While I was posting Deficit Unplugged, our President was compromising with Republican Leadership to create Deficit Ignored.  Should we have a payroll tax holiday?…yes we should.  Those tax cuts?  They should have gone the way of the DoDo.

Here is, honestly, why I am concerned about the deficit.  As a Nation we have promises to keep.  We have the promise to our citizenry that if you work hard and use your mind, you can have a better life than your parents, in other words, we have a promise of upward mobility, yet our middle class is shrinking.  For the last 75 years we have promised everyone who works that they, and in some cases their dependents, will have a safety net in old age and for the last 35 years we have promised elders some semblance of health care.

There is a risk now that all the promises will be as ashes.  In truth the giveaways that I talked about in Adult Conversation are part of the problem.  In order to make Social Security more appealing benefits increased and the retirement age was lowered even as the population began to see increases in  longevity.  In order to avoid fiscal responsibility, Social Security receipts were spent as part of the general budget.  When borrowing from ourselves wasn’t enough, we borrowed from other nations.

Engineering short term budget deficits will never allow us to attack the long term budgetary issues that affect our fiscal health.  We had a chance to let the tax cuts expire but now that ultimate decision has been kicked two years down the road.  Our tax code is a mess, to be sure: it is over 67,000 pages of nonsense and exceptions to nonsense. TAX prep is a 65 Billion dollar industry and roughly 61% of filers use a tax prep service.  Refund Anticipation Loans are a huge business in low income areas.  I have lost count of the number of articles I’ve read by economists over the past few weeks who advocate reforming the tax code, collapsing to two brackets, the top of which would be lower than the top bracket under the beloved Bush cuts, and adding a value added tax.  Taxing both production and consumption rather than production as we solely do now.  Some of the logic for not doing these things boggles the mind:  A value added tax would cause the poor to save rather than spend so we shouldn’t do it…huh???  We should preferentially tax the rich because the rich would save rather than spend….huh???  We should extend unemployment benefits because the unemployed will spend them….huh???

Since the 1970s the roots of our economy changed from a manufacturing base to a consumer base, an economy driven by spending.  What did George W. Bush urge us to do after 911? He urged us to remember our patriotic duty and shop.  But there is a problem with jobs based on retail and consumer spending and that problem was summed up by Lee Scott, CEO of Wal Mart:  “Some well-meaning critics believe that Wal-Mart stores today, because of our size, should, in fact, play the role that it is believed  General Motors played after  World War II.  And this is to establish this post-world war middle class that the country is so proud of.  The facts are that retail does not perform that role in this economy.”

Our economy has become dependent on people spending and when they run out of their own money to spend, borrowing to spend more.  No wonder we are in the mess we are in.  We have become a nation of “business as usual” trying to hang on to what it has rather than pave the way forward  with programs and incentives that will restore our middle class.  I actually believed that there would be a push for updated infrastructure and a new power grid.  It kills me that a chunk of my money every month is recycled back to the very extremist groups responsible for 911.

What do I think the President should have done?  How about lock everyone in a room with the camera’s rolling rather than hammer out an agreement after hours behind closed doors?  Make people responsible for their positions in public, not when surrounded by the safety of the herd as most politicians are when they make statements about the economy.  He should be in my face all day every day articulating his views.  That 70 minute internet only version of Mr. Obama’s 60 Minute interview was a revelation.  He has sound positions but is not doing a great job of communicating them.

I am not someone that my mother would call liberal; my mother occasionally calls me Neal (for Neal Bortz and she has even called me a selfish capitalist on my own blog)…I don’t believe in using the tax code to redistribute wealth, and I believe that everyone must pay.  I believe in term limits to certain safety nets like unemployment insurance coupled with sound public policy like a jobs bank and retraining.  By jobs bank, I don’t mean a jobs bank that the automakers had in which laid off workers were paid substantial incomes while at home waiting to be called back to automotive jobs.  No, what I mean is a database of jobs and industry trends so that people don’t have to guess what industries are fading and which ones are emerging, they don’t have to guess what the qualifications for any given job are, opening and closing dates for applications are posted and adhered to, resources for retraining are promulgated and there is funding for retraining. I believe in a national infrastructure bank with national priorities that are updated and funded and I don’t believe that public works projects should be awarded to  certain companies without the benefit of competitive bidding.

What we have now is a mess.  And political will only to posture rather than fix our problems.

I am afraid that the scenario that I outlined in Adult Conversation will take place.  I believe that Americans will ultimately have to forgive the intra-governmental debt Social Security now holds and Americans will have to accept less.  You avoid the iceberg when the tip is just a speck on the horizon, not when the berg is looming  off the bow.

By kicking the can down the road as our leaders just did this week we are surely headed for tougher choices down the road.

Please comment.

I started this blog because of my interest in personal finance and financial freedom.  Gosh, that phrase financial freedom is sooooo trite.  I started blogging just before it became clear there was going to be a financial meltdown.  I’ve been wondering exactly what my role in the overall economy is.  I make money, I save money, I invest money and I spend it.  But lately, it seems as though we are in a free-for all economy.  Everyone is worried and out to get theirs.

It seems to be okay that some thrive while others suffer.  Some intimate that the thriving of one group causes the suffering of another.  (Certainly the financial meltdown has shown that a few thrivers have caused many to suffer) but are we really going to fall into a society so polarized that we argue that the thrivers must pay their fair share to ameliorate the suffering of others?

We live in a civil society…everyone must pay.  To extend the tax cuts for everyone will cost roughly 4 trillion dollars.  Extending them for the wealthiest 2% of Americans will make up $700 billion of that total.  That means that the lion’s share of the tax cuts belong to the middle class.  The grand total being roughly 3.7 trillion dollars.  It seems silly therefore that we talk about budget deficits without considering the totality of tax cuts.  We cannot target one group against the other and appear to be an intelligent nation.

I’ve been looking at the US budget since 2004.  The US income statement is so easy to find.  I discussed the budget in 3 previous posts : IOU America, IOU America Part 2 and Robin Hood.

In my previous posts I used a hypothetical college student as a micro example of the US Budget.  Now I am going to use something more personal, me.

It is not a state secret I had major debt troubles; 30 years ago I got my first credit card, my debt increased gradually through the years until I had 16K a month revolving credit card debt.  I had a house, a car, expenses and deferred student loan debt.  My expense situation could be divided into immediate needs + short term debt.  Lurking down the pike was the Ghost of Christmas future:  long term debt + immediate needs + short term debt.

My short-term debt payments + immediate expenses were about 90% of income. I made up any short falls by borrowing, i.e., using credit cards.  I knew that I had long term debt obligations that I would have to begin paying, but I was so busy being a rat on a wheel, I didn’t know how I was going to make that happen.  Something snapped…I saw the light.

I adopted an austerity program.  But I adopted a program that made sense.  First I eliminated every expenditure that I didn’t absolutely need, that meant canceling credit cards, pre-paid calling cards, meals out.  I only spent a dollar if it put food in my belly, kept clothes on my back, or put a roof over my head.  I prioritized purchases, everything that didn’t fit the above categories went on a list.  I needed some major help in the financial literacy department so I allowed myself to buy books on that topic…4 per month.  One thing that I did do was develop a spending plan.  I had to get to and from work and take call so I maintained my car.  I also continued routine maintenance on my home to make sure the roof was okay and the cooling and heating systems worked.  The spending plan helped me save and take care of the priorities around my home while I paid off my debts.  It is important to mention that my total debt was 123% of my annual take home pay. Ouch!

It is important to understand that even while I was digging myself out of my hole, I had to continue to spend. I had to spend on housing, I had to spend on food, I had to spend on clothing, I had to spend on maintenance.   When our lawmakers talk about all spending as a bad thing they are  really blowing smoke. What they really should be saying is that we know we are going to continue to spend during this recession, but we only want to spend on the things we want to spend on.  And there is the ideological rub.

There are the billions spent on unemployment insurance on the one hand or the trillions spent  to make tax cuts permanent.  The expenditure for unemployment insurance will stop at some point as the economy improves and the unemployment rate falls.  The 4 trillion dollars in lost revenue through a permanent tax cut extension is, well, permanent.  This debate is not about the budget it is about ideology.  We have two 800 pound gorillas in the wings, the dual apes of Social Security and Medicare.  The economy has forced us to talk about them at least a decade sooner than we’d like. We can’t kick the can down the road and everyone must be prepared to give something up.

I am tired of hearing that earmarks amount to a rounding error in the budget.  At one end of an earmark is a Congressman or Senator who lobbied for their district, at the other end is a consituency who benefited.  Everyone must pay, earmarks must stop.

It was wrong for Krugman to rail against the freeze in Federal pay.  Federal employees have the most generous benefits packages around and have been receiving COLAs when others have been receiving pay cuts.  Federal employee pay may be a rounding error in the budget but everyone must pay.  By the way, VA and Federal employee retirement benefits were a 4 trillion unmet obligation in the Federal budget.  A two-year COLA freeze will save money because it will affect retirement pay.  The freeze should be extended to the military not on active duty.

I realized long before Mr. Obama was elected that my taxes were going to go up.  Honestly, I’m really surprised they haven’t yet.  My taxes should go up, but living in a civil society isn’t free. They should go up for everybody.  We shouldn’t be discussing saving 700 billion, we should be discussing saving 4 trillion.  Everyone should pay.  To take the sting out of the tax increase, there should be a payroll tax holiday and reform of the tax code as Bowles and Simpson have proposed.  Everyone will benefit from that.

We are in a recession, but there are still necessary expenditures.   Just as I had to maintain my car and home when I was in my personal recession, we have to maintain our infrastructure and doing that requires spending money, a jobs bank requires spending money.  Just as my mechanic and my plumber benefited from my maintenance plan, our citizenry will benefit from a jobs bank and infrastructure projects.

Please comment.

I finally got one! An iPad. As I write this, I am sitting in a Starbucks in San Francisco. This town should be called iTown. The woman sitting next to me on my right is typing into her Macbook Pro while listening to music on her iPad. The woman on my immediate left is using a Windows-based PC. On her lap is an iPhone.

What inspired this blog post? A Washington Post article of a few weeks ago called The Republicans Prepare Their Agenda of Less. In the article, a member of the Tea Party spoke of the need to address the looming issues of Social Security and Medicare and have an “adult conversation” with the American People.

Several months ago, I wrote a series of articles about why Medicare sucks. I am still getting comments about those articles. I wrote about the budget in those articles and that Medicare, in all its many parts, and Social Security represent represent tens of trillions of unmet obligations in the Federal budget. I also said that any attempts to address long term deficits would have to take into account those two programs and restructure them significantly if they are to remain solvent and if the American people are to continue to be able to afford them.

There are three things to remember about what I wrote:
1) Social Security and Medicare are paid for through payroll taxes. Every working individual, from the very old to the very young both rich and poor, pays into these programs. This is something that appeals to my sense of social justice, that is that everyone should pay for programs that everyone benefits from.
2) for the past 30 years the government has used receipts in excess of pay outs to fund general government operations. The excess receipts have been traded for government bonds. the interest payments alone are crippling. When people, ie, officials, talk about a trust fund, they are talking about money held in trust, except there isn’t money held in trust. There is money held in bonds, bonds that we don’t have the ability to repay, not at current income levels.
3) all discussions about Social Security are discussions about current income or current receipts, as example by the year 2037 to 2041 we will only take in enough income to pay out 75% of obligations. On the bright side this means that the government will stop misappropriating the people’s retirement funds to fund general government operations on the down side we will all wake up to the reality that that is what has been going on and there will likely be a significant public outcry.

The history of Social Security is outline well at http://www.ssa.gov/history It is worth a read fascinating, really. These documents hold the key to why we are in such trouble. Truthfully, everyone is to blame for the Social Security and Medicare mess. When the money was flowing and it wasn’t being borrowed against, it was too big a pile of cash not to spend. By 1950 cost of living adjustments and disability payments and survivor benefits were added. Health care was originally envisioned to be part of Social Security. It was not part of the original law, but along came Medicare in 1965. Politicians voted for the expansion of Social Security and Medicare at the urging of their constituents and no one thought about the long term consequences. Well, those consequences are here.

It is important to understand what Social Security was meant to do. It was originally called Social Insurance and it was intended to provide economic security against abject poverty. It was intended to keep people out of Alms or Poor Houses. The Great Depression was the third great economic dislocation this country experienced in about a century. It brought with it 25% unemployment and extreme poverty for many, savings were decimated and pensions were rare. Alms houses were funded by state governments to care for people in poverty, but state implementation of these programs was spotty, there was a significant stigma associated with accepting assistance from Alms houses, there was means testing and people were reluctant to receive help from what amounted to state-run welfare programs. When Social Security was enacted, it was not a popular program. The benefits, set at roughly 30 dollars, the amount intended to keep someone from becoming destitute, did not change for the first decade or so of the program. People felt that they could and would get more benefits from the state-run welfare programs. Social Security provided direct payments to states to bolster those programs. In the beginning, Social Security was simply another tax people paid that they perceived little benefit from. In order to increase the popularity of the program, payments began to increase and the retirement age was lowered from 65 in 1935 to 62 in 1950. Thirty dollars in 1935 has the same purchasing power of 470 dollars today, yet a recipient retiring at age 62 who has enough credits to qualify for full benefits will receive 1750 dollars, an amount more than 3 times greater than what Social Security was ever intended to pay our per individual. The machinations that took place in the 1950’s were successful; for a program that was intended to keep its eldest citizens from becoming destitute has become one of our largest entitlements. It is a program that has not kept pace with the realities of demography. In 1935 the life expectancy was 59 years today it is roughly 78. In 1935 people were only expected to spend a handful of years collecting Social Security. Today a recipient, retiring at age 62, may collect Social Security for 20 years or more.  The truth about the payroll tax is that it  has become a stealth income tax because income in excess of payments has been rolled into the general budget. Given that almost half of our citizenry pays no income taxes, yet everyone pays payroll tax, this is a form of tax justice I can live with.

What is the adult conversation our government needs to have with us? First we have to understand that it won’t be a conversation. This is what our government will have to say:
1) The party’s over
2) There is no trust fund and the trillions of dollars in IOUs the government has promised to pay Social Security will have to be forgiven.  What is a trust fund?  You can find the definition here.  I am sure you will agree when you read this that what is going on with Social Security does not meet the definition of “trust fund.” When I first wrote this, I went back to the Social Security site and went to the program solvency link FAQ’s.  When I read the FAQ section I was genuinely shocked.  See the solvency issue is really about what to do with stretching the current income being paid into Social Security.  No one wants to have the program redeem its bonds in large quantity to meet obligations because no one knows what would happen if Federal Bonds were redeemed.  Our government is already printing money at historic numbers to prop up the economy, how would it fare if investors showed up to say redeem 1 trillion dollars in bonds to fund Social Security obligations?  Where would the money come from to pay those bonds?  Right now the money that comes in is sufficient to allow the US government to roll over its debt as it relates to Social Security.
3) The retirement age will have to be between 70 and 72
4) Benefits will have to be reduced

I wonder if Americans are ready?

Please comment.

Okay so like I’m middle aged.  I think middle aged people tend to conduct their affairs in pretty much the same way.  Middle aged people tend to reflect on their lives and decide ultimately that people, more than things, are important.  I know that is true for me and I think is the reason why the fastest growing demographic on Facebook are people in middle age.  We are trying to recover those connections that we lost on the road to getting somewhere.  Middle aged people have acquired all the things they want or have adjusted their wants not to want so much and start to clear the clutter from their lives.  A few years ago my home flooded.  I was racing about the house trying to save things that were doing their best to die a water-logged death.  I realized then that I had way too many things.  A friend remarked as she viewed my personal possessions strewn about the back yard to dry, that my yard looked like the Sanford and Son junk yard. I began to de-clutter then out of necessity, but clutter is the natural state of our lives and de-cluttering requires conscious living and constant vigilence. Middle aged people also tend to become more frugal.  Retirement is just around the corner and we have to think about that.  A friend of mine recently told me about a trip out with his wife.  She wanted to go out for a burger.  He checked the fridge to see if they had the ingredients to make a burger at home.  They did not. Realizing that they would have to eat out, my friend grabbed a slice of American Cheese and put it in his breast pocket. He wanted to save the cost of the cheese for the cheeseburger.  My same friend enjoys a glass of wine with dinner.  The problem is that drinks with a meal can increase the tab by 30% to 50% and the mark up on beverages is routinely 300%.  So his solution is to bring his own wine and have a glass in the parking lot before going into the restaurant. While I don’t port my own cheese and wine, there are things that I do to save money.  All of my friends enjoy life,  time with their families,and  sharing the occasional meal out and traveling, what we all have in common is the desire to plug the crazy money leaks that can keep us from doing those very things.  I use online banking to save both time and money.  If you use online banking the customer service division at your bank is at your disposal should a payment go missing. Years ago I would have to wait for a check to clear then obtain a copy of that check to prove that I made a payment  No so with online banking, they have an electronic trail and they will make contact with your “payees” should your payment go missing.  I recently had an experience in which my bank caught one of my service providers holding a payment until it generated a late fee before crediting my account.  I ditched that service provider and got a cheaper plan with a competitor. I canceled my cable/dish subscription.  Most households spend over a thousand bucks a year on those subscription services.  You would have to become a zombie in front of the TV in order to get enough “value” to justify that cost.  I watch TV on the Internet instead.  Fewer commercials, less time to watch each show and I only watch what I want to watch when I want to watch it.  I reuse ziploc bags and aluminum foil.  As a result I only buy those items once a year.  I buy Amway SA8 laundry detergent.  It is super concentrated, eco-friendly, hypoallergenic, dissolves completely in the wash, gets my clothes clean and I only have to buy it once a year. Even though rates of return for savings are ghastly at all banks, I use virtual banks for my savings.  They offer higher rates and are FDIC insured.  I use a frequent flier credit card for charges I would make anyway, utilities, groceries and gas, and redeem the points for flights.   Since 2005 I have saved $1000 per year in air fare.  I negotiate big ticket items.  My money is very patient, I don’t have to spend it right away and, as a result, before making a purchase I ask, “can you do any better?” If I am shopping online and find an item I like, I always Google that item to see if I can find it cheaper. I almost always can.  I keep a “most wanted” list to curb impulse buying.  I am storing my DVDs and CDs in iTunes so that I can donate the hard copies and continue to de-clutter my life.  We have a garden and eat at home.  We go out maybe 4 times a month.  I don’t slavishly shop at Wal-Mart assuming I am getting the best quality for the deal.   I shop at Wal-Mart, Safeway and the local food co-op.  I had an electrician install a digital, programmable thermostat.  It has saved 20% on my heating costs.  I hire professionals to do work that I have either no business doing or work that isn’t in my best interest to do.  I am a big “do it your selfer”. But being a DIYer can put you in a time and financial hole as deep and as wide as the Grand Canyon (okay that is hyperbole but you get the point).  The trick is to figure out the tasks I should do and the ones I should not do.  Let’s go back to the thermostat.  I had it for 6 months before it was finally installed.  The instructions and the wiring that went with it were very complicated and carried dire warnings that a wiring mistake could result in furnace damage.  I added the installation onto a planned project that required an electrician, the thermostat got installed and I am saving money which wouldn’t have been the case if I had clung to my DIY tendencies.

I would love to know about those cheap things you do!

Please comment.

Yesterday I Tweeted an article that I found on the NY Times site:  Placing the Blame as Students are Buried in Debt the article is shocking.  A couple of weeks ago I asked, should parents pay for their child’s education? The post generated a number of comments.  The NY Times article has generated over 400 comments mostly laying blame on the student and her family for amassing $100K in debt so that the student, Courtney Munna, could get an undergraduate degree in women’s studies and religion.  She now works as a photographer’s assistant in San Francisco.

I believe we miss the point when we blame the Munna’s and people like them who accrue debts they cannot repay.  Blame does not help and it certainly does not get the debts re-payed.  It is scary that the Munna’s are in the position they are in.  It is scarier that they are not alone and it scarier still that unsecured student loan debt is being securitized and sold as bonds similar to subprime mortgage loans.  I have spoken to people who bought homes during the last boom.  Mortgage payments are 40 and 50% of gross income.  When I share that the age old rule in mortgage finance, that mortgage debt should not be more than 28% of gross income and total debt no more than 33% of gross income, I usually get incredulous looks back.

The problem is the lack of financial education and financial literacy.  Back in 2001 my mother gave a series of lectures for the Georgia Consortium of Financial Literacy.  Her topic, the growing debt burden of undergraduate students.

In the mid 1990s Robert Kiyosaki self-published Rich Dad, Poor Dad.  He made three bold claims that have gotten him labeled as a heretic or a lunatic:

1)  that the nature of the economy has changed from a manufacturing base with old age pension ideas to an information base with workers responsible for their retirements.

2) that because of the lack of financial education that many average Americans were destined to lose fortunes in the stock market.

3) that a home is not an asset.

Financial literacy refers to an individual’s ability to make informed judgements and effective decisions about the use and management of their money (from Wikipedia).  The United States is one of four nations who have nation wide, government- sponsored financial literacy programs and offers a free 162 page financial literacy document: Taking Ownership of the Future. The national website dedicated to financial literacy is mymoney.gov.  April is financial literacy month.

With all of these efforts what happened?  Subprime lending accelerated in the 1990s.  The US government put in place financial literacy programs in 2003 and you can’t swing a dead cat in a bookstore without hitting a personal finance book. So what has happened?  I suppose I could launch into the fact that wages have actually decreased for middle income Americans over the past decade.  I could decry the availability of easy credit.  I could decry the apparent widening gulf between rich and poor in America or that CEO incomes, traditionally about 50 times median household income are now about 500 times median household income.  But that is not it either.  I got my first credit card when I was 22 and had no job, that was over 20 years ago.  Unsecured credit has been easy to come by.  No, somewhere in the last 30 years we seem to have lost the ability to say to ourselves that we don’t have the funds to pay for that trip.  Or that item X is something we should save for.  It has become unfashionable to save and this has occurred at every level from our government on down.  I cannot tell you the number of books published in the last two years that discuss ways to trick people into saving.  Our national consciousness has simply shifted away from saving and toward spending and now it needs to shift back.  Recognizing that it is important to start somewhere, Bank of America has a keep the change program in which they round your debit purchases to the nearest dollar and transfer the change to a no-fee savings account.  Considering that I began saving as an adult by saving the resultant change whenever I broke a dollar into my home piggy bank, Bank of America’s program is probably a good idea.  The B of A program is based on a two simple premises, that people in general don’t value their change which is why it ends up under the cushions on the couch or under the floor mats in the car and that saving must be easy in order for people to do it.  There is a whole school of thought that saving has to be automatic in order for people to do it.  I don’t know that I believe that.  My savings plans are automatic now, but they did not start out that way. Once I got into the habit of saving, I took pleasure in manually moving the money from my checking into my savings account.  For me, I got into the saving habit because I could no longer tolerate the crushing burden of debt.  Surely more Americans feel that way.  So what will it take for us to return to a culture of saving.?

Please comment.

Okay.  So I am going to get a little technical here, but I’ll still keep it simple.  The definition of Gross Domestic Product (GDP) is:(Wikipedia)

“The gross domestic product (GDP) or gross domestic income (GDI) is a measure of a country’s overall economic output. It is the market value of all final goods and services made within the borders of a country in a year.”

Now remember the our college/grad student in the last post?  His student loans were not factored into his debt obligation because they were deferred.  Much the same way our government’s future obligations for entitlement programs are not factored into our current budget expenses because those expenses are in essence deferred.  But remember there are certain rules about debt.  Personal debt should not be more than 36% of gross income.

What is the government’s gross income?  Its GDP. Below is a graph of our GDP:

You can see that our GDP has risen pretty steadily, but unfortunately so has our debt.  Ever experience the phenomenon of getting a raise or a bonus at work only to spend every last dime of it and wonder where it went?

I’ll bet the answer is yes.  And alas Uncle Sam is no different.  Here is our public debt as a percentage of GDP.

Is our debt picture too high?  Well, we can see from the diagram that our debt as a percentage of GDP was highest after World War II.  How high is it today as a percentage of GDP?  Alas, I’ll let the Citizen’s Guide to the Unified Budget tell you:

“Historically, the Government has incurred debt when it borrows from the public to finance
budget deficits. The economic recovery efforts of the past year precipitated a need to
dramatically increase the amount of funds borrowed from the public. However, part of this
increase has financed investments that the Government expects to ultimately recover in whole or
in part. The Government’s debt held by the public totaled approximately $7.6 trillion at the end
of FY 2009, and was held by the public in the form of Treasury securities, such as bills, notes,
and bonds, and accrued interest payable. The “public” consists of individuals, corporations, state
and local governments, Federal Reserve Banks, and foreign governments. In addition to debt held by the public, the Government has outstanding nearly $4.4 trillion of intragovernmental debt, which arises when one part of the Government borrows from another. It represents debt held by Government funds, including the Social Security ($2.5 trillion) and Medicare ($372 billion) trust funds. (emphasis added)”

That would be $7.6 Trillion dollars plus $4.4 trillion dollars or $12 Trillion dollars against a GDP of $14.6 trillion dollars or 82%. OUCH! Actually this number is a bit worse because that GDP figure was from 2008.  Our GDP has declined due to the recession.  What happens to the people that we know who are in debt up to their eyeballs unless they make some dramatic changes?  A word of caution.  I am looking at total debt as a percent of GDP, most figures that you see will look at public debt only as a percent of GDP.  Public debt is debt held by the public: private citizens, other governments, corporations etc.  Public debt as a percentage of GDP is 50%.  I look at total debt because 1.  I don’t play games with balance sheets and 2. I consider intra-governmental debt because it is created by borrowing from Medicare and Social Security as important as any debt we owe to anyone else.

Now how did this budgetary mess happen?  Had we not had the recent housing bubble and Great Recession, we would still be in this mess, it is just that the recession has increased revenue shortfalls (think declining tax revenue) and made the conversation more urgent.

Again from the Citizen’s Guide to the Unified Budget:

“Strong economic growth and fundamental fiscal decisions taken in the early 1990s, including measures to reduce the Federal deficit and implementation of strong “Pay as You Go” (“Paygo”) rules, generated a significant reduction in the debt-to-GDP ratio over the course of the 1990s. From a peak of 49 percent of GDP in 1993, the debt-to-GDP ratio fell to 32 percent in 2001. During the last decade, much of this progress was undone as Paygo rules were allowed to lapse, significant permanent tax cuts were implemented, and entitlements were expanded. By September 2008, the debt-to-GDP ratio was 40% of GDP. The extraordinary demands of the  current economic and fiscal crisis have pushed up debt held by the public significantly.”

That last paragraph should put an end to partisan sniping, but it won’t.  Who was in the White House during 8 of the last 9 years?  George W. Bush.  The next to the last sentence describes pretty accurately what was done economically during his Presidency.  FDR, a Democrat, was in the White House when the deficit exceeded the entire GDP.  He had new technologies, a burgeoning work force and a new and rising tax base on his side.  The deficits grew during the Reagan and Bush I administrations, came down during the Clinton Era and went up again under Bush II.  The deficits would have gone down during the Reagan and Bush I eras had they actually cut spending while they were cutting taxes (in the end Bush I had to raise taxes), but, alas, they did not.  In short each party is responsible for our current debt burden.  They need to stop finger pointing.

Where are we headed?  It ain’t good.

This chart is scary because it doesn’t really take into account the debt I’ve been talking about.  This graph looks at income or cashflow.  Let me explain.  Remember, I said that our total income is about $2 trillion per year.  The chart looks at the amount by which expenses will outstrip our income going forward.  Again from the Citizen’s Guide:

“Chart J also illustrates the difference between estimated program spending (spending on mandatory and discretionary programs, excluding interest on debt held by the public) and estimated Government receipts.”(emphasis added)

I am going to stop here. Please comment. In my next post, I’ll look at why using the GDP figure makes me nervous.

Okay so the title is a bit sensational. This post begins the series I am doing on our domestic budget. Our income statement. Our ledger of income and expenses. Robert Kiyosaki’s books are all about teaching the average individual to read an income and expense statement. For individuals, sources of income can be royalties from books, photographs, articles, patents, licensing agreements, businesses, traditional employment, self employment, unemployment, etc. Expenses are in the form of credit payments, housing, utilities, etc. For the US government the income piece is a whole new ball of wax as is the expense piece, but an income statement is an income statement and they are all read the same. Fortunately for us, we live in a democracy, information is abundant and in many instances free. The government is not out to hide anything. The information that I am going to present is available for free from the GAO (General Accounting Office) and the Treasury. I will also use documents from the SSA (The Social Security Administration). The original transcripts and testimony from when Social Security was first established are available on that site! Imagine documents 75 years old available for all to see.

There are a couple of very important things to understand about Social Security.
1) At the time of the Great Depression there were no social safety nets
2) People who were self employed or owned businesses were just as likely as people who had been employed all of their lives to be unable to provide for themselves in retirement
3) People attempted to provide for their retirement through insurance vehicles (think something similar to whole life) but the surrender rate was very high and very few policies made it to maturity.
Surrendering a policy means that the policy holder surrendered the policy to the insurance company in advance of their retirement in exchange for the return of premiums. This is like someone taking a loan against their 401K or spending their Roth contributions ahead of retirement.
4) Social Security payments were only intended to be sufficient to keep recipients out of the then popular “alms” houses. The amount of money required to do that in 1935 was $30 dollars US.
5) The designers of Social Security only guaranteed solvency of the system to 1980. They felt that the Social Security Trust Fund would become too large and therefore too much of a temptation for politicians to spend. They weren’t sure that social security would continue to be needed and they wanted future governments to determine a way to keep it solvent.

Now for the scary picture:

What do you see? Oh come on….don’t be shy! What do you see?

Well it is a pie chart. Taxes make up a chunk of revenue and so do Payroll Taxes collected to fund Social Security. So what! you are probably saying. Okay…drum-roll. Social Security revenues that are not immediately spent on Social Security payments to beneficiaries are spent elsewhere in government. It works like this:
5 dollars come in for Social Security. Only 1 dollar is converted to beneficiary payments, leaving 4 dollars in the trust fund. That 4 dollars doesn’t stay in the trust fund. Someone slips into the treasury in the dead of night, takes the 4 dollars and replaces them with an IOU. The 4 dollars are then spent as part of the general budget.

But don’t believe me. The follow excerpt is from page 11 of A Citizen’s Guide to the 2009 Financial Report of the U.S. Government by the Treasury:

“In addition to debt held by the public, the Government has outstanding nearly $4.4 trillion of
intragovernmental debt, which arises when one part of the Government borrows from another. It
represents debt held by Government funds, including the Social Security ($2.5 trillion) and
Medicare ($372 billion) trust funds. These Government funds are typically required to invest
any excess annual receipts in Federal debt securities. Because these amounts are both liabilities
of the Treasury and assets of the Government trust funds, they are eliminated in the consolidation
process for the Governmentwide financial statements. When those securities are redeemed, e.g.,
to pay future Social Security benefits – the Government will need to obtain the resources
necessary to reimburse the trust funds.”

What that gobledygook actually means is that when one part of government borrows from another, the transactions cancel so it doesn’t actually show up on the combined financial statement of the US government. It doesn’t mean the transaction (intragovernemental borrowing) never occurred. It just means they don’t report it on the balance sheet. Yikes! Will the government have the money when it comes time to make good on those IOUs? The short answer is probably not.

Again from A Citizen’s Guide to the 2009 Financial Report of the U.S. Government:

“Social insurance programs and Medicaid continue to represent a large share of Government cash-based expenditures. As reported in the Statement of Social Insurance (SOSI), over the next 75 years, the present value of expenditures for OASDI, Medicare (parts A, B, and D), Railroad Retirement, and Black Lung2, are, absent policy changes, projected to exceed dedicated receipts for these programs by almost $46 trillion (nearly 6% of GDP over the 75-year period). Medicare Parts B and D are financed by general revenues. By accounting convention, the general revenues are eliminated in the consolidation of the financial statements at the governmentwide level and as such are not included in this calculation even though the expenditures on the components are included.”

The important thing about this last paragraph is that Medicare Parts B and D are unfunded.  The government has to find revenues in the general budget to pay those obligations.  There are no funds that come into the government coffers that are earmarked to pay for Medicare Parts B and D.

A quick word about earmarks and I will close.  About half of revenues that come into federal coffers are earmarked funds, funds that are designated to be spent for a specific purpose. The largest earmark is Social Security.  There was a great deal of discussion during the Presidential Campaign about earmarked funds. The implication was that because funds were earmarked, they represented wasteful government spending.  This was basically a misrepresentation of the truth.  Eliminating earmarks would have put all Social Security revenues in the general revenue pool bypassing the need to track the revenues with IOUs making an already bad situation intolerable.  The truth is that earmarked funds tend to be the most efficiently spent. The bad news is that any unspent earmarked funds are shifted to the general fund to address budgetary shortfalls elsewhere.

What do you think? Bad news?  Good News? Please comment.

I just received this update from The Simple Dollar on the “CC Bill of Rights”

The Credit Cardholders’ Bill of Rights Act of 2009 Is Here: What Does It Mean For You – And What Might It Mean for the Future?
Posted: 20 May 2009 07:00 AM PDT
On Tuesday, the Senate passed the Credit Cardholders’ Bill of Rights Act of 2009, an act that will quickly be passed into law with the signature of President Obama, likely within the week. This bill has a huge number of ramifications for credit cards – for users who are late on their payments, for those who pay their bills on time, and perhaps even for the ability to use credit cards in stores.

Washington Wire summarizes the bill very succinctly:

Existing balances: Issuers cannot retroactively change the rate on an existing balance unless the account is 60 days delinquent.
Payments: A consumer payment above the minimum applies first to the balance with the highest rate.
Teaser rates: Issuers cannot raise rates for the first year after an account opened. Promotional rates must last at least six months.
Bills: Issuers must send a bill 21 days before the due date.
Over limit: Issuers cannot charge over-limit fees on credit cards unless the consumer has signed up to allow such transactions.
Minors: For consumers under 21 years old, a company must get the signature of a parent or another to take responsibility for the debt, or it must obtain proof that the under-21 consumer can repay credit.
Disclosure: Cardholders must get 45 days notice of change in terms.
Fees: Issuers cannot charge fees to pay by mail, phone, and electronic transfer or online, except for expedited service.
Gift cards: All gift cards must have at least a five-year life.

Meanwhile, The Wallet offers a few predictions for what this means:

“We’re in uncharted territory here,” says Curtis Arnold, head of CardRatings.com, a credit-card comparison site. Mr. Arnold says consumers can expect issuers to work overtime to lure high-end, high-volume clientele while adding fees and rate hikes for customers with less-than-stellar credit profiles.

The rationale is that credit-card issuers make money off interchange fees (fees merchants pay to card issuers). So customers who charge everything and pay off their balances are seen as less risky and still profitable by card issuers.

The future of rewards programs is also up in the air. Mr. Arnold advises cashing in reward and airline mile points, as their purchasing power has been on the decline in the last year or so. However, he points to new cards from brokerages like Charles Schwab and Fidelity, which offer higher cash-back rewards that lure customers to their brokerage products.

Mr. Arnold also advises those customers with existing balances to pay them off as soon as possible and consider transferring them to smaller banks and credit unions, which may be able to offer more generous rates and repayment terms. He, and others in the industry, expect interest rates on existing balances to keep climbing before the proposed legislation kicks in. (An optimistic guess would be that card issuers would have to comply nine months or a year from now.)

Something else to keep an eye on: Annual fees. The era of reward cards, or even non-reward cards, with no annual fees may be at an end. Stay tuned to notices from your card issuers and the changing fine print of your statement

So what does this mean for you?

First of all, these rules do help people avoid getting into trouble with credit cards. I applaud the change that requires minors to get parental approval or to prove they have the ability to repay before getting a card. I also like that all extra payments always go to the portion of the balance with the highest interest rate – no more shenanigans with companies applying overpayments to 0% balance transfers. Eliminating fees for different types of payment is also a plus.

But what else will change? It’s important to remember that the full ramifications of this bill won’t be seen immediately. Obviously, the credit card companies will try to keep their level of profits the same, which means that, inevitably, they’ll have to change their business in some ways. However, as Arnold noted above, they don’t want to kill the golden goose – the interchange fees that they rake in as a result of wide credit card use.

So, beyond the immediate impact for credit card users noted above, I’m going to make a few predictions about how this bill will affect things over the long term.

Interest rates will keep climbing. The days of easy low-interest credit are ending. That means the role of the credit card will begin to change as smart consumers begin to use credit cards more like charge cards – they pay off the balance in full at the end of each month.

What this might mean for you: Paying down your credit card balances as soon as possible is more important than ever! If you’re carrying a credit card balance, now is the time to start buckling down and wiping out that debt. If you aren’t carrying a debt on your cards, don’t start one – stick to spending less than you earn and keep using the credit card as an intelligent tool.

The credit card syndicates (Visa, Mastercard, etc.) will seek to raise interchange fees as a first line of attack. Credit cards work most effectively when lots of consumers have them and then expect this service from merchants. Think about it from Target’s perspective, for example – if half of their customers use credit cards to pay, they’re somewhat tied to offering that service to customers. Thus, I predict credit card companies will use that to their advantage and raise interchange fees, particularly on large retailers.

What this might mean for you: Many merchants will attempt to recoup this increase in interchange fees by passing the cost along to the consumer, so I would expect a slight bump in prices – 1% or so, spread out over many purchases and items. For most people, this will largely go unnoticed and will be seen as normal inflation.

Credit card issuers will get clever with fees, but annual fees won’t return. Most consumers have come to expect that their credit card will have no annual fees, so I don’t believe these will return in wide use. Instead, the companies will see other avenues for fees – cards that require a minimum number of uses per month, cards that have fees to enroll in particular rewards programs, and so on.

What this might mean for you: You’ll have to be more careful with credit card offers in the future. Also, when there are updates to your terms, you’ll need to read them carefully. Again, if you keep your balance paid, your credit will be good, so you can walk away from any cards that try to slip sneaky fees in on you.

I don’t believe rewards programs will go away. I would expect, though, that rewards programs will become more tied to specific “partner” retailers, like Target and Amazon, and away from more general programs like Drivers’ Edge. Why? Merchant-specific cards encourage loyalty to those merchants, and that has quite a bit of value to the merchants – those aren’t programs they will want to see go away.

What this might mean for you: Don’t be surprised if you find some of your rewards programs changing, particularly when your current card expires. For now, though, stick with what works for you.

Any thoughts or predictions on this new world of credit card rules?

I just spoke with a friend angry at the “Bill of Rights” to be signed into law over the next week. We are concerned and just a bit angry because reward cards may become a thing of the past as a result of this “Bill of Rights”. As always the full implications of this new law won’t be known for years. Our credit card debt is in the trillions! See the YouTube video.