What can we do about national debt?

My answer to the question  : It is hard to cut taxes with high National debt. Monetary policy can only go so far in helping economic growth. In order to keep the interest cost of carry the National Debt, bond yields are too low so retired people don’t have enough income to pay their bills, investment returns for retirement savings plan will be lower and workers will have to either save more or work longer. ricodilello commented on The Multiplier, a theoretical concept invented by John Maynard Keynes in the 1930s

In another blog ricodilello refers to student loans and how they affect families and delay young people from buying a home, which in turn, cripples the economy.

So, you plan to spend (say) fifty thousand after-tax dollars to send each child to college.  This is a bad idea.  You don’t get what you pay for. You pay for what you get. What, exactly, does your child get for your money?  The first two years are wasted. Maybe more.

The average book assigned to college freshmen is at a 7th-grade level.   There are parents who pay for this. You should not be one of them. The RPC (Ron Paul Curriculum) suggests that a high school student should quiz out of the first two years of college. The exams cost about $2,000, total. A student can pay for this, and should.

RPC trains high schoolers to do this.    http://www.ronpaulcurriculum.com/public/department135.cfm

There are smart ways to earn an accredited college degree. Physically attending the first two years of college away from home is not one of them.

The above paragraphs are from the Ron Paul Curriculum website. My point is that students and families of students can save a lot of money for college to reduce their debt. That is where debt reduction must start. Ron Paul’s suggestion requires more initiative of the student and the support of the family to get him / her there. Do you set the example as a father? as a mother? as a family? Do you teach your children about debt? Do you pay off your credit card automatically every month? National debt does not come out of the blue. Our Senators and Congressmen willingly oblige to the public requests of more programs and more conveniences to get our votes. They conveniently forget having to scale back when the economy is down!

I am re-reading The 7 Habits of Highly Effective People by Stphen Covey. Habit 1 is to be pro-active instead of re-active. In the stimulus of going to college a pro-active response requires self awareness, imagination, and an independent will, by the student. He / she has the freedom to choose and their language should be: I can, I prefer, I will, instead of: I can’t, I must, if only. “If only my parents had enough money to send me to college.” They might, if the student would do the work and do the exams recommended by Ron Paul, thus saving two years of tuition plus room and board!

Principle I: Teach your children the difference between (National) Debt and cultural habits.

That is easy to say, but how do we do it in a society where we are bombarded with offers to buy, and where many households are far in debt, teaching children that debt does not matter?

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Before 2009 48% of households carried debt. Then it dropped and came back up again to 47%. The average debt dropped from $29,000 to $25,480 but not because people were paying off debt at a faster pace, but because banks closed out accounts. With these kind of statistics, how do we have a chance of teaching children the difference between debt and cultural habits?

By teaching our children economics, and how politics plays a role.

 Let me recap where we have been so far in the search of whether national debt is a big issue or not:

  1. Is debt a bad thing? I have given examples of debt in business, government, and individual debt.
  2. Government debt is twofold: a city can go bankrupt and so could a state, but the national government can stay afloat a bit longer by printing money.
  3. Social Security is not part of the budget, but is an entity of its own, getting financed separately. But it is an entitlement, which puts it high on the moral list in the American culture.
  4. I touched on aggregate demand, and where foreign exchange fits in.
  5. A business cycle is not very difficult to understand. It is based on how confidence in the market (Wall Street) and government fluctuates.
  6. How National Debt has  been on an astronomical increase, regardless of which political party was in office, either the Presidency and / or Congress.
  7. How culturally we have changed to the price-someone-is-willing-to-pay from cost-plus-reasonable-profits-to-stay-in- business, and regarding personal debt as being “normal” without worrying too much about the consequences.

I’ve described the business cycle, but not yet how emotions follow that.

What kind of banking system do we use? Are there more than one?

More about all that in the next weeks!

 

Should you help your children stay out of debt?

“In my day if we earned a quarter, we spent 15 cents and saved a dime. Your generation earns a quarter, spends the quarter and then borrows another quarter at 25% interest!”

I really identified with that saying by Jeanette Pavini in Market Watch. Wondering why it spoke to me so profoundly, I drilled deeper and came to the following conclusions:

  1. The thought processes are totally different between generations. When I was a kid, the concept still existed, that you can spend only what you have and no more. I would receive an allowance each week, but only after I showed the balance, and how the difference with last week was spent. It was not a matter of “checking up on me” as to how I spent my money and whether is was done wisely. My dad never evaluated the wisdom of my decisions, only the record keeping: that my physical amount of money matched my records. To give an example: A 10-year-old’s version of “living within one’s means” might include financial decisions like choosing whether to buy a new video game or saving their money so they can eat at the concession stand with their friends at the next field trip.
  2. Today’s generation is taught that you can have it all now. To sweeten the deal, the idea is that you pay-for-it-as-you-go, enjoying both your new video-game and a good time with your friends. This concept is permeated throughout our society: with lower interest rates you refinance your house, as your family grows you purchase your next bigger house, when you get a loan the payment plan conveniently shows the “minimum payment” (because the longer you draw out the payment the more interest your friendly banker makes!). Immediate gratification comes with a price, but “oh well, the house price will go up anyway, right?”

“Our financial habits rub off on our children and influence their relationship with money later in life. But what may be surprising is just how young children start to form financial habits. Adult money habits are set by the age of seven, according to a study by behavior experts at Cambridge University and published by Money Saving Advice.

Many children are growing up in debt-ridden households. As of September 2014, the average household owed $7,281 on their credit cards, according to NerdWallet.com’s analysis of Federal Reserve statistics. Looking at just indebted households, that number rises to $15,607 in average credit card debt per household. That’s a collective $880.5 billion in credit card debt that American consumers owe.” (from an article by: Jeanette Pavini’s Buyer Beware, in Market Watch).

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Bob Parrish 10 days ago:

       I got my first credit card at 18, a BankAmericaCard, the precursor of Visa.  I started using it for everything…and still do a half-century later!  But I NEVER carry a balance, instead using credit cards for the float they offer, for tracking my expenses, for frequent flyer miles, for enabling car rentals and hotel stays, etc.

Credit cards aren’t the enemy.  DEBT is the enemy and credit cards that are paid in full each month don’t generate debt.

PRINCIPLE I  about NATIONAL DEBT:

Teach your children the difference between (National) Debt and cultural habits. 

We aren’t the world

This is the title of an article very close to my heart!  In the article Joe Henrich and his colleagues are shaking the foundations of psychology and economics—and hoping to change the way social scientists think about human behavior and culture.

In the Amazon area in Peru, Joe Henrich introduced a game, pretty common in the USA. The test that Henrich introduced to the Machiguenga was called the ultimatum game. You’ll have to read the article for details.  What he had great difficulty with, was explaining the rules, as the game struck the Machiguenga as deeply odd.  At the heart of most research is the implicit assumption that the results revealed evolved psychological traits common to all humans, never mind that the test subjects were nearly always from the industrialized West. Henrich realized that if the Machiguenga results stood up, and if similar differences could be measured across other populations, this assumption of universality would have to be challenged.

That hits the target of my intent of this blog.  I always assumed that research in economics and psychology, was done for many different cultures, but Joe Henrich points out that he could not find much, other than what was done among western cultures which was then assumed to apply to all of mankind.