Scene: Jordan and Sandy, a former business colleague, are having coffee.  The discussion begins Entry #121,.  This segment is a continuation of Jordan’s description to Sandy of a conversation with the Speaker of the House and the Senate Majority Leader, which begins Entry #123.

Jordan:  “Waiter, we’d like another round, please.”

Waiter:  “And whose tab should I put this on?”

Jordan:  “Mine, unfortunately.”

John Boy:  “Jordan, you have no idea how good this drink tastes since you’re paying for it.”

Mackey:  “You’re not going to charge this to taxpayers, are you?”

Jordan:  “No, Mackey.  Not to worry.  My own money.”

Mackey:  “Now, explain all this accounting stuff.  What does it really mean?”

Jordan:  “Let me ask you.  When you were first married did you buy a house?

Mackey:  “Of course…and proud of it.”

Jordan:  “And did you pay cash for the house?”

Mackey:  “Are you kidding?  I borrowed all the money I could.”

Jordan:  “What if you were forced to pay cash for the house rather than borrowing?”

Mackey:  “Never could have afforded it.  In fact, we’d probably still be renting.”

John Boy:  “I think I see where you’re headed with this.”

Mackey:  “I don’t see.  Where is this headed?”

John Boy:  “Since the government uses ‘piggy bank’ accounting, it appears there is a big deficit when some of the funds are used to buy an asset…something that lasts a long time, like a new house.”

Mackey:  “I still don’t understand what you guys are talking about.”

John Boy:  “Why did the bank lend you money?”

Mackey:  “Because I had a steady income.”

John Boy:  “Did the house you bought cost more than your annual income?”

Mackey:  “Of course…4-5 times more than my income.  What’s wrong with that?”

Jordan:  “Nothing wrong.  What if you had to make as much money every year as the house cost?”

Mackey:  “Already told you.  I couldn’t afford the house and probably still be renting.”

John Boy:  “Well, Mackey, old buddy, I can see we have a problem.”

Mackey:  “The problem is the federal budget deficit.”

John Boy:  “It’s not the deficit.  It’s the way we calculate it.  If your personal household used the same accounting method as the government, you would be in a big hole when you bought the house, or even a new car.  If there were a Constitutional Amendment forcing a balanced budget, you never would have bought your house, or even that new car.”

Jordan:  “And most businesses would never have gotten started.”

Mackey:  “I think I’m getting this.  And boy, am I glad we are off camera.  We are off camera, aren’t we Jordan?”

Jordan:  “No recording, no notes, no record, just an informal chat.”

Mackey:  “Quite honestly, I just never appreciated…really never understood…the difference in accounting methods.  By the way, what’s the other accounting method called?”

Jordan:  “For the record, accrual accounting.  And ‘piggy bank’ accounting is really called ‘cash’ accounting but piggy bank is easier to understand.”

John Boy:  “Jordan, at some point you have to pay off your debts.  We paid off the loans on our house.”

Jordan:  “Are you completely out of debt?  I mean debt other than credit cards.”

John Boy:  “No, not really.”

Mackey:  “And neither am I.”

Jordan:  “You’re not alone.  Most people, even those who’ve paid off their house, are in the same boat.  So, some debt seems OK?”

John Boy and Mackey (in unison):  “Of course.”

Jordan:  “What about the amount of debt?  Does that matter?”

Mackey:  “All depends on income.”

Jordan:  “So you think Bill Gates could take on more debt than say I could.”

Mackey:  “That seems like another stupid question.  Of course Gates could handle more debt than you.  What’s your point?”

John Boy:  “His point, if I understand correctly, is the amount of debt should be measured against income or wealth, not just the amount of debt per se.”

Mackey:  “So $100 million of debt for you Jordan, might seem like a lot…”

Jordan:  “Excuse me Mackey?  Me with $100 million debt?  That’s a dream.  A debt of $1.0 million or even less would seem like a big deal.”

Mackey:  “As I was saying, $100 million debt might seem like a lot of debt to Jordan but not to Bill Gates.  Is that your point?”

Jordan:  “Exactly my point.  The measurement should be the amount of debt relative to income or wealth, not just the amount of debt.”

John Boy:  “Jordan, the way this discussion is headed you might make meaning less the argument that the federal debt is too high.”

Jordan:  “I wouldn’t say ‘meaningless’ but certainly citing the amount of debt as a scare tactic becomes a lot less impactful or rational…if people understand.”

John Boy:  “Mackey, why did we agree to talk to this guy?  He’s starting to ruin my day…even more than my golf game.  But, I really want to learn more about the relationship of debt to income…after a break.  Be right back.”

(To be continued.)