Imagine you’re the loan officer at a bank.  A nice gentleman named Sam Smith – a family man - comes in looking for a loan.  He sits down across from you, smiles, and together the two of you begin filling out the loan documents.  This is his profile:
·        He makes $100,000 a year

·        Last year he spent $120,000 (seems to spend a bit more than he makes)

·        He has credit card debt of $408,000 (no, that’s not a misprint!)

·        There’s good news and bad news about his mortgage.  The good news is that he has unusually good terms – it’s a 75-year note.  The bad news is that he owes $1,716,000 (rather a lot)

·        More good news – he has a very low interest rate (2.4%) on his credit card debt.  Of course, he has a lot of it – $408K – and so even at that low interest rate he ended up paying $9,600 last year in credit card interest alone (nearly 10% of his income).

What do you think?  Would you loan this man money?
If you haven’t guessed, Mr. Smith is actually our favorite uncle… Uncle Sam.  The numbers above are a rough approximation of what our national fiscal picture looks like when scaled down to family size.  The data is from the 2008 Financial Report of the United States Government ( ).  

The thumbnail:
Receipts (mostly tax revenues) = $2.5 T (Sam’s salary)
Outlays = $3.0 T (Sam’s expenditures last year)
Current Debt = $10.2 T (Sam’s credit card debt)
Future Obligations Currently Committed = $42.9 T (Sam’s mortgage)
To scale down the numbers to something people can get their heads around, I dropped six zeroes from each, then multiplied by four.
This is only an approximation, of course.  Sam nominally has the ability to change his long term committed obligations (mostly Social Security and Medicare).  But political exigencies will actually circumscribe much of that ability.  And since those programs are actually legal Ponzi schemes with a swiftly deteriorating receipt/outlay profile, they’re actually a much greater challenge than the “mortgage” I’ve represented it as.

Sam can also vote himself a pay raise – raise taxes.  But that will have other quick ramifications, including driving parts of the economy underground.  Realistically, tax rates can’t exceed 18-19% of GDP before those follow-on effects start to take hold.

And that wonderful low interest rate on his existing debt – that will inevitably rise as his bankers come to realize Sam is not the terrific loan risk they’ve always considered him to be.  When that happens it will pose immediate challenges to servicing the growing interest payments on that debt, much less paying down the debt itself.

Of course, this is all before we include the new “stimulus package” or President Obama’s suggestion that we will likely have trillion-dollar-plus deficits for years to come.  We are adding to Sam’s debt load at a breathtaking pace.

This is the elephant in the room, ladies and gentlemen.  This – not the prospect of a severe recession, not a 30’s-style depression, not the systemic collapse of the banking industry, not the bankruptcy of America’s auto industry... not, in fact, any of the stuff that currently gets all of the air time today – is the shoe you should fear.