Economics 101

7 09 2008

I took a day off from talking about the election and political stuff.  I like to do that sometimes just to give myself a break as much as anyone else that gets tired of reading it.  I’m sure once the election is over, I’ll balance out a little more.  I just feel like right now is the time to inform people about what’s going on since it’s only about 7 weeks until the election.

I said in one of my earlier posts that I’d be sorting through the issues to try to figure out which ones are the most important.  I thought about it for a little while and I think that I’m going to spend a post laying out each issue so that everyone can make their own decision.  It’s hard enough to figure out what any of these candidates stand for, so I’m going to look at their talking points, voting records, and sound bytes and try to come up with a side by side comparison.  I think doing that might change a few people’s minds.  Also, I figured it’s pretty impossible to try to compare some of these issues.  Comparing abortion to tax cuts is absurd.  What everyone really needs to figure out is what group of policies is most important (ie economic, social, international) and see what the candidates say about them.

I think, however, that there is one issue that sits alone above all others.  It effects our economy, our ability to create and fund social programs, and our ability to succeed in the international community.  It’s also a topic that’s not been talked about too much this election year.

The federal debt right now is sitting in the vicinity of $9.4 trillion dollars.  Yes.  That’s almost 1600 Wendy’s bacon cheeseburgers for every person in the world.  Most people don’t really understand what the debt is, how we get into debt, or how it effects our economy.  Thus, I shall start at the beginning.

The debt is a combination of money owed to individuals, corporations, foreign countries, and that the government owes to itself.  More then half of that money is from the purchase of Treasury Bonds and similar purchases.  These bonds, bills, and notes are basically like the savings bond your grandmother probably bought you at some point in your life.  You purchase the note at a certain price (which fluctuates based on demand for the notes) and after the term of the bond has ended, you are paid face value plus interest.  The difference is that these are in much larger denominations (the minimum is $10,000).   Basically, China and other countries bought these bonds and notes in large quantities and eventually, we’re going to owe them that money back plus interest. Any other money that we owe comes from borrowing it from social programs like Social Security.

The debt comes about because the federal government spends more money in a given year then its budget allows.  In the last 7-8 years, we’ve spent far and above what the federal budget allowed, mainly due to the war in Iraq.  For some reason (I’ll give you a hint, that reason was political), the President didn’t think it was important to include any extra funding in the budget for the war, so when the money ran out in the military budget, he had to ask for emergency funding to cover the tab.  This means that all the money we’re spending in Iraq is on borrowed money.

In this past year, the government collected $2,568 billion and spent $2,730 billion, which means that they had to borrow $165 billion dollars.  This year is not looking much better.  So the question you might (or should) be asking is: why do we keep borrowing money?  The answer is, well, because we can.  Everyone that lends us money is working under the assumption that, hey, this is the USA.  They’re good for it.  So far, we have been.  There will come a time, however, when countries will stop giving us money and then, how can I put it nicely…. we’re fucked.  Right now, our federal government is like a kid with a credit card.  It’s buying all this cool stuff now and it hasn’t set in yet that we’re going to have to pay for it someday.  In fact, the last 8 years have been the worst of it.  During Bill Clinton’s years, he was able to keep spending under control.  Over his last 6 years in office, the budget increased about $300 billion.  During George Bush’s 8 years, the budget has gone up $1.2 trillion.

So how does this effect the economy?  Well for one, we have the baby boomer generation is retiring and they want their social security benefits.  We borrowed a lot of that money so it’s not there.  The only way that they can get that money is to raise your taxes.  More then likely, the amount of money in Social Security payments will also have to be decreased to keep it sustainable in the short term.  In the long term, I wouldn’t expect to see it when you retire.  In essence, your retirement has been spent on wars and earmarks for Senators.

Second, using the world is flat viewpoint, many countries that traditionally had invested in us don’t need to.  Countries like Japan, China, UK , Brazil, etc are investing their money in their own economies and infrastructure.  That means less money to go around for us to borrow to keep our country running. It will eventually lead to higher interest rates which will further slow down the economy because it costs more to borrow. This also leads to the value of the dollar going down because the confidence in it is diminished and we keep making more of it to pay people (supply and demand: if we have more dollar bills floating around, they’re worth less).

It’s as simple as this: we need money to operate our government.  If we spend more then we have and we keep borrowing, we’ll eventually get to the point where we have no money and our creditors are going to come knocking.  That means no money for social programs, education, or, really, anything.  All the other stuff that’s important about this election really doesn’t matter if we don’t have a running government.

Everyone should seriously be considering which candidate is going to reign in our spending and lead us towards a surplus in our budget so that we can start paying down the debt.

I’ll talk about what each of the candidates want to do with your money when I do my side by side comparisons on the issues.




One response

10 09 2008
Flip Floppers « The 30 Day Challenge

[…] Economics 101 […]

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