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!

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. 

DEFICIT vs. DEBT

Recently there was an article in the paper explaining that President Obama tried to get credit for reducing the “budget deficit.”  The table (see below) extends out to 2017, gradually reducing that. How it is figured, I don’t know (yet).  Though he cannot run for office again, he wants to explain how the deficit has been declining under his watch, but nobody is paying much attention to that.

us_deficit_pct

Debt, on the other hand has been spiraling out of control.  According to a (Democrat) post, G.W. Bush is responsible for that, by not acting toward the end of his term, which might very well be true. I don’t know how that is figured, but cannot believe that in the past six years President Obama could do nothing about that.  In all fairness, it is very tough to get Americans to agree that we all are overspending, and need to do something about that.

debt-as-percent-of-gdp

October 1, 2014 Trent Lott (Republican Senate Majority Whip in 1995) and Tom Daschle (Democrat Senate Minority Leader in 1995) were interviewed and asked why the current congress cannot get along, between the two parties. They came up with various reasons. It was a very interesting interview. At one point Trent brought up the issue of a balanced budget under President Bill Clinton.  It was the only (recent) president under whom that happened, which was through cooperation between both Houses of Congress. Yet the debt kept, and still keeps, climbing.

Wikipedia has a very nice definition:

Suppose you spend more money this month than your income. This situation is called a “budget deficit”. So you borrow (ie; use your credit card). The amount you borrowed (and now owe) is called your debt. You have to pay interest on your debt. If next month you spend more than your income, another deficit, you must borrow some more, and you’ll still have to pay the interest on your debt (now larger). If you have a deficit every month, you keep borrowing and your debt grows. Soon the interest payment on your loan is bigger than any other item in your budget. Eventually, all you can do is pay the interest payment, and you don’t have any money left over for anything else. This situation is known as bankruptcy. If the DEFICIT is any amount more than ZERO, we have to borrow more and the DEBT grows. “Reducing the deficit” is a meaningless sound bite.  Each year since 1969, Congress has spent more money than its income. The Treasury Department has to borrow money to meet Congress’s appropriations. We have to pay interest on that huge, growing debt; and it cuts into our budget big time.

Some suggest: “tax the rich to make up the deficit”. As of the end of 2010, the total worth of all American billionaires is $1.3 Trillion. We could take ALL their worth, not just high taxes, but ALL their WORTH; and it wouldn’t dent our national debt. It wouldn’t even pay this year’s deficit! And if we did take their money to pay some of this year’s deficit, what would we do next year?

The debt, and Interest payments on the rising debt, will be paid by our children and grandchildren through much higher taxes. Is that Child Abuse?

Screen Shot 2014-10-15 at 9.43.06 AM

Notice how the budget, as approved by congress, has a built in deficit amount of $1.27 trillion in order to balance the total expenses. Also note at the right bottom,  the interest on that debt is $251 billion.

“For society as a whole, nothing comes as a ‘right’ to which we are ‘entitled’. Even bare subsistence has to be produced…. The only way anyone can have a right to something that has to be produced is to force someone else to produce it… The more things are provided as rights, the less the recipients have to work and the more the providers have to carry the load.” Thomas Sowell, quoted in Forbes and Reader’s Digest.

In short:

Deficit is a shortcoming of the annual mount spent beyond income.          

Debt is the accumulative amount of deficits year to year, plus interest.

Debt, good or bad?

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In searching the web about national debt, I came across many articles as to how the current debt situation ought to be handled.  Many sites show different opinions as to what needs to be done, so my first question: is debt good or bad?

Looking closer to home, what about personal debt? If debt is bad then we should not mortgage a home because a mortgage is a debt of what we owe on our house. If debt is bad, then we should save up money first so we can pay for a home in cash. Doing so will take about 15-20 years assuming we can invest at a 8-12% interest rate. In the meantime we need to rent a place, which might not be too bad if we change jobs a few times at the beginning of our career. We have two streams of money going: one is a savings account to purchase a home in the future and the other is rent we have to pay for a current abode.

This can very efficiently be turned into one mortgage that we pay toward owning the house outright. Skip the renting. Borrowing costs money too, because the bank putting up the mortgage wants interest in return.  The house does not become ours until the mortgage is paid up in 30 years, or whatever time period is agreed upon.

It is not about debt or no debt but what are the parameters?  From the early ’50s to 2000 a mortgage represented 25-30% of the budget. We also need to budget for food, clothing, a car plus gas to run it and liability insurance, taxes, education of the children, health insurance, to name some of the big ticket items. What if we need to replace the water heater? All this assumes we have a job, which not everyone can say anymore. Especially the younger generation has trouble finding a job, unless they are satisfied with flipping burgers at McDonalds, or other part-time jobs.

Is debt good or bad? It depends, as far as personal debt is concerned. Next article will be debt for private companies and for government.