Broke and Broker

Wow! We’re number one!! Add something else to the list of what we are beating the Americans at. Except this one isn’t worth the win.

What’s the so-called win? We just hit a debt-to-income ratio record of 150%. That means for every $100 we earn, we have $150 of debt. NOT something to be proud of.

Compare that to the U.S. where they maxed out their debt to income ratio at 136%. But what’s even more impressive is that Americans have paid their debts down by more than 20% in the last three years! Their debt-to-income ratio is now at 114% and dropping! Sure, it’s partly due to foreclosures and bankruptcies. But give Americans credit…pardon the pun. They found themselves in a deep recession and stopped spending and started paying down their debts in a big way.

You have to remember that there’s always a direct connection between savings and debt. We really can’t do both. The higher our debts, the larger our monthly payments, the less money we have to save. Plus, when rates start to jump again in the next few months, any debt that’s not on a fixed rate is going to become a whole lot more expensive to service each month.

Fortunately, our federal debt is a distant second to the U.S. As a nation, we owe a whole lot less than they do. If you’ve watched any cable TV station, you know that the U.S. Congress is in a prolonged fight over the debt ceiling. With their constitution, the maximum borrowing and debt has to be approved by Congress who controls the money. With a Republican controlled House of Representative, and a Democratic President, it’s been a slow-moving train wreck that has to be dealt with by August 2nd,or the U.S. is officially in deep trouble.

The debt ceiling is 14.3 trillion and they’ve reached it. Right now, their annual revenue from 2010 was 2.16 trillion, but 3.45 trillion in expenses. One of the funniest things, OK it’s not that funny, is to hear lots of politicians claim that it’s not a problem, and that there’s plenty of money to pay their debts.

OK, this is too stupid, even for a fifth grader: two trillion income, three trillion expenses and having to pay 14 trillion of debt. If your family spends 40% more than you make, can you still tell your partner that there’s plenty of income to pay all the bills? There is NOT enough money – hello? The fight over reducing spending and/or increasing some taxes, or closing loopholes, is going to go on for at least another week.

Why do we care? Well, the implications, or even the thought, that the U.S. government won’t pay their interest payments on their debt is pretty scary. We’re their largest trading partner, and we’re neighbors. If, or when, bond holders and the international finance community demands higher interest rates because of the risk, it’ll impact us as well. Remember, what happens in the U.S. happens here – sooner or later. Stay tuned and maybe the adults in the room will find a solution, and not just a temporary fix.

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