How to Understand the National Debt

How to Understand the National Debt

Imagine owning a business with gross revenues of $1 million, outstanding debts of $1.19 million, and cash flow from your business to service the debt of about 5% of gross revenues.  This means the company has only $50,000 per year to service the outstanding debt.  If the average interest rate on the company’s debt is 5%, the debt load on your company would be increasing your debt each year.  Your repayment of $50,000 would be less than your interest expense of about $59,500.

Imagine further that you forgo using the cash from the business for debt payment, and choose to borrow more to keep your debt payments current.  Bankruptcy would seem to be only a matter of time for the company.  At some point, finding suckers (lenders) will be difficult.

Thanks to Monty Guild for this analogy.

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One response to “How to Understand the National Debt

  1. It makes one wonder if the legislators in Washington are all pea-brained idiots who can’t chew gum and walk at the same time . . . or if they are just showing the callousness and greed of a new aristocracy.