This diary is intended as a primer for those who may usually ignore economic discussions. I will try to keep it simple because this is very important to you! I'd like to give an easy to follow description of the trouble the US is in, and why you need to protect yourself.
This is part 1, with other parts to follow in future diaries (hopefully)
Part 1. The Bushies have dug a big, big hole.
Part 2. Consumers are up to their eyeballs
Part 3. How low interest rates have destroyed America
Part 4. Our foreign friends (?)
Part 1. The Bushies lost control.
Okay we have all heard about how the budget went from a surplus under Clinton to a deficit under Bush. We have also heard how much the government is in debt, big, big numbers, blah, blah, blah. But you have to ask, what does it really mean to me? Think of it this way:
I owe how much?
This year the government will spend about $1,500 per person more than it takes in! There are a couple of other ways to look at this as the $1,500 calculation counts everyone from babies to 100 year olds. If you just look at the working population it amounts to about $3,150 per worker. If you break it into families it works out at about $6,000 per family of four. No matter how you slice it, since you did not give the government the extra money, it borrowed it on your behalf! Thank you very much.
The government has borrowed a fair bit on your behalf actually. To date it has borrowed about $100,000 for the family of 4 (or $25,000 per person). So to make you feel better (yeah right), not only do you owe the money on the car, the stereo, the house etc, but you are also indirectly responsible for another $25,000 for you, or $100,000 for your family. In case you are wondering, before Bush got in, you only owed about $18,000. So he has rung up the tab a bit hasn't he?
Balancing the books
Now we all know from personal experience that you can't spend more than you make forever (unless, like the government, you have a printing press in the basement). At some point you need to either cut your spending or get more pay.
Now here is the problem. Usually when the government goes into debt it is when the economy is in a deep recession and lots of folks have no jobs etc. Then, once times turn around, more people are working and they start getting raises again. The government then spends less on social programs and workers pay more in taxes (spending goes down automatically and tax money coming in also goes up automatically). So basically the whole thing sorts itself out as the economy improves.
Well this time is different. Why? Well despite the "jobless recovery" the unemployment rate is really not that high compared to past recessions. So even if lots of unemployed people got jobs it would not make a big difference. Secondly, with all the wage pressure from outside the US, and low inflation in the US, people are not getting good raises (when was the last time you got a 5% raise), so people are not automatically paying more in taxes.
Here are a few numbers (only a few I promise). In March, 2005 the unemployment rate was only 5.2 %, which works out at about 8 million people. If unemployment fell to 4% (what economists call full employment), that would mean an extra 1.8 million people working. They would ALL each have to pay about $250,000 in taxes to wipe out the deficit. Yikes, I don't think Wal-Mart employees pay that much in taxes.
Now of course every one else who is working could chip in more too! So to eliminate the deficit the following would have to happen. Everyone working would pay an extra $3,050 in federal taxes and the 1.2 million who miraculously find jobs will pay $8,000 each. No problem, right?
The real killer has been the very low increase in wages. While government spending on wars, homeland security, and Medicare etc. has been going up very fast, wages have basically stagnated. Unless wages increase, the taxes people pay do not automatically go up. In fact, what happened is that Bush's tax cuts dug the government into a big, big, big hole. They gave money back to people assuming they would be getting more money coming in, but that never happened, because wages did not increase. Big, big mistake (more on this later).
So basically getting the books to balance is going to require a big sacrifice from someone. And that is only to balance for the year, let alone start cleaning up the amount rung up on the credit card already.
Interest Rates
I'll have more about this in a future diary, but for now it is interesting to see that the one place government spending went down is on interest payments on the national debt. How is this possible with debts skyrocketing you rightfully ask? Well rates have come down so far, and the government has shifted to very short term borrowing to get even lower rates that after all the new borrowing it is still paying less in interest. In fiscal 2000 the government paid 361 billion in interest. In 2004 only 321 billion! (Nice trick, eh? Debt goes up by over 30% and interest payments go down!) Now that is still about $1000 per person, or $4,000 for our family of 4!
Of course, the question is what happens when rates go back up, and the debt is so much higher? When rates go up, the economy will slow. Tax revenues will go down and interest payments will go up. OOOPS this is not going to help solve the deficit problem at all, is it?
To sum up Part 1, the government is running a huge deficit. Bush claims it is really not that big compared to some previous years. But he fails to mention that unlike past times, this deficit will not be self correcting. We have seen that without wage increases (or tax increases) the deficit can not be reduced. In fact, the deficit has the potential to get far worse should interest rates start to slow the economy.
What should you do?
1. Use this time of low interest rates to pay off any debt that you have. It will be a lot harder once rates go up.
2. Don't buy a house yet. Keep renting and save for a down payment. Prices will be much cheaper in the not so distant future. If you have a house, don't borrow on the equity unless you plan to stash the money offshore for after you declare bankruptcy in a year or two.
3. Focus on your needs, not on your wants. This is not a time to indulge.
Two useful links
Info on the public debt
debt
Info on unemployment/labor statistics
labor stats