The Insanity of Budgets

Have we lost our minds?

Ok.  I am reading all kinds of things all over the news, and even more all over from comments that people have about this issue.  And, everyone seems to be twisting this issue to whatever side they are on.  The Republicans are pushing their agenda too hard and we can't approve their budget.  The Democrats are becoming the party of "no" and won't compromise.  The President wants to ensure that the military won't get paid during the shutdown. Blah, blah, blah.  Everyone has something to say, but none of it seems to be intellige - wait - I'm not getting paid?!?!

As you all know, I am military.  My family's sole source of income is from that military pay.  So, it would seem, I have a vested interest in them making a budget that works.  I should be going crazy right now.  I should be so angry with politicians and their evil Washington ways, right?  I'm not.  And you shouldn't be, either.  Let's examine the issue so that I can tell you why I am not ready to protest everything right now.

Government Budget 101

I think we need to start with a basic understanding of how government budgets work and why they are such a hot political thing.  It starts way down in some budget committee in the House of Representatives.  They go through (as far as I know this usually starts around August) and write up a budget for the government for the next year.  They put it out there for a vote, and then politicians begin adding to it.  Pet projects, money for their states to keep their voters happy, stuff promised to lobbyists, etc.  Some of it is not bad stuff.  Some of it is bankrupting the country.  But that is a discussion for another day.  It gets voted on, and if passed, then it goes to the Senate.  Same thing happens there, and then if passed, then the President signs it if he agrees and then it is law and the country can continue to run.  If not, well, we are beginning to see the fallout from it right now.

So, how does passing the budget really change the way money flows?  Well, once the budget gets passed, money then gets deposited into accounts and then the different departments then distribute accordingly to agencies who then distribute it down, etc.  If the budget doesn't get passed, the money doesn't flow, and then people aren't paid.  So, by not passing one simple bill, the effects are seen everywhere.  And the country won't function like that.  That means it's time to panic, right?  I mean, this is the end of our country!  Why is everyone only talking about some parks shutting down?

Politicians use certain stop-gap measures to keep important things functioning.  They pass other, smaller budget bills to extend deadlines for coming up with budgets, they make special bills to fund certain vital things, and they in general, spend money that isn't quite on the books yet, but once the budget goes through, it will be.  This process is very complex, and understanding government budgeting is something that I don't think anyone can fully say they completely get it.  However, the key point I want you to take away here is that lawmakers have to work to keep things going.

What is going on right now?  Why is the news telling me that Obama doesn't want our military paid?  Why does it say that Republicans are holding out on a budget deal for "pennies"?  Why can't they just talk about what is going on?  This is all part of the political pandering that I hate so much.  They are going at each other right now so that one of the parties can come out of this as the "hero" and win more votes.  That is what all the talk is about.  But I bet you already figured that out.  What you need is someone to cut through the headlines and tell you what is happening.

The President doesn't want to pay

Right now, Obama is sitting up there in the White House praying that he doesn't have to pay us military folks.  He hates us so much that he wishes stress and torture upon us and our families.  Now, let's think about that for a minute.  Even if this were true (which I really believe it isn't - especially with the work of Michelle Obama), how would that make any sense as far as trying to protect this nation and get re-elected?  It wouldn't.  So why is it in the headlines?  What story is really happening?  Well, President Obama told his Congress that if they come to him with a half-measure budget, that he would veto.  He wants the budget to be complete, and he wants Congress to have pressure to complete it now.  So, what about military pay?  As far as I can tell, if a bill is passed stating that funds need to go to accounts to make sure military still gets paid, that  President Obama will sign it.  To veto something like that would be political suicide (and that's why how he personally feels on the subject is irrelevant - you, my fellow voters, have made it that way!  Thank you!).

On the same token, Republicans are just trying to hold this budget ransom for just a couple of pennies.  They could care less about all the federal employees that won't get paid or all the services that will halt.  What's a few dollars, anyway?  Well, to the news media, $61 billion dollars may not sound like a lot, but to me it is.  Now, in the large scheme of things, $61 billion may not mean much when you are talking about trillions of dollars.  But, when I look at it, I think it is more a symbolic thing.  That $61 billion stands for a commitment to fixing the budgeting issues of the past, which I think is very important.  I think we need to start taking those risks to make sure that the future of this country is viable.  We need more of this type of thing happening in Washington, and we need to support those making it happen (and those are on both sides of the aisle - this, when you look at it, is not just a Democrat vs Republican thing).  It is tough and it is a struggle.  And if I have to go without pay to make our government start taking accountability for the spending it is doing, then so be it (although, after a couple of weeks, my bill collectors may have to go without their pay).

Sacrifice - Can you?

Bottom line, did I create this budget mess?  No.  Am I going to have to pay for it?  Not completely (thank God), but as a collective public, yes.  Am I willing to step up and do my part to curb our ridiculous spending? Absolutely.  I cannot wait to see the US with a budget surplus again (as long as we do it right).  Am I going to have sacrifice everything for this to work?  No.  Am I willing to?  No.  But sacrifice is going to be needed from everyone to make this start working the way we want it to work.  I would like to say that it's only the people that created this mess that are going to have to clean it up, but it's just not true.  We are all going to have to pitch in.  Are you ready to do your part?

Your kids are in danger!!!

Your kids are in danger!!!  This is the second worst thing happening to them right now!!!  There is something swooping across the nation and it is crippling your children for the rest of their lives!  I cannot wait any longer and must warn you of the coming danger!

Now that I have your attention, I would like to talk to you about government spending, the debt, and why you should be listening.  You are probably thinking that I am such a liar and you are about to shut this off.  I will admit, this trick is a little dirty (I solemnly promise not to use it again), but would you read this if it said "government spending"?  And, I didn't lie to you.  Your kids are in danger.  I will explain how all of this ties back together, but first, there are a few basics that I need you to understand about why the debt is such a problem looming overhead:

1. The national debt is right now just over $14 trillion (going up by about 3.8 billion per day).  There are 300 million (approx) people living here in this country.  So, that means you owe $45,000.  Total due: now.  We only take cash.  Oh, and it gets even better.  If you are married, then your spouse also owes that amount.  You got kids?  Each one of them were born $45,000 in debt.  What a way to start life, huh?  And that number is growing.  I am just a regular guy.  There are four people in my household.  Total owed by my household for the government's debt: $180,000.  That is more than I owe on my house!

2. The government no longer has the option to borrow money from it's citizens.  Let me explain.  In WWII, the government "issued war bonds".  What it really did was take out a bunch of mini-loans from regular people like you and me.  So, why can't the government do that again?  Because much of the generation that survived the Great Depression is gone or retired (savers because they survived the worst shortage our country has seen, so they put money away for that situation), and has been replaced by a generation (or two) that doesn't like saving money.  In short, the citizens have little to no money saved up. If you don't have any money saved that isn't going to bills, then you can't buy war bonds (or anything for that matter).

3.  This is where it gets tricky for most people, but let me walk you through this.  I promise it will be fairly easy to understand (plus there's a summary at the end if you want to skip the numbers). and you will come out on the other side much better for it.  Here we go.  The national debt is not even the half of it.  The government has money that it has promised out (mostly to it's own people), but those debts have not come up yet (so they "don't count" in the national debt).  For example, I tell you on Monday that I will give you $20 on Friday.  I don't actually add that to my debt tally because it is not Friday yet.  Dumb political way of doing accounting, but it is what it is.  So, then, how bad is it?  Here's the breakdown (as of right now) if the country were to sell all of it's assets and pay as much as it could in liabilities:

a. Assets - $4 trillion in Small businesses, $13 trillion in corporations, and $59 trillion in infrastructure.  Total: $77 trillion

b. Liabilities - $15 trillion for Social Security, $20 trillion in prescription drug benefits, and $78 trillion for Medicare.  Total: $113 trillion

We have over $36 trillion that we couldn't pay if we had to right now.  Remember that $45,000?  Well that just almost tripled.  Try more like $120,000 per person in your household.  Per person.  Per Person!!!  Have I got your attention yet?

What does this mean to you?  How is this going to affect us in the end?  See here to get a short, simple explanation.  Once you have read that, then continue.  So, what do we do in face of these seemingly insurmountable odds?  How can we possibly overcome such debt?  And when are you going to tell me how this endangers my kids?  Let's look at some possible ways to help out with this debt, and then I will tell you about the why this is so vital to your kids.  Ways to help:

1. This has been covered by me previously, but it applies here.  We need to stop asking government to do the things for us that we can do for ourselves.  The government spends trillions on trying to take care of our retirement (planning), disability (insurance), and soon, healthcare (which I will talk about in a later post - subscribe to my feed for more).   We need to start planning on taking care of those things on our own.

2. Don't plan on receiving social security. If you are near or at retirement age, then ignore this. If you are not, then let's tell the government that we don't need social security, and then let's take care of our own retirement. That's $15 trillion less that our country would owe. This is something that we could take care of ourselves - more in a later post (just follow me here or twitter to find out when it comes).

3. Reform Medicare to something cheaper and that makes more sense (notice I don't say get rid of it - more to follow in a future article - stay tuned). As of 2006, 96 million (which is a lot in my opinion, that could be part of the problem - 1/3 of our population?!?!) people are on Medicare and we are spend $78 trillion on it? How much sense does that make? That is $812,500 per person on Medicare. If you or someone you know has tried to deal with that system, it is awful. Why does it cost so much, then? I don't know. But it is definitely something that I don't see being discussed a lot and it should be.

4. Get back to exporting. When we export things, business get revenue from outside the US. They are taxed on that revenue, so the government makes money. The public sees job creation (someone has to make the things we export), and the government takes their piece of that, too. All of this money that is being spread around this country is coming from other countries. We need to stop working on making China rich.

And these are only a few of the ways we can do this. I think there should be lengthy discussion and debate on this topic. The public should be allowed to participate through social media sites. The politicians shouldn't be the only ones making decisions with our money. In fact, I think that all of our major issues should get public involvement (with a few national security issues aside, of course). We are, after all, "A government for the people, by the people". I don't feel like I had much say in the whole "let's go into serious debt" decision. And I know that our kids - who are being born with enough debt to crush marriages and compact cars - definitely didn't.

So, I bet you want to know how this endangers your children. Well, I covered it some in the national security post, but here it is. If we don't fix this problem - and soon - we will be facing some real issues trying to keep financially stronger countries from taking advantage. US policy makers would probably be tempted to sell off weapons (like they did in Russia) to keep people fed. We saw in 2008 how quickly our economy can turn. And one built on debt is doomed to collapse. So, what happens when it does? Does anyone want to find out? When will it happen if we don't fix the situation? I am not sure of the answers, but I do know one thing - if we keep going down this road, it will collapse. It could be while your kids are alive, or your grandkids, etc. Are we really going to leave them in an uncertain and potentially dangerous situation? Would you let your kid play in the street?

Legerdemath

Sounds Boring - but it's not

I know what people who read this title think (LegerdeWHAAAT???).  This is going to be another story of the financial system and how corrupt it is.  It is going to be boring.  Corruption, yes; boring, no - and here's why:

I stumbled across this post by Omer Rosen.  This, in a nutshell, explains how banks were cheating clients on something called treasury-rate locks.  Now, I am not going to go into how all this works (Omer explains it so much better than I ever could), but I wanted to give folks my reaction to this (please read the post before continuing).

This was something corporate wizards bought into!  This was hedge fund managers and the people running retirement accounts buying these investments!  The banks were duping the financial services industry!  How could any normal person stand a chance against them?!?!  This thought process lead me to another one:  what happened to the days when companies bought their customer's loyalty - giving up short-term gains for a lifetime of profits?  Are there any of those companies still around (and no - I am not going to tell you a list of companies that are good)?  How can we get those days back?

Wizards and dried up wells

Well, let's start with the problem.  From my understanding of the situation*, in the 1990's, incentive structures really began to get more and more huge.  Incentives that were designed to cause top-level management to do what is in the best interest of the company (stock-options, profit sharing, etc.) ended up making management only do what was good for the company short-term (cooking books to inflate shares, taking on long-term high risks for short-term high profits, etc).  This, at least for the short-term, made the company look ridiculously profitable, and made the shareholders and the executives very rich.  It also made for some serious problems later on.  Execs were coming up with all kinds of schemes to make the company barrels of short-term money.  From shifting losses around to other departments (or even companies), giving out insanely risky loans, or insuring things that should never be insured (gambling and those insanely risky loans are just two examples), corporations were doing everything they could to grab as much money as they could while it was still out there to grab.  Eventually, though, everyone on the inside of this knew the well had to dry up.  Then September of 2008 hit.

In that month, all the credit markets froze.  What that means is, the well dried up.  There were massive withdrawals from money market mutual funds (from which most credit flows), and loan defaults were at an all-time high.  Everything financial was put to a halt, and the banks went into panic mode.  All the money grabbing was done.  There was a massive reset hit, and billions of dollars vanished in the blink of an eye.  Obviously there were other factors to this that I will probably discuss in a later post.

You would think that kind of thing would cause corporations to realize their mistakes, adjust their incentive plans, and start doing business differently.  You would think.  But that doesn't seem to be the case.  So, companies are back at business as usual.  Which brings me back around to the original intent of the post: to explore and understand why companies don't value customers and ignore long-term profit potentials.  They do it because their executives get paid better when they do it.  So, how do we fix this?

Education, education, and change

Again, I am not an expert at any of this.  This blog has many topics that have been and have yet to be covered, and I am no where near smart enough (nor do I have the time) to be able to become an expert on all of them.  But, here, again, are some of my thoughts and possible suggestions on this:

1. Education - I know, I already covered this subject, right?  Well, I mean we need to educate shareholders and owners and boards of executives on how to properly structure incentives to achieve long-term goals.  We need to make sure that well-planned, long-term incentives are part of every corporate game-plan to make a fortune - over a long period of time.

2. Education - Wait, what?!?!  You just said that!  This time, we need to educate the public on the math principles behind financial markets, and then how to apply those principles to new situations.  Us, at the lowest levels, could have stopped what was happening if we had understood the principles behind it and said, "I'm not going to buy".  The banks didn't hide how they calculated all of this, they just didn't say that it wasn't an ethical way to calculate these things.

3. Accountability - We need to start holding corporations accountable when they do under-handed stuff like this.  This, for me, is just like stealing.  You would arrest me and throw me in jail if I just came in and took money out of your vault, so why should we let you get away with taking money out of our pockets?

4. Incentives other than money - This is a society change that I never really liked.  We have moved away from doing things because they are the right thing to do and because they need to get done.  We now do things because they make us a lot of money and because they "feel good" (Those things usually cost a lot of money).  People need to realize there are other things than money that we should be worried about.  It used to be your banker was a trusted advisor, a friend, and a pillar of the local community.  They would work hand-in-hand with you to make your money work as hard for you as possible.  They focused on your long-term goals.  They took care of you, and you had no problem paying them for that.  On the big picture side of things, job creation, the country's stability, and infrastructure improvement should all be incentives to corporations as well.

5. People - We need to have the courage to stand up and say there is something wrong when we see something wrong.  We need to be able to tell corporations that act this way that we won't give them our money.  Until that happens, I don't foresee any changes to the current system.  I think businesses will always follow the money (even if it is just short-term).

When we decide to work together, build businesses that don't act like this, educate our people, and take a stand; we could make great things happen.  I hope that someday that will be possible.  Keep reading, folks, and I look forward to hearing from you soon.  Thanks.

*For those that want more reading, check here, here, and here (these are very lengthy and very technical posts).