Thursday, 25 May 2017

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.

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