Far better it is to dare mighty things, to win glorious triumphs, even though checkered by failure, than to take rank with those poor spirits who neither enjoy much nor suffer much, because they live in the gray twilight that knows neither victory nor defeat.

Theodore Roosevelt, The Strenuous Life

July 16, 2011

Managing Debt, Money and Finance, Opinion

Comments Off on U.S. Efforts at Deficit Reduction

News concerning debt ceiling negotiations recently mentioned three plans by  Mr. Obama to cut the deficit. The most aggressive, and offered as such, is a $3 trillion cut.  He did not say that we will cut $3 trillion over ten years, or an average of $300 billion per year. Assuming an equal cut per year, a big leap, this is only a 20% cut in the current deficit,  reducing the deficit to about $1.2 trillion per year. And it is quite likely the majority of the cuts will be delayed to affect future administrations.  Thus, the unsustainable and profligate spending will continue,  providing substantial annual additions to the $14.3 trillion debt of the United States. The Republicans are correct that this level of deficit reduction simply postpones more instances of raising the debt ceiling in the future. Also, cutting the deficit the same amount each year over ten years is not in the interests of Mr. Obama because delaying the cuts helps his chances for re-election.

Stated differently, the current debate is not about reducing or eliminating the debt of the United States. It is about finding an agreement on the appropriate rate at which the debt should increase!  If the United States eliminated the deficit, there would be no need to increase the debt ceiling.

Paul Krugman and many Democrats argue that this is not the time to cut government spending because we need to create jobs. They are right, except that the U.S. government cannot afford to do the best thing. We spent too much during good times and bad since World War II, creating a huge debt load.

The Republicans are against raising taxes. They are wrong. Taxes must rise to resolve this. They should agree to a ten year tax increase, with a sunset provision and a tax trigger, causing the application of the tax only if deficit spending is at or below an agreed annual target. Cutting Social Security benefits is within the authority of Congress, but they should not do it for anyone who is paying social security taxes. We are relying on Social Security for our retirements and will need much of that income to cover medical insurance costs, especially if we retire prior to attaining the Medicare eligibility age of 65.

News organizations should be more factual in reporting what is happening, clarifying when someone refers to a reduction over a ten year period and leaves the period of the reduction out of the statement. News organizations should be clear that the debt will continue to rise irrespective of which party dominates the outcome. And finally, news organizations should simply stop reporting on these negotiations daily. The budget, tax law, spending, and debt management are under the exclusive control of Congress and Mr. Obama. They made this mess; they need to solve it.

The average citizen is simply stuck with what passes Congress and is signed by Obama. Congress and Mr. President, please do your job and tell us the truth about what you are doing. We don’t hold the power to decide this issue, but you may not get re-elected if you continue to screw this up.

The budget fight continues. Here are a few myths and observations:

1. It is the wrong time to fight the deficit and debt. Creation of jobs is what is important.

This is catchy. It is correct, except that we are essentially out of money. Indeed, the U.S. would be brilliant to spend any surplus on re-vitalizing the economy. The problem is that the U.S. already expended the funds and cannot afford to stimulate the economy as much as it should.

2. We should not cut spending for public radio because U.S. spending for the Corporation for Public Broadcasting is trivial compared to the deficit and debt.

Most spending that is wasteful or that should be reviewed for cutting is trivial compared to the enormous debt of the U.S. This argument applied to all expenditures dooms to failure the frugal and diligent who believe spending is too high.

3. We are making cuts to the wrong programs.

The parties need to first agree on the magnitude of the cuts, then they can fight about where the cuts should be taken. There are two issues. There is no reason to disagree on the cuts, but where they should be made is a natural area for controversy.

4. We have a spending problem, not a revenue problem. New taxes are not justified.

The first sentence is true. However, the hole we have dug is too big to fill without new taxes. The only questions should be against whom should they be levied and how much should they be.

5. We have a budget deal that kept the U.S. Government open for business. Isn’t this wonderful?

Right. Congress cut the budget about 1% and spending is more than 40% greater than income. Great work.

6. We need to close tax loopholes for corporations.

This is not so. It is far better to use the Individual Income Tax as a tax for individuals and keep corporations in the U.S. by not taxing them at all.


There is no one to bail out the U.S. in case we default or otherwise need financial help. It took years to create the current mess and will take much diligence and pain to reverse the trend. The analogy is to the family that is spending at the rate of 140% of its income; a lot of good expenditures must be cut to make the finances work in the long term.

BBC World News is reporting this situation well, distinguishing between the debt and deficits of the United States and regularly comparing our debt to GDP ratio with that of other nations struggling under mountains of debt. When people know the amount of debt we have per worker the political pressure will increase on our leaders. This debt level makes every major spending decision, such as funding a huge stimulus package or war effort, a Hobson’s choice. We gamble with not addressing a present need or risk economic collapse because of excess spending and debt. This is not a path to a world leadership position and is unacceptable.


March 12, 2011

Current Events, Managing Debt, Money and Finance

Comments Off on The Effect of Japan’s Debt on Recovery From the Earthquake and Tsunami

Japan will soon embark on a massive reconstruction from the earthquake. We all know that natural disasters that cause the death of people and the destruction of property are bad. This post confines itself to the property loss and economic effects.

I am a fiscal conservative, and have argued in this blog that the debt of the United States is a significant problem. Japan’s debt (compared to GDP) is much greater than the debt of the United States. Both countries are far from having a surplus.

If Japan had a budget surplus and monetary reserves, it could pay for the work needed to recovery from the earthquake. This would modernize the areas destroyed, employ people, and stimulate the Japanese economy for years to come. Instead, Japan has two very bad choices: minimize the repair subsidies by government or go deeper into debt.

The United States, to maintain freedom to choose military options based on national interests, to recover from disasters, to have money to help other nations, and to remain a world power and agent of change, must deal with its deficits and reverse the constant increase in our national debt.

CNN reports that the Debt Commission is calling for a $4 trillion deficit reduction over the next 10 years. That is $400 billion per year in cuts, reducing the current rate and projected rate of annual deficits by about half.  Is this enough? By my simple calculations, the U.S. will continue to increase its debt load. Although some Democrats are already complaining, the commission’s plan should be more aggressive. The U.S. should have a balanced budget within no more than five years and be running surpluses continually within ten years. And the sooner the better.

Implicit in my view is continuing to fight inflation and not letting it exceed 2 to 3 % per annum, with less than 1% still a bit better.

Congratulations to the chairmen of the commission, Alan Simpson and Erskine Bowles, for a major step in the right direction.

April 23, 2010

Managing Debt, Money and Finance

Comments Off on The Financial Advisers Tell Us to Save Enough to Live for 6 Months Following Job Loss, but How?

Have you noticed the “pay yourself first” crowd that advocates savings really do not tell you how? Here are the things I like to do to save money so that I can keep enough cash on hand for emergencies, fun staff, and for new things when the time comes:

Although I buy new cars, I never buy expensive models or feature rich-models. We got our first auto air conditioner when they were included in the standard package. We have no automatic transmissions.

Car loans are never longer than 48 months. If the loan is longer than that, I can’t afford the car.

I keep my newly purchased car for between 130,000 to 185,000 miles and over ten years. I am usually sick of them at the end, but keep driving them until the cost of repairs exceeds the value of the vehicle. This saves a ton of money on car industry profits and sales tax.

I buy a lot of tools, as many as I can figure out how to use. Tools often pay for themselves with the first use. Of course the problem is storage of all the tools that accumulate, but that is the subject of another post.

I seldom eat at restaurants. This is good for the budget and good for the diet. See www.aisleofconfusion.com.

My wife and I tend to use things up before disposal. I do not take things to second use building materials anymore because they won’t take my items. They are totally worn out, obsolete, and no demand exists for the stuff I tear out.

I recycle my clothes and shoes. When my work clothes are worn out, I use the garments for mowing the lawn.

I buy the cheapest lawnmower that I can with the widest swath, never a riding mower because they are too costly and do not give me any exercise.

My commuter car gets, on average, 35 miles per gallon. I drive it 9000 miles per year.

My trucks get poor gas mileage. They are driven 2000 and 4000 miles each per year.

I burn wood for heat.

I cut our own trees for some of our firewood, although of late I have purchased a great deal.

We use compact fluorescent lighting in places where we can accept the color of the light. We do not like them and believe they save little when used in heated spaces (our heat source is propane, which is equally costly to electricity, so the waste heat of incandescent lamps helps keep our house warm nine months of the year)

We never pay credit card penalties, high interest, checking account fees,or annual fees on our credit cards.

We do not hire plumbers, electricians, carpenters, etc. The only work done by craftsmen since purchasing our house were workers here for warranty work, wood stove installers, and a team of three who installed a foundation for our cabin.

I subscribe to no newspapers.

I carry a sack lunch that my wife hates to prepare. She saved enough money over the years to pay for a huge expense that we had not planned on.

A future post will cover what some of the benefits are that arise from the behaviors noted above.

April 23, 2010

Managing Debt, Money and Finance

Comments Off on Debt and Age

Imagine for a moment a stable economy with low inflation. You can assume that your income would tend to rise following your entry into the work force until it reached a maximum sometime prior to retirement. Either before retirement, or certainly at the time of retirement, your income decreases typically.

Now think about debt, with its essence of buy now and pay later. By using debt in the early years, a worker can meet the huge needs of housing and transportation on that new, entry level income. The problem is we all feel young, even as we approach retirement and continue using debt like a kid in a candy store. As we get older most of us should borrow less and retire our debts. In my opinion, the correct way to enter retirement is with no debt, at least for most of us, perhaps those of us with a net worth up to the 80 to 90 percentile. That big group includes yours truly.

April 23, 2010

Managing Debt

Comments Off on My Prior Post – Was It Insensitive?

I received some criticism for my prior post. What a redneck comment, eh? Well, the point was that we should carefully analyze the range of outcomes possible during the loan payback period, the likely probabilities of those outcomes, and decide what is best before signing promissory notes. Again, talk to people who have been through bankruptcy. You will find that loan indebtedness, based on signing mortgages, trust deeds, credit card slips, student loans, and other contracts are frequent precursors to the debt problems that make bankruptcy the best option. Caution, conservatism, and appreciation of likely benefits and risks are simply prudent. Risk can be lowered by incurring less debt (a less fancy car), by incurring debt less frequently through postponement, by assuring terms and conditions of the contract are reasonable (low interest), and by saving for some or all of your next big purchase before making it.

April 20, 2010

Managing Debt, Money and Finance

Comments Off on Good and Bad Consumer Debt?

I’ve had enough financial advisers and journalists make the conclusory statement that credit card debt is bad to reach a generalization. Financial advisers and lawyers view debt somewhat differently. The financial adviser feels credit card debt does not represent money well spent but does represent a high interest loan. I have even had one advise me to pay a credit card debt with a lower interest rate than my mortgage! That is absurd.

Let me give you one lawyer’s view. Bad debt is secured or has a high interest rate or a variable interest rate. Bad debt requires fixed payments irrespective of extra payments or any other action by the debtor. Many of us have these debts in the form of mortgages and car loans. As with any debt or good liquor, neither should cause difficulty when used in moderation.  Secured loans for houses and cars can create a win/win situation for the creditor and the debtor.

The opposite characteristics are features of good debt, especially being unsecured and low interest. We bought a truck using a loan secured by an investment property. Why? We could pay as little as interest only, the interest rate is low right now, and we have the cash to pay it off. The joke is that a default costs our tenants their home but we can keep our truck. That is thinking like a red neck, I guess.

My apology for not writing much of late, but like many of you my focus was on filing our income tax return. Accurate completion is not particularly easy, with the two most challenging tasks being accumulation of needed financial information and trying to assure that all lawful deductions and credits are taken. This year was a bit interesting; the sales tax on our new truck added to our standard deduction. Sweet.

This is a good time to segue into the broad topic of personal finance. To me, our handling of money is analogous to diet in that we must adopt to changing needs and circumstances throughout our lives. Of course, the analogy fails when discussing savings. Saving money is considered a good idea by most of us, but saving energy in the form of a wide girth is not a good thing.

I will start this series of posts with some value judgments, reasons I think that warrant indebtedness. They are:

1. Education: Education is a way to change your life for the better. Going into debt for it is a reasonable thing to do, especially for young people who have a reasonable expectation of increased income for many years in the future by getting their degree.

2. Mortgage or Trust Deed: Signing a note in return for a security interest in a modest residence is a necessity for most of us. My rule of thumb is be able to own the property or a similar property unencumbered with a loan within 30 years of your first mortgage. Thus, those moving cannot continue to have new 30 year loans after signing the first one.

3. Clothes for a Job Interview: The risk of not having the right clothes for an interview is far higher than a reasonable indebtedness to make the right showing.

4. Your First Car. Never buy with more than a four-year loan and keep the first car purchased this way for at least eight years. For the last four years, pay yourself an amount equal to the loan payment. Any future car loan is taken because of a very low interest rate or no-interest offers. The cash exists to pay the entire amount owed at all times.

5. Emergency expenses that occur which cannot be covered by savings.

In general, begin to view each debt you have as a risk to your future. Except when you are young (less than 40) try to have enough cash to cover your highest debt, even your mortgage if it is adjustable, in its entirety. Set a goal to have enough cash to eventually cover all consumer debt and your residential mortgage in its entirety. This does not apply to debt incurred for investments and businesses, but the residence you live in is an expenditure, not an investment.

I have not yet met a consumer approaching or coming out of bankruptcy that had not signed a loan contract that contributed directly to the dire situation. We must all be careful with what we agree to sign, and thereby agree to pay.

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