Thursday, January 03, 2013

Visualizing the national debt

Personal Income in the US in 2011 can be seen in three ways:

  • Per capita $41,560

  • Median     $62,273

  • Average    $42,980 (wages)

Given the Federal Income of $2,170,000,000,000 (2.17 trillion), and taking away eight zeroes we come to $21,700. From that simple figure we can visualize the debt problem as a personal income. However, that is only about half the "average" wage and per capita income.  The "median" is the point where half the personal income is higher and half is lower.  And so, let us double the figures and compare with the US government.

On a personal level, then, if we acted like the government, we come up with this scenario:

A person comes into a financial adviser's office and asks for advice.  He wonders if he can ever get out of debt.  So he lays out the facts:

"Well," he says, "I made $43,400 last year.  But my expenses were $76,400.  I got by with my good credit by adding $33,000 to my card.  The creditors remind me that I now owe $245,420."

"Uh-huh," the adviser says, "Have you worked on a budget?"

"Why yes," the client says, "I've found $77.00 that I can cut!"

Now I don't know about you, but I'd say that guy had better have a "rich uncle" or work two jobs.  That's our government for you.  But even if ALL the income was spent toward the debt, it would take a decade to pay it off.  In our hypothetical analogy, there are a few things that the hapless debtor can do. 

The easiest would be to declare bankruptcy, simultaneously ruining credit and alienating creditors.  In such a state of affairs, the individual would be on a cash-only system for seven years or so and HAVE to be on a budget that includes saving toward many of his expenses.  This option probably will not be taken by the government (which owes "itself" most of its own debt).

Next step will be to stop spending more than is taken in.  This is something the government can do.  Most states must have balanced budgets, so why can't the federal government?  If the government set apart some money to also pay down the debt, then it would be even better.  The hard part is deciding to cut back on present spending -- austerity.

We know what this looks like in our average households, but it appears that the idea has been lost in Washington and in some state capitals.  With the taxpayer citizen the cost of living itself is adjusted each time a spending choice is made.  In the private sector, this will result in goods and services being delayed or abandoned.  The yardwork will be "in sourced" to weekends with a lawn mower and/or a rake rather than to someone who makes money this way.  The lowest man on the economic ladder will become even poorer while the middle man maintains the status quo.  Old clothes will last longer and may even be replaced with quality used clothing in the after market.  Retailers lose out, along with those lower-paid salespersons on the floor.  Standards of living begin to change, starting with the middle class.

In our example, the debt-ridden citizen would have to make quite a few changes.  His standard of living would have to be cut back to almost poverty levels in order to begin paying down his debt.  While living off of two-thirds of income, the huge debt begins to diminish.  Meanwhile, he becomes to realize that he CAN live on less.  New habits change him in many ways.  Life becomes simpler and soon the looming debt begins to look less threatening.  Once the debt is gone, having not incurred new debt, then the money begins to work FOR him.  Savings grow even as things are being bought with cash.  He re-enters a middle-class lifestyle and begins to live like those who are "rich," until one day they would be prosperous once again.

The government must learn from the "governed."  Do the math.  The choice to "live beyond ones means" brings financial collapse, whether it be a family or a government.  Many people die broke, and some die deep in debt.  The nation is now both.  Our representatives must make hard choices.  We expect it of ourselves.

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