Economy or Not

In my last essay I tried to show that the US economy is actually almost completely dependent on government spending.  While I may not like this situation, there is little or nothing that anyone, other than the legislators, can do about it.  The great money engine of the 20th century, the manufacturing industry, has left America and possibly will never return; at least not in my life time.  As long as the wage difference between the west and the east persists, manual jobs will gravitate to the east.  To be sure, the folks in Shanghai are going to want more money for their labor as time goes by.  Not to worry.  There will be other folks from the interior who will work for the low wages.  China alone has three times as many people as the US and only a tiny percentage of them are being paid well.  With such a huge supply of cheap labor, it will take a very long time for wage increases in China to make a material difference in the prices of the goods they sell to us.  I think we can consider this arrangement as a permanent one.

Don’t misunderstand me.  America still has manufacturing companies but, the total number of them is greatly reduced from what it once was and many that do exist actually have their products made elsewhere.  Given the highly competitive nature of world trade, the pressure will continue to be applied to any remaining manufacturers to move operations to China or India.

So, where does that leave America’s economy?

We are in trouble.

Ever since the 1980s, we have been living in a false economy driven by ever increasing debt and speculation of one kind or another. I am conservative by nature and would rather put a dollar into savings instead of eating out.  But, my actions, emotions and motivations are a far cry from what most Americans have been doing for the past 30 years.  It is not necessary to place a moral judgment on the actions of myself or others because the only things that are important are consequences.  The consequences of our collective actions have been such that we are collectively bankrupt and scared.  Note that this is a 30 year period of spending mania and a large percentage of the population remembers nothing but this time.

It was oh so tempting to buy a big house.  Credit was available and everyone was doing it. And besides, house “values” were going up so fast that all you really needed to do was keep it for a couple of years and then sell it to some other fool for a huge profit.  What could possibly go wrong?  You could take out a second mortgage and use the house equity to buy all kinds of stuff that you have always wanted. You know, stuff like a 48 inch flat screen TV.  Life was good.

But, the party ended and now people are trapped with mortgages that they cannot pay and they have run their credit cards to limit and many have lost their jobs.  What do we do now?  The president wants all American’s to start spending again.  The trouble is that Americans do not have any money and their credit cards are at limit and they cannot afford the big house that they bought thinking they could “flip” it for a profit.  The dilemma that President Obama is facing is simple this; people who can afford to borrow won’t and people who want to borrow can’t qualify.  The result has been that private spending has fallen off a cliff.  Automobile sales are down some 40% from the 2007 levels.  The list of things not sold is quite long.

In order to keep the economy moving at least a little, both President Bush and President Obama have offered financial incentives, outright cash, and increasing government spending on “stimulus” projects.  These did induce people to buy cars and houses but as soon as the government stops handing out “incentives” sales plunge.

Some say that we should get used to the new economy because from here on, we are all going to have to make do with less.  We are now going to be forced to live on our income and not our home equity and credit cards.  If that is true, and I believe it is, then there are going to be some major changes in how people live.  I do not have a crystal ball that works so, I cannot predict what people will do.  I will only say that each person will make their own adjustments as they see fit.  However, I believe it is safe to say that the future will not be like the past.  We will not continue business as usual.

It is my personal opinion that there is so much debt in the system that cannot be serviced that, it will have to be paid off or defaulted on before things get better.  In recent times the federal government has passed laws making it difficult for individuals to declare bankruptcy and rid themselves of all debt.  That means the debt must be paid off and that will take most people many years to accomplish.  In the mean time, while the debt is being removed from the economy, I expect little or no real economic growth.  Note I said “real economic growth” as opposed to debt driven growth.

Russia went through an economic collapse starting in the late 1980s.  Dmetri Orlov sojourned in Russia before, during and after the collapse.  His writings on the subject make for great reading.  I recommend that all Americans read his story.  You can find his articles on the net with ease.

Regards

Challenges

I will step back a minute and consider two simple facts.

1) People in China and India are willing to work for $.10 per hour

2) Americans will not work for less than several dollars per hour.

Is this sufficient information to make predictions about such things as the jobs going off shore?

Well, no. People in Nigeria and Haiti will work for $.10 an hour too and no one is actually considering sending manufacturing jobs to those countries.  So, what makes India and China different? Several things.  First, India and China are more or less politically stable.  Second, the people are educated.  At least the upper classes are. But, even that is not sufficient to make jobs go from the US to Asia.  What really makes the difference is that India and China and other countries have acquired knowledge about how to build things and they have the tools to do so.  Education, skills, knowledge and tools combined with a low labor rate make Asian countries into manufacturing magnets for western jobs.

Now that everyone in the west has become accustomed to and in fact we demand cheap consumer goods, there is no going back.  Manufacturing jobs that leave the US are not coming back to the US any time soon.  And, we can expect more and more jobs to leave the US for the same reasons.  Engineering of all types, software programming of all types, banking services that do not require local customer contact and virtually all manufacturing will no longer be practiced in the US in the not so distant future.  I don’t think anyone needs a crystal ball to see this coming.

So, what will Americans do to make a living after all these jobs are gone?  Sell insurance, real estate and hamburgers to each other?

Let’s see.  We will still have mineral extraction for such things as iron, copper and coal. There is a reasonable chance that there will still be some jobs for medical practitioners and lawyers.  Of course, we will still grow food.  We will still have retailers, barbers, undertakers, and maintenance folks.  And, we will probably have a military.

What else is there?

Well, it turns out that probably everyone else will be essentially a ward of the state.

I know that this sounds foolish but, I think it is true when you look at the details.  Consider the following.

The gross domestic product of the US is $14.4 trillion dollars.  President Obama has submitted a budget proposal for approximately $3.8 trillion dollars.  Note that this is 26% of GDP. The rule of thumb for the money multiplier in the US and most industrialized countries is about 3.  This means that every dollar spent by the government, results in nearly $3 dollars in circulation.

You get a single $1 from the government.  That dollar is tallied as your income and is added to the next years GDP total.

You buy stuff with the $1 and then,

The merchant spends that money on merchandise. The cost of the merchandise is added to the GDP for next year too.

The suppliers of merchandise pay people to manufacture the goods they sell.  The money paid out for raw material and labor is also added to the GDP total for next year.

So every dollar that the government spends results in $3 dollars added to the GDP.  Pretty good huh?  So, if the federal government collects then spends $3.8 trillion dollars that money will account for $3.8 x 3 = $11.4 trillion dollars of the total $14.4 trillion dollars of GDP.  This means that the federal government is directly or indirectly responsible for 79% of the GDP!

When the Navy orders a new aircraft carrier that creates lots of jobs in the ship yards.  It also results in lots of restaurants, shopping malls, banks, automobile repair shops, etc.  But, if the Navy had not ordered the ship none of those other jobs would exist.  A clerk at the local restaurant near the ship yard may not think he/she is a ward of the state.  But, he/she owes their job to the government anyway.

If you add up all the other people who work for local governments you discover that just about the entire economy is in fact a ward of the state.  These would include police, fire men, road building and repair crews, school teachers, prison guards, city council persons and their staff, state and local government employees, park rangers, etc.  Since state and local taxes also result in a multiplier effect of nearly 3 to 1 it is safe to say that nearly the entire economy in the US is dependent on government money.

What this means is that the US and most of the industrialized western countries are in fact socialized welfare states.  If you were to remove government spending from the economy, the economy would collapse.  Every year, more and more of our industrial capacity is hollowed out and that leaves the rest of us more and more dependent on the government for our livelihoods.  Most of the western industrialized countries are more dependent on government spending than we are because they have nationalized or socialized health care.

There was a time when industry was the primary source of GDP.  Those days are long gone and will probably never return; at least not in our life time.  In theory, if the government can collect 33% of the total GDP in taxes and then by spending those taxes the multiplier effect results in 100% GDP then, we have a perfect perpetual motion machine.  What could possibly go wrong?

It really does not make any difference what goes wrong, does it?  If anything goes wrong and for some reason the multiplier effect drops to say 2.5 then the GDP will be reduced.  If a hurricane strikes New Orleans and that siphons off some of the government money to rebuild, that unexpected expenditure will also result in a lower GDP.  Without any excess money in the economy, we cannot withstand and weather through unexpected things.

But, the worst part of all this is that the government does NOT collect enough taxes to pay for the federal budget.  The money that the government spends does result in generating most of the GDP but nearly half of the money that the government spends is borrowed.  If for any reason, any reason at all, the federal government cannot sell enough government bonds to raise the full expenses of the government then, there will be real trouble in the economy.

We are almost at this point now.  Our largest benefactor, China, does not want to lend us any more money.  Japan and England are our next largest benefactors and they are too broke to buy any of our government bonds.  I wonder what the US treasury will do when the bond market fails.

All I can say is we are probably going to find out in short order.

Regards

Social Entitlements

There are people who are paid to think about the economy and the ramifications of government legislation and policies. There are others who think about these things without getting paid to do so.  It is somewhat like an expert witness who has come to court to provide testimony for or against a defendant.  The attorney who calls the expert already knows that the expert agrees with the prosecutor or the defense.  An attorney simply will not call an expert if he/she thinks the expert will disagree with the position that the attorney is presenting.  In a similar manner, if senator XYZ wants to “prove” that his/her bill is going to accomplish the stated goal then there is always an expert who will support that position.  You can always find an expert who will support any position you like.  How does that saying go?  ”It is difficult to get someone to accept something if that persons continued income is predicated on him not recognizing that the thing exist”.

So it is with social welfare programs.

This will come as no surprise to anyone but, the costs of social welfare programs have been increasing at a rate faster than the economy has been growing and way faster than government tax receipts.  No problem.  The government simply borrows the needed money by selling bonds.  That increases the national debt.  No problem.  Sell 30 year bonds and you will not have to think about it until the bonds are mature and payable.

Everything is OK.

But, at some point the bonds do become payable.  What if we can no longer borrow the money to keep the social welfare programs going?  Of course, that day will arrive but, we do not need to worry about it right now. Do we?

It is hard to get a senator to acknowledge that a problem exists when his continued reelection (i.e. continued income) is predicated on him not recognizing that the problem exists in the first place.

So, year after year, our legislature keeps adding more and more benefits to the social welfare programs.  It is only a matter of time before they will become too expensive to maintain.  What do we do then?

OK.  Let’s assume that everyone in the US accepts that this will happen.  Who among us is willing to give up benefits so that some level of social welfare can be maintained?  Which of us are willing to accept only half of the Social Security benefits or go without that medical treatment just so the system can be maintained?

Hmmmm.

Or, are we just going to be like yeast in a petri dish who keep eating any food that is left until it is all gone and then all of the yeast die?  Are we smarter than yeast?

There are a good many people who would suggest that we are going to behave just like yeast.  Even if the voters do not demand more and more benefits from the government, our senators and representatives just cannot stop themselves from giving us additional benefits anyway.

I think a day of reckoning is coming and that right quickly.

Regards

Vote them all out

If you listen to the voices, you will be forced to conclude that the way that an elected official gets elected is by promising to “give” people something; a bridge, a library, a highway, more jobs, change you can believe in, etc.

Is this true?

I don’t think so.

Did you actually vote for Obama because you believed him when he said that he was going to run a more open administration and require that all bills be put on the internet 72 hrs before any votes are taken and that he would have televised congressional debates on the health care proceedings?  If so then, what makes you believe that any politician will actually deliver on their promises?  Is there a preponderance of evidence somewhere that I have missed that makes this a good bet?

I don’t think so.

I think people vote against one politician in each race and one of the consequences is that the other politician wins.  Obama was not voted into office.  The Republicans were voted out.

So, what about all those, so called, “ear marks” that are attached to each and every bill?  Those are pay back to people and companies who put up the money to get the politician elected.  Or, they are out and out graft.  You know.  Things like a construction project for a new wing on the city library in a town where the politician’s son in law (I mean his/her daughter’s husband) owns the main construction supply company.  Politicians want to keep ear marks secret.  They do not advertise them as “work accomplished” when it comes time to be reelected.  They do not want you to know who is getting paid back or special treatment.

Every bill that is crafted is done so with direct “aid” from special interest groups via the representatives for those groups.  These are private advocates.  Each and every bill is really just eye wash for the public and pay back to the monied interest that paid to get the politicians elected.  Money makes all the difference.

And what results can we point to from all this activity?  A budget that is so large that it cannot be paid for with taxes without destroying the economy.  The only way that the federal budget (state budget and local budgets as well) can be paid for is by selling bonds.  Bonds are nothing more than loans made to the government in return for some interest.     Nearly half of the federal budget is paid for by selling bonds.   All those bonds have to be paid back some day.  As it turns out, 1/3rd of all the federal bonds are to be paid back this year.  Isn’t that sweet?

So, in addition to raising 50% of the 2010 federal operating capitol by selling bonds, in 2010 we must also raise enough money to pay back 1/3rd of the existing bonds with interest.  Where are we going to get the money to pay back the bonds that have come do?  Why, the answer to that is simple.  We are going to sell more bonds to raise the money.  This is the very definition of a Ponzi scheme which is to take money from new “investors” to pay off old “investors”.  Bernie went to prison for doing exactly what our federal, state and local governments do all the time.

This is the equivalent of borrowing money from your credit card to pay the mortgage on your house.  It may let you make one more mortgage payment but it only gets you farther into debt.  At some point, your credit card will be maxed out and then what will you do?

This is the fix the federal, state and local governments find themselves in.  Credit lines have been maxed out.  China has been buying most of our federal bonds but they have made it clear that they are no longer interested.  The UK and Japan have been buying lots of our federal bonds but they are in such bad trouble that they need to spend their money at home.  No help there.  So, where is the money going to come from?

The federal government spends about twice as much as it takes in taxes.  There is absolutely no reason to believe that our elected officials will do anything about this imbalance as long as they can sell more bonds.  But wait.  Who cares if there is someone to buy bonds anyway?  We have a printing press in the basement of the Fed and we can just print some more money.  That will solve everything.  Right?

Well that is exactly what the federal government has been doing ever since I can remember.  That is why a loaf of bread now costs $1.40 instead of $.07.  All those extra dollars that the fed has been printing have diluted the value of the dollar down to only 5% of what it used to be worth.

So, what’s the problem with that?  We can still buy a loaf of bread because our wages have gone up just as fast as the dollar has been devalued.  Problem solved!  Stop whining.

But, but, but…….

What if wages stop going up as fast as the dollar is devalued?  That is where we are headed if the federal government does not get the budget under control without turning on the presses.

How can they do that?

Raise taxes.

OR

Reduce spending.

Those are the only two options other than turning on the presses.

The only time in my life when I have seen the government actually lower spending…..  Wait a minute what actually happened was the federal government reduced the budget.   That is different from reducing spending.  See, the government keeps two sets of books.  One is called “On budget”  and the other is called “Off budget”.    During the Bill Clinton years, the On budget expenses were in fact reduced.  This came about because in the previous administration, congress pass a bill to close 400 military installations.  However, congress did not lower taxes to compensate.  So, the  tax money kept rolling into the federal coffers and as the On budget expenses dropped with each base closing, walla, a “surplus” was generated.  Isn’t that great?

Of course, congress spent ALL of the surplus for OFF budget things.

So, I can stand witness to the fact that at least one time in history congress actually voted to reduce the budget.  By the way, it was not Billie’s administration that voted to reduce the budget.

But, that is politics so we will simply move on.

It is very unlikely that our governments will do much to reduce spending.  The reason is simple.  Most of the budget is taken up by entitlements like Social Security, Medicaid, Medicare, etc.  Is there anyone out there who will willingly take a 50% reduction in their “entitlement”?  I don’t think so.

The alternative is to raise taxes. But, in order to raise enough money from taxes to pay for the entire budget, taxes would need to be doubled.  Who among you is willing to pay the government twice as much in taxes as you pay now?  Not very many I suspect.

But, more importantly, who among you would vote for a politician who did double your taxes?  That is the worry that all politicians have.  They know that the budget is out of whack and they know that something must be done.  They just do not have the guts to do what needs to be done.  So, they will do nothing.  At least nothing you can see and tie directly to individual politicians.

What they are going to do is turn on the presses.  They have been doing it for decades.  But, now, they will do it big time.  And when they do, the dollar will be devalued much faster than wages will rise.  This will result in inflation, big time. We have seen it before.  During the Nixon presidency, we had 15% to 20% inflation and I believe we will see it again.  Soon.

So, what we really need right now is another government entitlement to add to the list.  Universal health care.  That is what we need.  Health care will not be called an entitlement.  But, it will be mandated and you will have to pay for it whether you want to or not.

I’m sure it will all be better then.  Aren’t you?

If you like how our crop of politicians are running things then vote them back in. But, if you are discusted by the shenannigans then vote them all out so we can start over.

Regards

Algebra again

    It seems that California wants to drop teaching cursive writing and require 8th graders to pass a course in algebra.

 

Find it here.

 

http://www.orovillemr.com/opinion/ci_11482716

 

    I agree with the author.  I simply cannot tell you how silly I think this is.

 

    They also have a problem in that they do not have enough qualified teachers for the task.  You can find that here.

 

http://www.edweek.org/ew/articles/2009/01/07/16report-1.h28.html

 

    I am pretty sure that this is some political answer to why America is not graduating enough engineers and scientists.  Of course, the real answer to that question is that lawyers and investment bankers make more money than either engineers or scientist.  So, why would a young person want to be an engineer or a scientist?  This is no mystery to me.  Follow the money.

 

    However, I really believe that very few students in the 8th grade are ready to learn algebra.  What I mean is that even if they weren’t spending all of their time thinking about Britney Spears or Brad Pitt, the majority simply do not have the discipline required to learn formal subjects like algebra.

 

    On pain of boring everyone, I will do a small demonstration.  Here are the basic rules of algebra. 

 

1) Any number multiplied by 1 remains unchanged.

 

2) When a number is multiplied by 0 the results is 0

 

3) When multiplying numbers together, the order of multiplication is not important. 

 

Example:     thee times five gives the same results as five times three.

 

4) Division by 0 is not allowed and is undefined in algebra

 

5) If equals are added to equals the sums are also equal.

 

    Note that these five simple rules are adequate to teach the first semester of high school algebra.  It is also instructive to note that all five of these rules are totally made up.  Moses did not bring them down from the mountain inscribed on the back of the tablets.  Furthermore, you are not allowed to question any of the rules.  They are to be taken as true without any proof whatsoever i.e. like religion, algebra is axiomatic.

 

    The 5 rules listed above and the paragraph given above should be presented to the class on the very first day of the first semester of algebra.  I would expect each student to recite all the rules from memory without error.

 

    The problem is not the rules.  The difficulty comes when you start to apply the rules to symbols and you require the students to “solve problems” formally.  Up until their first algebra class, most students have never had a course that required anything more than memorizing facts.  Well, that is not entirely true.  They do a little bit more than rote memory in basic math.  But, not much more because all they need to do is learn to add, subtract, multiply and divide and all of these follow rigid rules that can be learned by rote and, once learned, are easily applied.

 

    Lets be realistic.  If a child is having trouble with basic math then, that child is NOT ready for algebra.

 

    While the five rules given above seem simple enough, the devil is in the details.  For example, when a mathematician uses the word “add” this word does not mean the same thing as it did in basic math class.  Basic math class does not consider such things as negative numbers.  The transition from the concepts of basic math to the more rigorous concepts of algebra requires that the level of understanding of numbers in general be increased.  You really cannot learn algebra without an understanding of signed numbers.  But, signed numbers is NOT part of formal algebra and more than the times tables are.  Algebra assumes that the student is already competent with the times tables, multiplication, division, signed numbers among other concepts. 

 

    Making the transition from basic math to algebra usually requires a student to take a pre-algebra course in which the new concepts are to be learned.  So, if we are going to teach algebra in the 8th grade then we need to teach pre-algebra in the 7th grade and that implies that the student must have already mastered basic math by the end of the 6th grade.  You see the problem.

 

    The idea of teaching algebra to every student in the school system is sweeping the nation.  It is completely misguided in my opinion.  I think it will result in more high school drop outs and discouraged students.  It should be stopped.

 

California Budget

    California is the poster child for what is wrong with Americans.

 

    Let me see.

 

    The state is broke.

 

    The governor will not sign the budget bill because it requires spending more money than the state can collect in taxes.

 

    The legislature will not raise taxes or lower spending.

 

    There simply is no market for state bonds that have been used in the past to raise money for the deficit spending.

 

    Unless they can find a “friend” to lend them some money they are at the end of the line.

 

    Hmmmmm.

 

    Isn’t this exactly the same thing a person who is maxed out on credit cards, who cannot increase his/her income but wants to keep shopping anyway?  They want their friends to lend them money so they can keep on spending.

 

    In this case, California’s “friends” are you and me.  They want the federal government (that means us) to bail them out with borrowed money.  I think we should just cut them off and let the chips fall where they may.

 

    But, I will bet that Washington will bail them out with our money.  I’m sure you won’t mind helping out a “friend”.  Will you?

Stimulus Package

    Let’s see.  It is almost a certainty that there will be a stimulus package from the federal government.  What I have read tell me that it will amount to about $500 per person. 

 

    Hmmmmm.

 

    That is less than $10/week.  But, it will increase the national debt by something like $800 billion dollars.  I have a better idea.

 

    Instead of paying off a little extra on your credit cards each month.  Just give your kids a little extra allowance each week.  They are going to spend it for sure.  I mean, if $10/week extra spending from each of us is going to save the country then we can do it without a stimulus package by simply passing a law that requires each and everyone of us to eat at least one meal away from home each week.  That should do it.

    I’m joking but, this guy is not joking and he wants to go way beyond my suggestion.

 

Here is the quote.

 

“The next logical step, although it may be politically controversial, would be to do the opposite of what the Tories suggest. Instead of reducing taxes on interest payments, the Government could tax all bank deposits and other risk-free savings. This would create a negative risk-free interest rate, encouraging savers either to invest in property, shares and other productive assets – or simply to save less and consume more. In either case, the result would be more consumption and physical investment, less unemployment and faster recovery from the slump.”

 

You can find the original article here.

 

http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article5469589.ece

 

Watch your pocket books.

The simple life

When I was a kid, I loved to spend a few of my summers with uncle John and grandma.  By today’s standards, most people would consider the conditions we lived in to be totally unacceptable but, to me it was an idyllic way of life. 

 

    The only utility that uncle John had was electricity.  To be honest, I think he could have gotten along very nicely without electricity as that was the way he and grandma had grown up.  The house did not have running water and there was no indoor bathroom.  Water came from the cistern where it was collected from the rain and the “rest room” was an out house.  There was no air conditioning and the only heat in the winter was from a single, small, wood burning stove in the living room where uncle John slept.  There was no bathtub.  There was no such thing as soaking in a nice hot tub of water.  Instead you took sponge baths from a wash tub and the water was heated in a kettle on the stove.

 

    Uncle John had chickens that provided him with fresh eggs every day and fried chicken on occasion.  He had a cow that provided him with milk and cream.  While he did not personally tend a garden he had children who did and they supplied him with fresh produce in season and vegetables and fruit to can for winter.  He made his own biscuits.  About the only thing he purchased from the grocery store was flour, salt, sugar, baking powder and baking soda.

 

    I truly believe that if a young couple today tried to raise children under those very same conditions, the state would consider the living conditions to be unacceptable and would probably take the children away. But, the truth is that uncle John lived at a higher standard of living than his parents had and higher than almost every human being that lived before him. 

 

    Today, it is just assumed that everyone will have hot and cold running water, a bath tub, indoor toilet, electricity and natural gas piped to their house.  Everyone has a clothes washer and dryer, two car garage, two cars, an entertainment center with a large flat screen, color TV, CD players, microwaves, refrigerators, bread maker, stove with an oven, a warm bed, credit cards, cell phones, Internet access, gas fired bar-b-cue, etc.  If people had to give up all these things they would feel very deprived.  But, centuries and centuries have gone by where people had none of these things and they did just fine.  Thank you.

 

    People are so spoiled to the easy life that modern conveniences offer, that they think “camping” means to drive their RV to a KOA camp and plug it into the electricity outlet and hook it up to the water supply.  With that done they can then sit around and watch television from the comfort of their fully air conditioned and centrally heated cocoon.

 

    I don’t really care what others do.  But, as I get older I long more and more for the simple life that I enjoyed during my visits to uncle John’s. 

 

Online Schools

    I just ran across this article.

 

http://www.idahostatesman.com/128/story/615259.html

 

    This is one of my pet subjects.  It is my opinion that one of the best ways that the Federal government can improve the education system is to provide QUALITY online instruction on every subject imaginable.

 

    With high speed internet available nearly everywhere, it should be possible for every child to have access to high quality online courses.  This would eliminate the problem we now have where the gym coach is teaching algebra and is more interested in proving that he is the smartest person in the room than in actually teaching the subject.

 

    I want the courses to be totally free.  But, I also want them to be in English.  That is where the whole idea would run into problems isn’t it?  Some would insist that the courses be available in 100 different languages to which I say “hog wash”.

 

    Oh well.  What do I know?

Federal debt – it’s too late

    President elect Obama is about to take over the ship of state and as the helmsman it will be his responsibility to find a safe port from the storm in which we now find ourselves.  I wish him luck but, in my heart of hearts, I do no believe there is a painless way to accomplish the task.  I believe there are rough seas between the here and now and that safe port.

 

    Metaphors aside, we are in for some very troubled times and they are going to be on us very quickly.  GWB told us last January in his state of the union speech that all is well.  He assured us that the economy was in great shape and that there was nothing to worry about.  Of course, no one believed him and about 8 months later the banks began to fail.  The talking heads in the media and the boyz inside the beltway are telling us that the economic recovery will begin to be felt by March of 2009.  Really?  Humm.

 

    Guess what?  I simply do not believe it.  In fact, I would go so far at to say that we will not see any recovery for several years.  When in due course things do “recover”, life will not be then like it is now.  There is no way that what we have now can be sustained.  Our present way of life is a thing of the past.

 

    What do I mean by this?

 

    To answer that question, we must first define what is meant by “our present way of life”.

 

    The vast majority of Americans have been living on borrowed money.  Well, not “money” per se.  Actually we have been living on credit.  That is different from money.  Money is something you actually have.  Credit is an act of faith on the part of the creditor that some day you will have money to pay the creditor back.  If a creditor looses faith that you will be able to pay the credit back with real money then credit will not be extended.  Americans are so far in debt to creditors that there is absolutely no way the loans can be paid back.  Once that is realized by the creditors then they will stop lending.  It is only a matter of time.

 

    If we just consider the obligations that the Federal government has made on our behalf, we find that it is currently about $56 trillion dollars.  The number changes on a daily basis now as the treasury and congress continue to spend like drunken sailors.  But, if we just take $56 trillion and divide it up evenly between all 300 million people in the US today then we find that each and every one of us is on the hook for $187,000.  That makes the obligation for a typical family of 4 equal nearly $750,000.  Every time congress authorizes an additional $700 billion stimulus package, the family obligation goes up by $9,300.  How long will it take your family to pay off your part of the Federal debt?

 

    But, it is not just the Federal government that has been spending wildly.  The state and local governments have been doing the same thing.  Why stop there?  What about the big box churches?  What about personal spending on McMansions, SUVs and credit cards?  Yes.  It has been just one big party where everyone is spending and spending and spending but no one has any real money.  The whole thing is running on credit.  That is the definition of “our present way of life” and that is what will stop completely.

 

    Why?

 

    Because it is now obvious to our creditors that we simply cannot pay the loans back with real money.  Ever!

 

    The Federal government has been paying for this spending orgy by selling bonds to other countries like China.  China has just made it clear that their willingness to buy our bonds is waning quickly.  Soon, there will be no one to sell bonds to and shortly thereafter, the present bond holders are going to try and redeem their bonds for real money.  It is probably already happening.  Pulson is paying them off with more borrowed money.  It is really just another Ponzi scheme.

 

    The days of virtually unlimited credit card debt, no money down mortgages and 5 to 7 year, 0 down auto loans are over.

 

    Think about how life will be different when you have to pony up 20% down, in real cash, to secure a mortgage.  Of course, that will be in addition to proving to the lending institution that you can actually pay the loan back. 

 

    Everyone knows that when you drive a brand new automobile off the lot, it instantly drops in value by 20%.  In the future, no lending institution will let you borrow the full asking price of a car or truck knowing that it will instantly depreciate.  Buyers will have to come up with that 20% depreciation, in cash, and probably a little more just to make sure that they are committed to really paying it off.

 

    And what about credit cards.  I suspect that in the future you will be required to prove your credit worthiness before you can get a credit card.  The days of finding three more credit cards in your mail box every week will come to an end.

 

    Now, think about how these three changes in credit availability will change the life of the average American.  But, more importantly, think about how it will change the entire economy.  If big ticket items can only be purchased for cash or on credit with substantial down payments then, there will be far fewer buyers.  With far fewer buyers there will be far fewer manufacturers and that means far fewer jobs and less family income, etc.  We already see this happening in the housing and auto sectors of the economy.  And, we just learned that Christmas sales were down 8% from last year.  This is just the beginning.  That is the future that I see.

 

    The future will be more like the 1940s.  That was when you mended socks and patched holes in jeans and repaired shoes, etc.

 

     It is too late to fix what we have.  It must be replaced.   But, between now and that distant stable future there will be difficult times.