Deconstructing Debt and Deficits, and Where We Go from There

I've never been a huge Tony Robbins fan AND I have never doubted his sincerity or his brains at what he does.   Below he's put together a truly first class piece of work that really brings home the scope and scale of both our total Debt (which just crossed $16 Trillion - thanks Washington!), as well as our ongoing annual deficit. Commentary below the video.




The commentary: Let's start with the big stuff.  $16 trillion in accumulated debt plus another $117 trillion in unfunded liabilities means we owe a grand total of $133,000,000,000,000.00, or $427,653 for every man, woman and child in the nation.  And the number keeps growing every second.

The big conclusion I draw from this is pretty straighforward: For this number to have gotten this big with the majority of the public being largely unaware and not understanding what it means to them is a crystal clear indicator that we have hired the wrong people to run our business (of every party and persuation) for very long time.  This needs to change, and as soon as the people get engaged it will - I hope that happens soon.

Where to go from here: As with most things in the human experience, when we find ourselves in an unacceptable circumstance the only thing that really matters is what we decide to do about it.  The "why's" of what got us there are only valuable as a guide for illuminating things to avoid in the future.  In looking at solutions to our debt problem the school of thinking that seems to get the most attention simply promotes a basic, binary approach - higher taxes, lower spending, or a combination of the two.  If we accept that binary premise as fact, then we that's all we have, and all we'll ever have.  Fortunately as humans we excel are being creative - and that is exactly what is required here.

Here are three things just to consider (and the first two are old news):

Stop spending!  The old adage applies - "When you hit rock bottom, stop digging!"  To put it simply - run the government like a business by incentivizing performance that reduces budget size, spending levels, duplication of effort (do we really need dozens of departments with the ability to arrest our citizens?) and improves efficiency.  Above all, we can't afford to add any more weight to the cart, and any politician who is unable to work towards that goal needs to be voted out of office at the first opportunity.

Cut taxes! - This is counter to the general media conversation and not very (currently) populist AND here's the deal: Every time since the 1940's (which is when permanent taxation began in the US) that marginal tax rates have been lowered, actual tax receipts have risen. 

How can this be?  We lower rates, but then we actually end up with more money flowing into the Treasury??  It's true.  Please understand that there are no politics here - only empirical, numerical fact, and the facts are incontrovertible.  Don't believe it?  Go investigate at the CBO website.

The fact that when we lower tax rates actual tax receipts increase indicates something incredibly important (that I've talked about here before), which is that there is in all probability an Equilibrium Tax Rate - the phenomenon is called The Laffer Curve.  Equilibrium points are very common in economic theory, and Tax Rate Equilibrium is simply the rate that yields the highest actual tax receipts.  When rates go down and receipts go up it is telling us that rates are too high, and my guess is that they are far too high.

Quick Note: As with any politically-charged issue there are lots of folks who dispute the numbers for lots of reasons (there's a pretty good one here).  The main problem with all of them (besides being mostly politically motivated), is that they look at the US economy as a closed system, when in reality our place in the global economy and as the global reserve currency are advantages that no other economy can replicate, and we need to use those advantages.

And finally: Rev the Engine! - This item gets almost no attention out there, even though it is one of the most critical solutions we can go after.  "Rev the Engine" is about increasing the velocity of money through the system (not increasing the amount of money in the system).  The velocity of money is, in my opinion, one of the key triggers of the Laffer Curve phenomenon (lower tax rates equals higher actual tax dollars collected).  Semantically I use the engine reference for a reason: Engine speed is measured in RPM's.  By the same token, monetary velocity (at least in terms of this discussion) is measured by how many times a dollar can go around the system.

Example: Let's make a point of taxation the start / finish line in this race.  If conditions exist to make it possible for a dollar to make it to the taxation point two times in a year, instead of one, then that dollar has 100% more taxation revenue value.

So what does it take to increase economic velocity of money through our economy?  Think of it this way: What makes people and companies not want to send their money through the system in the first place?  At the end of the day I believe that it is simply Risk.  In this view Risk equals friction, and friction slows down the money - Risk in making or taking a loan, risk in starting a business, risk in hiring an employee, risk in expanding a business, risk in taxation itself - the simple risk that they will not get that dollar back again.

From a business perspective what are the places where government can change the perception of risk in the economy?  Here are a few:

• Unemployment costs
• Regulation costs
• Uncertain government policy
• Unfair international competition
• Unfair currency translations
• Unfair or even uncertain taxation - as an example if by sending that dollar on its journey through the system you will only get $.25 cents of value (so assuming a 75% tax rate, which we have actually had in the US in the past)

Each of the above (and many more) increase the perception that a dollar spent will not be able to be recaptured, and ends up putting dollars on the sidelines instead of producing positive economic effect.  Currently US companies are sitting on nearly $2 trillion in cash, with a huge build up coming since the financial crisis.  The reason - too much perceived risk.

From a policy perspective, the job of the government should be to remove impediments and friction (risk) on the cyclical flow of money through the economy to the highest extent possible.

Conclusions: The three items here, pursued simultaneously, in my opinion would put economic growth over 8% within 24 months for a period of between 5 and 10 years.  The resulting tax revenue would be enough to eliminate the outstanding debt within 15 years, and have the unfunded liabilities in check (as long as we don't allow the politicians to go and fritter away our wealth yet again!).

All that by simply hiring the right people in Washington, unchaining both the economy and, most importantly, We the People!

Really Bad Reporting that Paints a Not-So-Scary Picture

A story on Yahoo! Finance today (you can read it HERE) struck me as being a particularly shoddy and misleading piece of work.  The author attempts (in a marginally tongue-in-cheek fashion) to associate the amounts of foreign-owned US Government debt that the holders could trade in to "buy" portions of United States as thier settlement.

Okay, so first, not really funny, or a joking matter right off the bat.  Our Debt Addiction is serious business, and the consequences could be severe.

Next, the model the author uses is just plain silly: He asserts that the value of the pieces of the US that would be ficticiously "sold," mostly different states, is equal to exactly 1 times the GDP for the respective state.  That's like saying that you would buy a house for the price of what the residents earn in wages every year! 

So a family earns $90,000 and lives in house with a market value of $250,000 would sell the house for $90,000?  That's just dumb.  How much the people who live in the home earn (their GDP) has no bearing on the intrinsic value of the property.  For instance, if that property happened to be sitting on top of a bunch of oil, or gold, or other land-based valuables that $250,000 house and land could be worth millions, even though the "GDP" of the household is only $90,000.

Finally, a kudo to the author: He actually lists out the specific amounts of US debt purchased by the top 10 foreign government holders.  It turns out that China, whom I would have assumed we would be into for trillions of dollars, actually only holds less than $900 billion of our debt.  That's a HUGE number, to be sure, and it's also less than I had feared.

The number 10 on the list holds a total of $106 billion in US debt.  Again, a huge number but, dare I say, manageable??  I think these could could be paid off!  Our Federal budget is over $3 trillion, so we could pay that back by cutting back less than 3%.  We could do that, right?

So in the end, trying to scare us with ridiculous comparisons that have no basis in any kind of economic reality just to gin up some readers seems to have backfired a bit. You (the story's author) actually removed some of the fear. Even though I know that's not what you intended - THANKS!

Now, the truth is that we are, right now, trying to borrow nearly half of the total federal budget just for this year.  The truth is that until we get to a balanced budget, as painful as that may be in the short term, we have no hope of whittling down one dime of our debt.

And the plain, old truth is that - while the numbers may be astronomincal - we got ourselves into this hole, and we can get ourselves out.  We just need to get started.

See What I Mean??

In Sunday's post I talked about the critical need to remove the self-imposed blocks to our economic independence.  I just really didn't expect the universe to throw me a prime example so fast!

This Story (AP via Yahoo!) talks about the threat by German companies to ban sales of a certain anesthetic to the US because it is also used in death penalty executions.  Now, I don't care what your politics/views are regading the death penalty.  At its heart this issue is simply and only about the ability of other governments to dictate or impose their will upon us, regardless of their reasons, simply because they control the means of production of something.

Today it's a drug used to execute criminals, and you may be perfectly fine with that.  What if tomorrow it's cars - because another country thinks we have too many cars here?  What if it's industrial power generators (which we don't make here anymore) - because they they think we have plenty of electricity?  What if it is floor coverings - because we have plenty of housing here you see?  What if it is a flu vaccine?  A defibrilator?  A cancer drug?

All of these things are no longer "Made in the USA."  In some cases (industrial generators) we don't even have the equipment to make the equipment!  What would happen if China simply decided it would be in their own best interests if we didn't have any more of these? 

In the end, we've ceded a certain amount of control (and therefore freedom) to peoples and governments we did not elect, and whom we can only hope have our best interests at heart.  Did we give that away just to get cheap crap @ Wal-Mart?

So You Want to Compete, Huh?

The story of the day from DC appears to be "Obama's economic agenda: Boost US competitiveness" (from AP, via Yahoo!).  So the President appears to believe that the way to spur our economy is by making US businesses more competitive.  I agree!  I wonder if he's serious?

As I totally would expect, there was pretty much zero detail in the story on exactly how the Administration plans to accomplish this.  The allusion was that all would be revealed during the State of the Union address - history shows that promises like this have nearly zero probability of actually materiallizing in any meaningful way (remember Bush's promise to secure the border?).

To me this looks to be the opening act in the Administration's coming run towards the center (gotta get re-elected, right?).  I think we may be in for the most amazing show of polical marketing ever seen!  Expect it to get piled high and deep, and the BS-o-meter to go right off the charts.

This "Competition" nonsense is going to rank right up there.

The truth is that the things required to allow us to actualy compete are the very things that this Administration can't (won't) do.  Competition isn't some abstract concept.  It simply means that US products and services must offer a better value than global alternatives in terms of some meaningful combination (as defined by the buyer) of price, quality and function.  That's pretty much it.



Of the three attributes to facilitate effective competition, quality and function can be explored pretty quickly.  In the commoditized world in which we live there simply aren't enough qualitative differentiators available, or barriers to copying function to make advantages in these areas achievable in the short-term (i.e. before November 2012). 
 
With that being said, offering amazing tax credits for R&D activities and incentivizing (not subsidizing) immediate innovation could produce pretty fast results in bringing back some previously offshored activities (and helping the unemployement rate).
 
Being that this would require effectively reducing corporate taxes, I think this option can be safely discounted:the Administration running towards the center is one thing - a socialist becoming a conservative is probably asking a bit much.
 
Sadly, the fact that the reduction in unemployment costs, additional personal income taxes generated and additional, tertiary tax receipts from higher overall domestic economic activity would probably replace the "lost" corporate taxes a couple of times over will, of course, fall on deaf ears to those folks who are more concerned with positions and power than results.
 
The reality is that the government does not perform commercial innovation, invention or efficiency.  It can only cutoff or disinentivize these activities by the people.
 
So, that leaves price.  If we want to compete (i.e. sell more!) then the fastest path to accomplishing this is to sell our products and services at a better price.  Luckily the government can do plenty about this.  Question: What are the things that systemically make "Made in the USA" more expensive than global alternatives, and over which the government has direct influence?  There are several incredibly important ones:

• Labor Cost - I think that generally most folks would agree that employee earnings should go up, not down.  There is, however, a lot of opportunity to be had around the efficiency of labor dollars.  Paying people not to work, incentivizing unproductive wage allocations and holding companies hostage to broken collective bargaining process (hello Detroit) are all examples of government assisting in the artificial inflation of inefficient labor.  If it sounds like I am criticizing labor unions in a sideways fashion, then let me be direct: Labor unions are broken, just as government is broken.  Listen to the market, assist in its efficiency, and get out of the way.
• Tax Costs - there's simply no way around the facts.  Businesses don't pay taxes - they pass them along to the buyer.  Period.  The End.  Anyone that tells you different is lying, and every cost that is passed along (and increases price) directly, negatively affects competitive position.
• Regulation/Legislation - See "Tax Costs" above.  Regulation (just like funding the Government) is essential.  Inefficient regulation is expensive (uncompetitive).  Beaurocracy as a subsititue for regulation is potentially deadly (Healthcare anyone?).  Guiding theme: We allowed our government to regulate and legislate our manufacturing sector out of existence, and to incentivize the movement of millions of jobs offshore- we can order them to allow it all to come back , and all it takes is a little taste for competition.
• Level the Playing Field - Just as our goverment has disastrously hobbled our businesses' abilities to compete, other countries actively give their own products an edge (in their local markets, as well as here in the US).  Fair is fair.  Anyone not playing fair should be locked out of our markets.  I'm not saying we should go out and start trade wars; only that we should demand fair treatment and accept no less.  The reality is that they need us (and access to our markets) just as much as we need them - and probably more.

Independence is our birthright.  Economic independence is essential in protecting our personal freedoms.  We have access to everything we need, and we have allowed the government to choose for us not to use what we have.  Any item or input (energy, people, rare earth elements) for which we are dependent on another country should be allowed to be produced here.  Do that and we won't just compete - we'll lead the pack.

So there it is Mr. President.  If you seriously want to facilitate the ability of our businesses to compete globally, all you have to do is get out of the way.  And completely alienate the radical core of your support base.  That won't happen.  That's why the latest "story" is just the latest, worthless PR move.  Don't believe it.  Get ready for more.

Proof Positive - Another Answer We Already Knew

As we all know, things tend to expand until they reach a limiter.  Populations and human waistlines both know this to be true - they expand until something keeps them from expanding further (food is a great example of a limiter for both of these).

Budgets are no different.

In the case of our government budget the unfortunate truth is that the limits to growth that could and should be in place are all controlled by people who have a vested interest (power) in the budget being as large as humanly imaginable (and they seem to be able to imagine bigger every year...).  Even more problematic is the fact that they control the means of financing these larger budgets (printing money, raising debt ceilings, and potential to tax us all to Siberia).

The good news is that there is one, definitive limiter to budget growth that the Beltway Bozos don't control - US!

If we proceed in the knowledge that We the People are in control.  That we are responsible for hiring and firing our employees sitting in the seats in DC, then all is not lost.  November was a great start.  It showed an electorate that was awake, aware and alert (i.e. the Career Politician's worst nightmare!).  The big question now is: Can we all stay awake?

This is simply and only a question of management.  We sent these people to Washington to work for us.  Whenever you hire someone the worst, most damaging, absolutely guaranteed way for them and you to fail is to fail to supervise.

So as a test, through election day 2012 I resolve to try and be a good manager of the people I have hired and sent off to Washington.  I want to know if they are working well for me, and I will provide feedback to them (good and bad) to let them know how they are doing and where they need to improve.  I will use the information that I learn about them to make a better hiring decision the next time.  And if it works - meaning that I have held my employees accountable, and that the next time I know specifically who I am voting for and why - I will do it again.  And again.

What kind of country would we have if we all did that?

Let's find out!

Say it ain't SO, Castro!!

I saw a news story from the AP today [link at the end of this post] that Cuba is considering eliminating government jobs (from the 97% of the workforce employed by the government) due to the lack of available work.  Wait, you mean that Socialism/Communism isn't perfect??  Do you think the current administration and the liberal wing of our political spectrum have heard about this??

So the big question is: When there is no incentive to excel, why try?  In my mind this question illuminates the the cornerstone of the fallacy of Socialism/Communism.  When your workforce throws up their hands and says "the State pretends to pay us, and we pretend to work," how far can that culture really go?

This isn't just about economics - it is incredibly larger than that.  We (humans) are just like every, other organism on the planet: we are Survival Machines.  Generally, the survival instinct is the most powerful driver of our behavior.  Democracy and Capitalism have driven human achievement farther and faster in the last 200-odd years because they directly relate to and leverage our survival instincts - the accumulation of personal resources (food, water, money, you name it), striving for achievement = safety (the smarter/stronger/more successful you are - the more secure you, your family and your offspring will be).  Bottom line: Democracy and Capitalism make our species stronger simply because they urge every individual to strive and to do more by, on the whole, directly rewarding that behavior.

The flip side: Socialism/Communism fail (over, and over, and over, and OVER AGAIN!) precisely because they are anti-competitive and they DIS-incentivize the strongest instinct we have (survival).  At the end of the day, if you don't have to expend any effort, how do you keep from becoming weak?  How do you keep from being out competed (and potentially naturally de-selected!) by others who DO have something to strive for?

The funny thing is, with the enormous amount of empirical evidence on the inefficiencies (and at this point downright silliness) of Socialism/Communism, and that they simply cannot deliver the social and cultural results that they promise - how can we explain the people who still promote them??  If these people aren't mentally deficient (and many of them are VERY smart), and they understand that they cannot deliver on the promises they are making - then we MUST assume that the political aspect is secondary to some other aspect for which these people ARE striving.

If you look clearly at the purveyors of Socialism and Communism (both past and present) it becomes obvious fairly quickly that these people simply end up serving their own survival instincts through the accumulation of personal resources (the best cars, the best dachas, etc.).  To sum it all up: the promoters of Socialism and Communism are simply using the grand ideological promises, and the aspirations of the people themselves, as vehicles for the accumulation of personal power, and the expression of their own bloated egos.  It's not about governance and freedom - it never was...

At the end of the day, every political system is perfect on the drawing board.  the real test, is the Real World.  Socialism and Communism fail as dismally and spectacularly as all of the other - with a single exception.  Regardless of your political persuasion, the combination of Democracy and Capitalism is measurably better than all of the other systems that humans have devised.  And the fact that you can look at them, and measure the success is all that matters.

Are Democracy and Capitalism perfect?  Not at all (I don't know about you, but I tend to leave perfection to the Almighty), and there is a lot of room to improve.  In my mind that's what we're here for: "to form a more perfect Union" each generation improving on the previous.  And while we will certainly make mistakes in the process, why on Earth would we go in the direction of things that we know DON'T WORK??  Why would we buy the Snake Oil of the current crop of Socialists and Communists if [I'm right and] it's only about their own personal power, and not at all about We the People?

We have work to do.  The question is what will make us WANT to do the work?  The opportunity to experience achievement and success?  Or simply working because someone else told us to work - someone who has NO Divine Right to fruits of our labor?

Here's the link to the original story: Cuba Mulling Government Job Cuts

The ROOT of the Matter - Matters!

Conserve (Verb)
1) To prevent injury, decay, waste, or loss of
2) To use or manage wisely

 

Conservator (Noun)
1) A person who conserves or preserves; preserver; protector
2) A person who repairs, restores, or maintains the condition of something
3)A guardian; a custodian

 

Conservation (Noun)
The act of conserving; prevention of injury, decay, waste, or loss; preservation:

 

Conservative (Adjective)
Predisposed to conserve; supporting the act of conservation; acting as a Conservator

 

It is probably obvious where I am going with this, so let's get started.

 

If you want to know what a true Conservative is in the political sense just look at the root and the relations:

• Prevent loss
• Protector
• Guardian
• Maintainor

Nowhere does it say anything about "turning back the clock" or any kind of related rubbish.  The truth is in the root, and in the history.

If you believe that the the pricipals upon which the Republic was founded form the core of the platform from which we have excelled as a nation for so long, then the act of protecting and conserving that foundation - being a conservator/conservative - MUST be critical to our continued success.

Progress within our Republic - by both reason and definition - lies in the extension and growth of that foundation - NEVER in its elimination!  Those who fight in opposition to the foundation of our Republic, through either blindness of ignorance or malice of intent, must be cast aside.  The resounding ring of truth, and the voices of all citizens who know that truth, must NEVER be silent, and must grow ever louder and more insistent.