14 Jul 2010

Thought You Were Short of Cash?

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In debt? Having trouble making ends meet?

J. Kennerly Davis Jr., at the Richmond Times Dispatch, points out that you may have forgotten to add your household’s share of federal debt and unfunded obligations to your personal deficit. Add a negative $1,069,100.

Currently, federal, state, and local government debt, in the form of bonds and other securities, totals approximately $16 trillion. As staggering as this figure is, it doesn’t capture the full scope of the threat that confronts us.

In addition to selling bonds and other securities to borrow money, government at all levels also has made enormous financial commitments over the years, without providing funds to back up these commitments. Currently, the unfunded commitments of the federal government to programs such as Social Security and Medicare total almost $109 trillion.

It’s difficult to grasp the significance of such huge numbers and the real threat they pose to you and your family.

Let’s consider the case of a family living in Richmond. Call the parents Michael and Jennifer. They have been married 10 years, live in the Fan, and have two young sons who attend William Fox Elementary School.

They both graduated from college and have good jobs. Jennifer is a high school teacher and Michael is a corporate financial analyst. Last year they had a combined earned income of just under $125,000, the median income for the typical American two-income professional couple. They are hard-working and financially responsible.

Last year they were able to save approximately $1,500. They took one family vacation trip to Sandbridge. In 2003, they purchased their house in the Fan for $380,000. They are current on their mortgage payments and other monthly bills.

Over the past year or so, Michael and Jennifer have become very concerned about their financial situation. Recently, after reviewing some financial advice columns in The Times-Dispatch, they decided to draw up a household balance sheet to get a snapshot of all their financial assets and liabilities.

Like most Americans, Michael and Jennifer’s home is by far their most valuable asset. Its current market value is approximately $450,000. Their savings and in vestments total just under $76,000. The combined value of their two cars and other personal property is approximately $45,000.

So, altogether, their household assets are worth more than $570,000. The liabilities on their balance sheet are limited as a result of their responsible lifestyle. They owe $266,000 on their mortgage, and approximately $34,000 on their car loans.

When Michael and Jennifer compared their assets to their liabilities, they were pleased to see that the value of their total assets exceeded their total liabilities by about $270,000. They were proud that they had been able to build up this much net worth.

But wait! The balance sheet that Michael and Jennifer prepared does not begin to accurately represent the family’s real financial health and future financial prospects. It does not take account of their household share of federal, state, and local government debt and unfunded commitments.

In round figures their share is:

Federal debt: $108,000 Federal unfunded obligations: $907,100 Virginia debt: $3,100 Virginia unfunded obligations: $30,200 Richmond debt: $16,000 Richmond unfunded obligations: $4,700.
So this young family’s total share of government obligations and debt is $1,069,100.

When these obligations are added to their other liabilities their household ends up in a deep financial hole. Despite all their hard work and responsible financial behavior, decades of financial mismanagement by the government have effectively wiped out the net worth of $270,000 they thought they had. Instead, they owe almost $800,000.

How about you? What does your household balance sheet look like when you factor in $1,069,100 of additional liabilities?

Hat tip to Paul Mirengoff.

One Feedback on "Thought You Were Short of Cash?"


Balance sheets have to be examined more closely than that. You can have a lot of debt as long as that debt is invested in something productive that will generate future cash flow. So if the Federal government and the Commonwealth of Virginia invested that money wisely — say, in toll roads or real estate improvements that will generate a lot of future tax revenues — then Michael and Jenn are probably okay. Now if their government invested that money foolishly in things that aren’t economically productive — say, financing medical bills for illegal immigrants or the John Murtha Airport — Michael and Jenn are, well, screwed.


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