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How Stupid Can We Be?

When you watch this video, if you were unaware of the problem, you likely will be enraged. If you want to know why our economy is stalled and will begin to regress (GDP declining, the standard of living going down… Read More »How Stupid Can We Be?

Measuring Well-Being

The Fable of Smith and Jones

You moved into a new, upscale neighborhood a few years ago. The two biggest homes in the area were owned by Mr. Smith and Mr. Jones. While the homes were comparable, similarities between the two gentlemen ended there:

  • Mr. Smith had two older model automobiles, maintained his own lawn and property, rarely went on vacation and played golf at the local public course. He didn’t entertain very often and rarely dined out.
  • Mr. Jones, on the other hand, had three new expensive automobiles, had a gardening service come weekly, went regularly on exotic vacations, and belonged to the most exclusive country club in town. He hosted frequent, large parties at his home and often ate at the best restaurants.

Initially that was all you knew about the two gentlemen. Based upon this evidence, you assumed that Mr. Jones was doing well while Mr. Smith appeared to be less well-off.

About a month ago, Mr. Jones’ home was foreclosed and two of his autos were repossessed. Then Mr. Smith provided aid to Mr. Jones by paying off the loan against his remaining car, a large BMW, to prevent him from losing that.

You learned that Mr. Smith and Mr. Jones earned equal amounts of income each year. How could someone who looked so prosperous lose most of his assets? How could the man you assumed to be less well-off be in a financial position to assist the “richer” man?

The answer is simple — Mr. Jones spent everything he made and borrowed to spend even more. He appeared more prosperous because you were seeing only his spending. Eventually his unsustainable lifestyle and borrowing caught up with him, and he was unable to honor his obligations.

Had you been privy to the personal balance sheets of these individuals, your judgment regarding who was doing well would likely have been different. Mr. Smith was accumulating net worth while Mr. Jones was living high via debt. High Spending may impress neighbors, but if it is not backed by wealth creation it cannot continue and often ends in bankruptcy.

The Bigger Meaning To The Story

This allegory used the fictitious Smith and Jones to illustrate an important point regarding economics and how well-being is measured. Gross Domestic Product (GDP) measuresRead More »Measuring Well-Being

Government As Wrecking Ball — Part II Opportunity Costs

In Part I of this series the direct costs of government were discussed. According to a study by the Center For Fiscal Responsibility over 60% of national income was spent by government at all levels in 2011. Americans, on average, only controlled 40% of their earnings and how it was used.

Part II discusses the additional burdens of government, of which Opportunity Costs are focused on. Subsequent pieces will deal with the other burdens.

The Additional Burdens of Government

The burden of government goes beyond what passes through the ledgers of national income accounting. There are other costs, some subjective and others objective, which are substantial. These costs are all in addition to paying for elected officials, their bureaucracies and the costs of adhering to their legislative acts.

It is likely impossible to identify all of the burdens that government imposes. Even those which can be identified are difficult to quantify in terms of costs. The following three categories will be used to group and discuss these burdens:

  1. Opportunity Costs
  2. Freedom Costs
  3. Costs Imposed By Arbitrary or Poor Decisions
Part II of this series will discuss the Opportunity Costs associatedRead More »Government As Wrecking Ball — Part II Opportunity Costs

There Is No Way Out

It is nearly impossible for the average person to comprehend the damage the US government has done to the economy. Regulations have harmed business (and consumers). The welfare state is sapping the energy from the productive sector. Growth is below par and will continue to under-perform in terms of historic norms. The standard of living has slowed and will soon turn negative. Per capita income and wealth are stagnant or down. Unemployment is grossly and deliberately understated. It is difficult for the layman to grasp what has happened or that the future will get worse.

Easier to understand is the debt burden imposed on citizens. The numbers themselves are not comprehensible. Few understand what a billion dollars is. Even fewer have any understanding of what a trillion is. Nevertheless, the rate of deterioration is apparent as these debt numbers accelerate. Regardless of how much you understand, there is one thing that can be stated unequivocally: There is no way out of the debt problem other than massive defaults.

No economic theories or policies are able to avoid this ending. The rules of mathematics now control outcomes.

There is one possible solution which would require immediate and drastic cuts in government spending. Simpson-Bowles $4 Trillion target over a ten-year period is meaningless. It doesn’t alter the spending curve. Cutbacks of a trillion or two every single year, starting today, are required. The budget must be balanced and surpluses generated to have any hope of avoiding sovereign bankruptcy.

No politician is able or willing to address this problem. Attempting to solve the problem would be political suicide for the politician or party that tried. Civil unrest would break out everywhere. Hence we get lip-service or BS solutions which are meaningless. They only extend the game a bit longer while ultimately producing more pain.

To understand the magnitude of the debt, this list from Economic Collapse is useful. Read it to understand the hopelessness of the situation:

#1 It took more than 200 years for the U.S. national debt to reach 1 trillion dollars.  In 1986, the U.S. national debt reached 2 trillion dollars.  In 1992, the U.S. national debt reached 4 trillion dollars.  In 2005, the U.S. national debt doubled again and reached 8 trillion dollars.  Now the U.S. national debt is about to cross the 16 trillion dollar mark.  How long can this kind of exponential growth go on?

#2 If the average interest rate on U.S. government debt rises to just 7 percent, the U.S. government will find itself spending more than a trillion dollars per year just on interest on the national debt.

#3 If right this momentRead More »There Is No Way Out

Rooster Economics

Pretending that economic health can be returned to an economy via printing more money is a scam used over and over by governments. It does nothing to repair the problems in an economy although may jack up GDP numbers temporarily.… Read More »Rooster Economics