? Basically impossible for most people.
mixmastamyk 6y ago

ejb999 6y ago

>>I am leveraged (via my mortgage) about 600% of my GDP (yearly salary). This seems realistic for me, why is it not realistic for the government? Especially when the government's spend directly correlates with their future income. if you manage to pay of your debt, and then end you own an asset that is presumably worth more than the total of all your payments - so for you that migt make sense. If you owned 600% of your personal GDP and all you were doing was buying food and booze - i.e. current consumption - that would be a HUGE problem. Problem is most of the debt that govt is taking on is of the food and booze variety - i.e. spending money on things that will be consumed today, and counting on future generations to pay for your poor choices.