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.

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!