All the news recently has been about raising the debt ceiling and about the national debt. But no one understands billions and trillions of dollars and politicians rely on the arcane nature of the whole discussion to obscure what is really going on.
So I decided to reduce it all down to the level of a personal budget so that it is more easily digested. Here it is in a nutshell. What would you think of a guy who came to you and said the following:
“Okay. I make $6,000 per month but I’m spending $10,000 each month. I’m making up the $4,000 monthly difference by borrowing. I have assets that are valued at $460,000 but I also have debts of $460,000 so that my net worth is $0.00.
Now I realize this situation is not healthy and I know that I need to make some changes. So here is my plan.
I’m going to continue to borrow $4,000 per month for the next two months. Starting Oct 1st, my spending is going to go up by 8% to $10,800 per month. Since I’m not expecting a raise in my income, I will need to borrow $4,800 per month starting in October. By the time we get to the end of September in 2012, I will have borrowed an additional $80,000.
But good news — I’m going to reduce my spending by $80,000 also. Granted, I’m not going to make that $80,000 reduction over the next 14 months while I’m accumulating the additional $80,000 in debt. Instead, I’m going to reduce my spending by a total of $80,000 over the next 10 years. But, hey, it’s a step in the right direction. And it is an average of $8,000 per year.
Now I hope you will understand that I can’t actually spend $8,000 less in this very next year. I’m going to have to ease into this reduced spending. I promise that I will spend $80,000 less over the next 10 years but I’ll start with less than that right now and then do even more than $8,000 per year in the later years.
But, again, I’m committed to spending less. And so, to show my good faith and earnestness about this matter, I will start immediately by spending $684 less over the next 14 months. This works out to $57 per month.
In other words, I’ll reduce my spending from $10,800 per month to $10,743 per month. And, instead of having borrowed $80,000 over the next 14 months, I will only have borrowered $79,316.
And now that I’ve got such a solid plan, will you agree to loan me the $79,316 that I need over the next 14 months?”
Any takers?
(Note: All of the above numbers are exactly the same percentages as what we just did with the debt ceiling and the national debt but just scaled down to a personal level).
Mike,
Very helpful…if correct
Depressing…if. Correct.
Mike…where should we go from here?
Tom
Mike, nice work on the analogy. We all need to get folks out to vote in more conseratives in 2012 or we ain’t seen nothing yet.
Marty says “hey, you sold our house; I’ll lend you the money”. As long as you keep selling houses and pay me back before anybody else.
Thanks Mike…
You sold me… You are being very responsible to limit the increase in the speed with which you are going deeper in debt.
You are to be commended. If you actually tried to control your spending, you might destroy your family… Oh wait, you are already destroying your family with debt they can’t pay…
Anyway, keep smiling!
Let’s just assume that the math is correct and the percentages have been properly applied. May I ask another few questions? Is all that “spending” just spending or is some it going into investments that might pay dividends? Should we maybe separate those funds out from the money spent to buy tomatoes to throw at my neighbor just to make sure he never considers stepping into my yard? Any of that money going to pay for medicine for my sick child? Food for my elderly parents? Shelter for the guy down the street that bravely defended me when thugs broke into my house and tried to steal my food? So yes! Let’s please get our national spending back under control, but let’s not be stupid and callous in our method. It took years to get us into this mess and BOTH parties did it to us. Americans always want fast easy answers to difficult complex problems. Overreacting and making haste decisions seems just as cruel to me as the overspending that got us into this mess.
Regarding food, shelter, medicine…part of the reason we are in such a mess is that people want government to take care of them instead of being personally responsible. And now we have a government which thinks that same way. And they want to fund their nannyism by taking away from those who have exercised personal responsibility. It is not stupid and callous to want to end government largesse. It is stupid and callous to burden our children and our children’s children with fruits of our folly.
Some of the fiscal crisis we are in did indeed take years to develop. But a great deal of it ballooned up over just the past 2 1/2 years. We can’t take a leisurely approach to fixing the problem. The S&P downgrade of the US debt rating was just one more in a series of wake-up calls.