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SavingsINTRO

 

Once upon a time people worked and earned money.  They paid their living expenses and maybe indulged themselves a little.  Then they put a little something aside to save for that car or home, that small business, or to prepare for a rainy day.  You weren’t rolling in dough, but anytime the going got rough you took comfort in your savings and through this lens you could see a  future and feel at ease knowing you had something to fall back on in case of emergency.  Saving may have been challenging but watching the balance grow was rewarding.  Today, the image of working to earn an income is similar but that’s where the similarity ends.  Now, ones income is used to pay the principal and interest on their debts and they borrow and rely on employment and/or government benefits for everything else.  Savings has gone the way of the dinosaur.  Of course this isn’t true for everyone.  There are some who avoid debt completely or manage to keep it very low relative to their income.   But it is true for many…maybe most.

The first scenario forces you to manage your budget within the limits of your income.  Your financial security and your plans for the future are directly related to your ability to save.  The second scenario allows you to live beyond the limits of your income, at least for awhile.   This continues up until you reach your credit limits or your income can no longer support your debt payments or your lenders simply stop lending, whichever comes first.  Saving is not so critical in this picture as mortgages, lines of credit, credit cards, car loans and leases, small business loans, school loans, insurance financing and other types of credit are there to finance just about everything.  Add to this  your employer and the government who stand ready to provide certain types of social, medical and tax benefits to cushion against emergencies and keep you borrowing and spending.  The availability of easy credit, employment benefits, government social programs, tax benefits for borrowing and spending along with low interest rates makes saving an unattractive option.

Nevertheless, both scenarios are ultimately limited by our ability to finance them from our income.   This requires us to manage our finances or risk the consequences.  Feel free to use your imagination here.  If we would rather not face those consequences then one important task is to sit down from time to time, maybe at the kitchen table, and review the state of our finances.  This way we can determine whether we are staying within the bounds of our limited income.  With our financial info in hand we try to answer some basic questions.  How much do we have in the bank?  How much are we making?  How much are we spending?  How much have we borrowed and what are our debt payments?  How much are we saving? Are we keeping up with our cost of living and our debt or are we falling behind?  Are we getting wealthier, standing still or getting poorer?  Once we get a clear picture we can determine whether things are going well or if changes in our spending need to be made to keep from going broke.  Although its a fairly simple exercise, many of us put it off longer than we should.  I suspect it is because we know intuitively that we won’t like what we find and we really won’t like the cure.  However, if we put it off too long and our spending is outstripping our ability to pay, then we pass the point of no return and go broke.  In this context, the road to prosperity or the poor house is not hard to understand.

For the remainder of this essay, lets set aside all the complex and never ending talk of stimulus, bailouts, deflation, inflation quantitative easing, and other such terms, and focus instead on the basics of our nations finances.  It is an eye opening exercise and one we have put off for to long with obvious consequences.  As we will see, our governments finances have simply gotten out of control.

In going through this exercise, keep in mind that in reality the U.S. government has no real income or expenses or debt.  The money that the U.S. government receives is a portion of the income we earn, they did nothing to earn it.  Therefore, the money they spend is our money.  And, we will have to pay back the money that the government borrows or prints in the form of either future tax increases or more expensive goods and services.  Of course we could simply default on this debt and not pay it back but this is the topic of a future essay on the nature and consequences of national default and inflating the money supply.  For now lets take a simple graphical look at our basic financial situation, and as always, draw your own conclusions about where we stand and what we individually and as a family ought to do about it.

INCOME

As shown in the chart below, the Federal Reserve reports that U.S. Government receipts of income taxes (both individual and corporate) reached a peak in early 2008 of approximately $2.6 Trillion.  This is an annual amount.  Since that time, income tax receipts have been falling dramatically as a result of the economic crisis.  According to the Monthly Treasury Statement (MTS), individual income tax receipts are down approximately 21% while corporate income taxes are down about 58% from the previous year.  With the fiscal year ending in September, this years tax receipts are projected to fall to approximately $2.1 Trillion, down $500 Billion from last year.  Keep this chart and these numbers in mind as we go through our expense and debt figures.  By the way, here is a great link to help you visualize just how much one Trillion dollars is.  What Does One Trillion Dollars Look Like?

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U.S. Government Tax Receipts

U.S. Government Tax Receipts

EXPENSES

The same Monthly Treasury Statement shows approximately $3.1 Trillion in expenditures as of early 2008 and $4 Trillion in expenditures projected for this year.  The Federal Reserve chart shown below supports this and shows that we have reached $3.5 trillion so far this year.  The Treasury projects a budget of  approximately 3.6 trillion for fiscal 2010.  It doesn’t take a “rocket surgeon” to see that our $2.2 Trillion in tax receipts will not cover the $4 Trillion in expenses.  There is a shortage, or deficit, of $1.8 Trillion.  These expenditures include money for the various bailout and stimulus packages put in place to restart the U.S. economy and to support an increased military budget.  The Congressional Budget Office (CBO) is projecting that the government will continue to spend more than it receives in excess of $900 billion, on average, for at least the next decade.  These projections include costs for the newly proposed universal health care program.  This is close to 50% or $1 Trillion more than the government currently receives in tax receipts.  In short, tax receipts are falling dramatically while expenses are rising dramatically.

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Federal Government Expenditures

Federal Government Expenditures

SURPLUS?  NO, JUST DEFICITS

So if we put our simple picture of income and expenses together for the U.S. government we have large and growing deficits, as shown in the two charts below.  The U.S. government has not been living within its means for many years, but the budget deficits have exploded since the crisis began from approximately $458 billion in 2008 to the projected level of $1.8 Trillion for this year.

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US Government Budget Deficits

U.S. Government Budget Deficits

U.S. Government Budget Deficits

SAVINGS

So as we sit around the kitchen table reviewing our finances we discover that there is no government savings and therefore there is no chart for this section.  There is no savings from which the U.S. Government can finance future initiatives or store up for a rainy day.  As shown above, they only have ever increasing deficits.  Of course, the primary way government can spend more than they take in is to borrow.  The other means they have at their disposal is to print the money, but this is a desperate measure.   Thus instead of savings, the government has debt and the printing press.  Let’s take a look at the debt situation.

DEBT

The below chart presents a grim picture.  It shows government debts and liabilities as well as the household debt of the public.  Household debt includes mortgages, credit cards, car loans and other types of debt.

U.S. Household & Government Debt Picture

U.S. Household & Government Debt Picture

If we add all of these debts and liabilities together, we will see that the American public is on the hook for approximately $151 Trillion.  I know the debt figures are mind numbing and eye watering but they are real and taken from government sources.

The chart shows the following:

To keep this in perspective remember that tax receipts to the government are about $2.1 Trillion annually and the yearly output of the U.S. economy (GDP) is about $14.1 Trillion.  Where is this money supposed to come from?  Increased taxes?  New borrowing?  Printing money?  Debt default?  These are questions for us all.  There are growing  indications that the world has reached the limit of its willingness to continue lending to the U.S. and thereby financing our large deficits.   In addition,  the Federal Reserve has very publicly begun printing money to buy U.S. Treasury debt as discussed in my last essay, “Of Treasury Auctions, Rocks and Hard Places“.  In other words, we have begun printing money to lend to ourselves.  The bizarre part is that we, the public, then have to payback this printed money with interest from our taxes.

PUBLIC SAVINGS

Let’s take a brief diversion from the finances of the U.S. government to take a look at the Personal Savings Rate of the U.S. public.  As you can see, after declining steadily since the early 1980’s the savings rate has increased dramatically since the beginning of the economic crisis.  I don’t want to spend much time on this topic in this essay as our focus is on the finances of the U.S. government but this chart gives some idea of what the public has been doing with their money over the last 50 years.

U.S. Personal Savings Rate (% of Income)

U.S. Personal Savings Rate (% of Income)

The chart below is intended for comparison to the savings rate chart above.  It helps explain one aspect of why the public has not been saving over the last 30 years.  The chart shows the  steady decline of U.S. interest rates  since the early 1980’s right along with the steady decline in the U.S. Personal Savings rate.  The 10 Year Treasury rate is used as it is the basis for many types of loans and therefore is considered reflective of interest rates in general.  The government and the Federal Reserve have had a longstanding policy to “manipulate” (that is Ben Bernanke’s word not mine) interest rates lower to encourage lending and borrowing and thereby increase consumption in the U.S. economy.  It has worked for the last 30 years as American’s turned away from saving and towards borrowing.

10 Year Treasury Rates 1962-2009

10 Year Treasury Rates 1962-2009

 

FRACTIONAL RESERVE BANKING, BUDGET SHORTFALLS AND THE DECLINE IN SAVINGS

I promised no complex concepts at the beginning of this essay but I couldn’t resist this one.

It would appear that we have exchanged savings based long-term economic stability and growth for unsustainable debt based growth.  How has this happened?  One important perspective on this situation is to recognize the impact that the near universal availability of cheap and easy credit,  government social programs, tax incentives that encourage borrowing, and employment benefits have had on our financial behavior as a nation.  This landscape of cheap and easy borrowing, benefits, and social aid have caused us to loose touch with the critical link between savings and economic stability, growth and prosperity.  Instead of economic growth being built on our savings, it has been built on a credit expansion driven by fractional reserve banking managed by the Federal Reserve, which through an interesting method can turn a $100 bank deposit into $1, 000 in new loans.  This credit expansion (i.e. borrowing and lending expansion) has a limit and thus can not sustain growth.  Savings establishes the bedrock for sustained real and lasting economic growth.  Debt saps ones long-term ability to save as money that might have been saved must now be used to payback principal and interest.  The U.S. government and much of the public finds itself in this position as principal and interest payments consume significant and unsustainable amounts of it’s income.  Nevertheless, this is the vicious cycle we now find ourselves in.

In short, we have allowed ourselves to be seduced away from saving.   The wisdom that provided an incentive to save seemed to disappear in the face of falling interest rates and the expanding availability of credit, social and employment safety nets.

CONCLUSION

The sole purpose of this essay was to take simple stock of the financial condition of our government in the same way we might take stock of our own finances.  When put in this context it is hopefully easier to assess where we are, where we are going and how to evaluate the proposals, decision making, comments and opinions of our political and financial leaders as well as media reporting.  More importantly, I hope it helps to stimulate thought on what needs to be done.  Our government has made it clear that their solution to the problem is to borrow and spend and to encourage us to do the same.  They have made it clear that they want us borrowing and consuming to get the economy back on its feet.  They have given the banks extraordinary amounts of money that they want them to lend to us so that we will spend.   There isn’t any real talk of balancing the budget, saving money or of the importance for the American public to save.  They only speak of borrowing and consuming as the keys to economic growth.  After the above discussion, do you agree with this position?

As I write these closing comments it occurs to me that there is something very disturbing about the policies to get us to borrow and spend.  It seems that we will have to pay this money back with interest twice.  Consider that if the government is borrowing money by selling bonds in order to give to banks to then lend to us, then we will have to payback the loans to the banks with interest and we will have to payback the money the government borrowed with interest.   Sounds like the topic for another essay.

These are my thoughts and I am very interested to know yours.

You play an important role in this discussion and your feedback is valued.  If this post has been of value, I encourage you to share it.  Feel free to use the social networking links below.

Regards,

– The Falcon

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