Financial Analysis

"We need two types of leadership: The Fire Chief to put out the "current forest fire" and Smokey the Bear to prevent future "forest fires."

by Jefferson Pinto

Mar. 2009: Last month I addressed the Stimulus Package. This month I'll address the National Debt by comparing and contrasting: diet & personal debt, with the National Debt.

Part I: The Problem Caution: The following includes intense subject matter that may be disturbing or unsuitable for immature readers. OK. The election is over. The detainees have disembarked Guantanamo Bay. The stimulus package has been passed. Can we get back to one of the most colossal issues threatening our country’s future ?

Let’s face it; obesity is a huge problem in this country. (Sorry I couldn’t resist the pun.) I'm really addressing "economic obesity." Instead of rattling off huge words that only mean something to members of the Political Economic Vocabulary Club (PEVC), I'll explain it in terms of something to which I can more easily relate and convey.

Back to today’s discussion: accumulated fat. (Or in the case of our government, the National Debt). Suppose your household earns about $50,000 per year (the annual household median income in this country). Let's say you end up spending $100,000 this year. Where does the other $50,000 come from? It's called consumer debt and it takes the form of credit cards, car loans, and "zero interest" installment loans. Let's recap. You just spent everything you will earn for the next two years. Oh yeah did I mention the consumer interest rate of between 10 and 20 percent, will equate to between $5,000 and $10,000 per year. That's in addition to paying back the amount you borrowed. Ouch that hurts!

Helpful hint: If you want a 20 percent tax-free risk-free return on your investment - PAY OFF YOUR CREDIT CARDS! (Suzie Orman would be so proud.) At a personal level, you pay more due to the interest, and the payments go on long after you remember what you bought. With consumer debt, you have to work to keep it! You get the point.

Now pretend you are the Federal Government. (Scary I know, but go with it.) Suppose you did the same thing for the past few decades. Consider your country's annual income is about $1 trillion and the accumulated debt is about $11 trillion dollars. It's not what's referred to as "going green". It's economic pollution and obesity of the worse kind.

Jefferson's Metaphor: If you eat more calories than you burn, you are going to get fat; as in, if you spend more than you earn, you are going to take on debt (economic fat). There are many effective solutions. Sure you can exercise more to burn more calories. Then again, you could take a second job to earn more money. Or better yet, eat and spend less.

Back to the National Debt. Eleven trillion dollars is a lot of money by any standard [Now, late 2016, Over $19 Trillion]. It's almost incomprehensible. The problem in dealing with such a large number in the trillions is that 100 billion dollars becomes a rounding error and is treated like spare change. The National Debt equates to almost $37,000 for every man, woman, and child in this country. For a family of three, that’s $111,000 or about $625 per month for the next 30 years. I know it sounds worse when I put it that way.

"To pay off $1 billion of the National Debt, you would have to walk 15,783 miles or almost two thirds around the globe."

Paying off the National Debt: Let me put it into perspective. Suppose you were to start on the beach in Santa Monica, California. And pace off the National Debt at a rate of one dollar per inch. By the time you reached just under 16 miles you would have reached downtown Los Angeles and paid off $1 million dollars of the National Debt. To pay off $1 billion of the National Debt, you would have to walk 15,783 miles or almost two thirds around the globe (You’d be in Mongolia.) To pay off $1 trillion dollars, you’d have to walk around the world 631 times. To eradicate the National Debt, you’d have to walk around the earth 6,600 times.

In its simplest form, debt itself is bad. Well how bad is it? It makes our economy sluggish and mortgages our children and grandchildren’s future.

Personal Rationalizations not to act: The rationalization: It's OK; I can make my minimum payments. Well yeah, for now. Daddy daddy, I want a golden goose; I want a golden goose nowwwwww! (immediate gratification leading to conspicuous consumption.) What happens when you need a new car, or the roof springs a leak ? The rationalization: It's not my job. Everyone else should pay off their debt so I can have abundant access to money at a low interest rate. That’s sort of like saying, "I think everyone else should carpool and take the bus so I can drive my car on an uncrowded freeway and enjoy low cost gasoline." The rationalization: I'll reduce my spending next year. Yeah I know smoking is the proximate cause of the most preventable illness leading to death, but I'll quit smoking next month. I had an instructor who once said, everyone is for change... just not right now. The rationalization: I know I'm on a diet but, it's _______ ___ (Choose one: •my daughter’s wedding, •Christmas/Hanukah/ Kwanza, •Thanksgiving, •Groundhog Day, •National Watermelon Day) and I'll start my diet next month. I'll defer the corrective action because of the crisis at hand… and the next crisis at hand, etc. Let me be clear, I don't advocate martyrdom by depriving yourself of some treats or some nice things. But my question is this: can you/we really afford to pay it back with interest ?

Part II: The Journey to Correction The five most dangerous consecutive words in the English language are: MAYBE IT WILL GO AWAY. I hate to be the bearer of bad news, but without an aggressive change in behavior, it won’t.

Ladies and gentlemen, it's time once again to play the symptom/cause/problem game. Classify each of the following as a symptom, cause, or problem. 1. Obesity 2. Poor food choices 3. Excessive quantity of food consumed 4. Lack of exercise 5. Compensating for emotional injury or dysfunction 6. One or more credit cards are maxed out 7. You can’t make the minimum credit card payments 8. You spend beyond your needs Symptoms: 1, 6 Causes: 3, 4, 5, Problems: 2, 7, 8

How much does it cost? In 2008, we (the taxpayers) spent $253 billion in interest for the National Debt. That alone is more than a quarter of the recently passed stimulus package. Put another way, if we had lived within our means all those years and not accumulated the debt, we'd have one fourth of a stimulus package each and every year.

"Soon enough, the interest will move from the third largest item on the National Budget to the largest."

The bigger problem is the consistent fiscal incontinence: Picture this; You are in a cabin located in the middle of the forest. There is a blizzard and you are snowed in. You are running out of firewood to burn to keep warm. Then you start pulling boards off the inside of the cabin and burning them too. If the storm continues and you keep burning the cabin, soon you will not have any protection from the elements. An alternate strategy is to put on more coats and blankets and burn less wood to weather the storm. The same is true of our fiscal policy (spending) and growing National Debt. Soon enough, the interest will move from the third largest item on the National Budget to the largest.

"You can no more spend your way out of debt than you can eat you way thin."

I invite you to resist the great rationalization: "As a percentage of Gross Domestic Product (GDP), the National Debt isn't proportionally that big." (GDP being the National Economy, including government, industry, and consumer spending.)

My take: (the only way I can put it, that is fit to print) is that the above statement is the largest quantity of animal waste product excreted from an unaltered male bovine I have ever encountered. Keynesian Economics is the concept that government deficit spending is good and OK. This concept, originally introduced by John Maynard Keynes, a British economist was very popular in the middle of the last century, when most of our politicians were educated.

Jefferson's Metaphor #36: You can no more spend your way out of debt than you can eat you way thin. It defies the laws of economic physics. So what's the go forward strategy? Here are a few to cogitate.

Educated decisions based on full disclosure: Popeye's friend, the gluttonous J. Wellington Wimpy, was made famous for saying, "I’d gladly pay you Tuesday for a hamburger today." At least he addressed the cost of the burger with a repayment schedule. That's the way it ought to be. If our politicians were to use this same philosophy, it would sound more like, "How about a hamburger for you hungry citizens?” Sure I'll take one. Oh wait. What do you mean it will cost $15 each and you are going to put it on the country's credit card and charge us interest for the next 30 years? Nah, forget it. I can feed myself more efficiently and still have the freedom to choose what I like to eat without paying any interest. Don't make me say it. OK, if you insist: There is no free lunch.

Feel the pain now to understand the consequences: When the awareness of wearing seatbelts came into the mainstream, the cars of the day made the most annoying buzzing sound when the driver wasn't wearing a seat belt. Albeit, the loud buzzer was a punitive and effective way of motivating the driver to do the smart thing - wear their seatbelt. Nowadays, my car has the most pleasant tone that really isn't that motivating. Would Pinocchio and the other boys have spent the afternoon at the "carnival" if they knew they'd be turned into slave jackasses?

"Blackmail the citizens: by cutting the most visible and vital services. "Sorry folks, we’re cutting back on air traffic controllers. Have a safe flight."

There is no effective mechanism to shrink government: Even when the rest of us have taken an economic hair-cut, the recipients of social security, welfare, etc. have automatic increases built into the National Budget. Shall we all feel the pain equally? Prior to expanding government, let us inquire about the exit strategy. When will the need for this program cease? When will the flow of dollars stop?

The ineffective tools of choice include - Across the board budget cuts: Imposing a (fill-in-the-blank)-percent across the board budget cut is a short term fix, at best. If there is a function/department that's not necessary, cut it out completely, don't just make it smaller. Did you know there are still government-paid tea tasters on the payroll and we're still paying farmers not grow crops? I'd like to say it isn't so, but it is. Why not start paying General Motors to not make large SUVs? (I realize that joke is only half funny because that's effectively what's happening now.)

Blackmail the citizens: by cutting the most visible and vital services. "Sorry folks, we’re cutting back on air traffic controllers. Have a safe flight." We finally crumble under the pressure and say, OK ! OK! Increase taxes. We really ought to consider cutting out the Transportation Security Administration (TSA) where "Your safety is our priority". I think their motto ought to be, "We're creating stupid rules that are arbitrarily enforced by otherwise unemployable high school dropouts with the appearance of safety." By the way, thanks for adding an airport tax to my airline ticket. Thanks for confiscating my fingernail clippers and factory sealed bottle of water so I can pay $3 for the same bottle of water after passing through the security check point.

"The Federal Balanced Budget Amendment.... doesn’t address the overall size of government."

At the state level, the Legislative filibuster/ blackmail used by our "friends" in Sacramento isn't working so well. Instead of playing together nicely toward a common goal for the citizens (remember us?) and addressing the core issue, there is new talk of reducing the number of minimum votes to gently pass budget increases. The "change the rules by changing the balance of power" strategy stinks. What they are effectively saying; "if I can’t have my golden goose now, I'm changing the rules."

Jefferson’s Editorial: Frankly, I commend the Governator for not negotiating with the budget terrorists and their incremental pork. Note: California differs from the federal government in that bond issues (incurring debt) must be approved by the voters. In the case of the federal government, they simply issue debt as a result of the budget and subsequent incremental legislation.

"I propose all elected officials have at least 20 hours of CPE annually in finance and economics... another 20 in human psychology.... You know, the money and the people thing. I’d throw in another 40 hours for ethics."

The Federal Balanced Budget Amendment (of which the implementation keeps getting deferred) has both merit and limitations. It only addresses the equalization of spending and tax collection. That's good.

However, it doesn’t address the overall size of government. That's bad. There is nothing that will prevent further expansion and increased taxation or debt accumulation. Take our friends across the pond in the UK, as the epitome of expanded government and creative ways to fund it. They have a higher tax levied on the operator (the citizen) of a color TV, than on the operator (citizen) of a black and white TV.

"Pull the curtain out from behind the wizard.... politics (poly meaning many, and tics meaning blood suckers)... I’ll buy votes today and have the next generation of constituents pay it back later, after I’m out of office."

Up the anti on our elected officials: Just about every other profession (excluding attorneys) requires Continuing Professional Education (CPE) to keep their license. I propose all elected officials have at least 20 hours of CPE annually in finance and economics and another 20 in human psychology (child development, addiction, etc.) You know, the money and the people thing. I’d throw in another 40 hours for ethics.

Pull the curtain out from behind the wizard: The problem with politics (poly meaning many, and tics meaning blood suckers) is this: I’ll buy votes today and have the next generation of constituents pay it back later, after I’m out of office.

"Our government is doing to us (the citizens) what the banks did to unsuspecting borrowers (currently in default because they lacked the capacity to pay)."

Here’s my fix: List the National Debt interest separately on the tax return. Dear citizen you owe $5,000 and another $1,000 as your portion of interest on the National Debt. Your total income tax bill is $6,000. I advocate aligning the consequences with the action or activity.

I'm for saying all federal expenditures should be paid out of the current year's budget. Certain capital projects, like Hoover Dam for example, are pretty costly and would create a huge distortion if all costs were absorbed in a single year. This is much the same way most citizens couldn't pay for their house in one year. I do advocate issuing bonds, for a specific project for a fixed period of time, not to exceed 10 years. Casually issuing Series EE bonds isn't going to cut it anymore.

"The Cruel Irony... my generation is the first generation in the history of the US that will have a lower standard of living than our parents."

The Cruel Irony: Our government is doing to us (the citizens) what the banks did to unsuspecting borrowers (currently in default because they lacked the capacity to pay). The demographic reality is that my generation is the first generation in the history of the United States that will have a lower standard of living than our parents. One of the biggest contributing factors is the National Debt. The government borrows money, driving up interest rates. The National Debt is mortgaging our children's and grandchildren's future.

"How Obama Handed Your Children, Grandchildren, Great Grandchildren, Great Great Grandchildren..... a Big Fat BILL - The Monster Within."

The Epilogue: I have found that when I get one area of my life in order it also helps me apply the same lessons elsewhere and get other areas of my life in order. My objective is to educate and motivate, not shame.

"We need two types of leadership: The Fire Chief to put out the "current forest fire" and Smokey the Bear to prevent future "forest fires."

I've tried to parallel issues with similar behaviors and relate them to the National Debt as an inevitable economic dragon that needs to be slain. If you're OK with the current state of affairs and the direction this country is going, then keep doing what you're doing because you are going to keep getting what you're getting.

The good news: Our national leadership is talking about it. The bad news if we don’t quit overspending "cold turkey" we are going to relapse. We need two types of leadership: The Fire Chief to put out the “current forest fire” and Smokey the Bear to prevent future “forest fires”.

In summary: the National Debt is a colossal problem. It grows so slowly and quietly. Our economy is currently in stage two economic cancer. The good news; it is curable with early treatment. However, without aggressive changes in behavior, the National Debt will eventually lead to our demise.

Jefferson Pinto is a retired CPA, holds an MBA from one of the finer accredited universities in this country, and is the VP of corporate operations for his day job.