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:  “A little surprised, Mackey?”

Mackey:  “Absolutely.  I had no idea.  John Boy, did you know about this?”

John Boy:  “I’ve heard Democrats talk about it but never really believed them.”

Mackey:  “Jordan, could you walk us through this chart?  I want to make sure I understand it.”

Jordan:  “Gladly.  Let’s start with what is displayed.”

John Boy:  “Federal debt as a percent of GDP, right?”

Jordan:  “Yes, debt as a percent of gross domestic product.  Not the absolute level of debt, just the percent.”

Mackey:  “So the chart really is more like what we talked about re Bill Gates.  He can afford to take on a lot more debt than any one of us because he makes a lot more money than any one of us.”

Jordan:  “True.  But we also need to consider wealth in addition to income.  A lot of people make a lot of money every year but spend most of it…and therefore really haven’t accumulated a lot of wealth.”

Mackey:  “But Gates has income and wealth.  In fact, a whole lot more wealth than his annual income.”

John Boy:  “As simple as that sounds, talking about the combination of income and wealth really helps me understand.  The United States has a lot of assets, really accumulated wealth, which could be used to back-up the debt.  What do they call that back-up?”

Mackey:  “Collateral.  The back-up is like what they do for your mortgage.  The bank uses your house as security or back-up for the loan.”

John Boy:  “Jordan, you sure no one is recording this discussion?  I’d really be embarrassed if someone heard us asking these questions.”

Jordan:  “No one is recording the conversation.  And I think you hit on a good point.”

Mackey:  “You mean that a lot of people, including many of our legislative colleagues, do not understand the basics of finance.  And especially how the Federal government is financed.   From what you’ve said, financing the government is similar in some ways to your household finances, but there are some key differences.”

John Boy:  “Let’s get started with the chart, please.”

Jordan:  “What most people don’t realize, is the US has been in debt since the Revolutionary War.”

John Boy:  “What?  Debt since the Revolutionary War?  That seems hard to believe.”

Jordan:  “Think about it.  During the Revolution, the US was really like a start-up company…but really a country.  With the Revolution we gave the finger to our biggest trading partner – call it our biggest customer, mother England.”

Mackey:  “Now what do we do for money?  And where do we get some key supplies to fight the motherland?”

John Boy:  “We’ve got to import goods.”

Jordan:  “Goods cost money, which we don’t have.  But…”

Mackey:  “But like Bill Gates, we have lots of assets that other countries can use.”

John Boy:  “So now some countries, notably France, lend us money and also buy some of our products.”

Jordan:  “A new country going into debt is not unusual.  Really no different than a start-up company going into debt.”

Mackey:  “OK, the US has lots of debt but the economy starts to grow.”

John Boy:  “Yeah and according to the chart by 1835 or so we paid off the debt.  Who was president then?”

Jordan:  “Andrew Jackson.”

John Boy:  “What happened?  We were debt free and then we go back into debt again.  Seems stupid to me.”

Jordan:  “Try the Civil War for starters but let’s move beyond that.  Think of the US as a fast-growing company.  Give me some license in this comparison but I think you’ll get the point.”

John Boy:  “Many companies have no debt.  So why shouldn’t the US operate that way?”

Jordan:  “Here’s something I’ll bet you’ve never thought about.  Do you own stock in any companies?”

John Boy:  “Of course.”

Jordan:  “Mackey, how about you?  Own stock?”

Mackey:  “Absolutely.”

Jordan:  “Many of those larger companies replaced their debts…loans…by issuing stock.”

Mackey:  “What a minute.  Are you saying the people who bought the stock are really financing the company…just like the bank?  They’re really loaning it money?”

Jordan:  “Yes, but with one difference.  The company never needs to pay off the loan.”

John Boy:  “Aren’t stockholders protected?  The company has all the assets.”

Jordan:  “Stockholders can benefit by having the value of the stock increase and/or by receiving dividends…at least some companies pay dividends.  But there is no guarantee of anything.  If the company goes bankrupt, stockholders are at the back of the line and hold what is probably a worthless stock certificate.”

Mackey:  “If there’s no guarantee or no backing to the stock certificate, isn’t the company effectively printing money?  All they have to do to get more money is issue more stock, rather than going to the bank and getting a loan.”

John Boy:  “Mackey, we get all exorcised because the government issues money without backing it up with gold or silver.  When you stop and think about it, the companies that sell stock are, in essence, doing the same thing – printing money.

Jordan:  “A real eye opener, eh?  But let’s hold the conversation about printing money.  Back to the chart and more about when debt as a percent of GDP went up and then came down.”

(To be continued)