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A Smaller Piece of American Pie

“Any way you slice the pie, Americans better come to grips with the fact their lifestyles are going to contract.” That’s the bottom line I’ve gleaned from attending several conferences and listening to some of the nation’s top economists recently.

Basically, the US is spending far more than it takes in via tax revenues, creating an annual deficit. The shortfall is covered by borrowing the money, which adds to the national debt. The Treasury Department borrows the money from two sources: private investors (individuals, banks, companies, and other governments) and the Federal Reserve Bank.

Where does the Federal Reserve get money? They create it with a keystroke, which is the digital-age equivalent of printing money.

It’s important to understand that the US government has no intention of ever paying down the US debt. Neither politicians nor economists can agree on whether to stop borrowing (or creating) money to fund the annual deficit. To actually reduce the national debt, we must run surpluses, something we haven’t done in over 15 years and then it was only for one year. We actually have never paid off our debt from WWII.

Reducing our deficit spending requires us either to raise taxes, cut spending, or borrow (which includes creating) more money. If we raise taxes to cover the deficit, we will most likely force a recession or depression. We simply can’t take $1.3 trillion out of the private sector without imploding the economy. If we cut spending, we will most likely create a recession or depression, as we simply can’t cut $1.3 trillion of government spending overnight without imploding the economy. If we do both, we will most likely still have a recession or depression.

At the moment, Congress can’t agree what to do, so we continue to borrow and print money. An increasing national debt means higher borrowing costs (interest). This means we need more revenues (from taxes or creating more money) to continue to fund Social Security, Medicare, welfare programs, infrastructure, and national defense. Creating (printing) money can lead to rising inflation, though it doesn’t automatically do so, as Japan has demonstrated for 20 years. This results in the devaluation of our global purchasing power, meaning the cost of everything we buy from other countries increases. It’s clear that the most appealing option to politicians and most economists is to continue to borrow and inflate.

No matter how you cut and paste these options, one result is the same. Americans’ lifestyles will contract. This will come either from less government support and services, less spendable income via higher taxes, or an erosion of purchasing power from a declining dollar.

This is the last message most Americans want to hear. The attitude is like that of the overspender who recently asked me, “How can I cut my expenses but maintain my current lifestyle?”

The most honest answer is, “Sorry, but it can’t be done.” True, it’s possible to find creative ways to keep the parts of your lifestyle that matter the most. However, reducing expenses almost always means a lifestyle reduction. This is one reason so many people resist budgeting.

For most people, budgeting means reducing spending, even though that isn’t inherently what budgeting is. In its purest form, it is becoming aware of our current spending patterns and redirecting income to the areas of spending that will best support our desired lifestyle. The more our income shrinks, the more crucial it becomes to redirect it carefully and consciously.

In other words, if we have to settle for a smaller piece of pie, we’d better make sure we’re buying the kind of pie we really want.

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4 Responses to A Smaller Piece of American Pie

  1. Joe Michaels August 6, 2012 at 11:14 am #

    I think Adam Smith’s Wealth of Nations and many economists since would tell us that government spending is not good or bad; it depends on what they spend the money on. It is certainly appropriate for a government to borrow money to build a bridge and then pay that debt off over the life of the bridge. If people benefit from that bridge, the benefit to the community would exceed the cost of the debt service. Borrowing money to pay for and win World War Two may have been one of the reasons we won that war. Germany could not sell bonds so they printed money, inflated and destroyed their currency which many economists believe is one of the reasons Germany lost the war.

    Zero government spending (and government debt) is clearly the wrong number. We need roads, police, national security, etc. The government spending of this administration is not effective. This administration has spent massive amounts of government money picking winners among public and private companies. This “move the cheese and you’ll move the mouse” manipulation of the economy has destroyed Americans’ ability to plan. People just don’t feel good about the future because they don’t know where the government will put the cheese next with their big spending in the private sector.

    Excessive government regulations have the same effect. It is a violation of Federal law to sell a shower head that has a flow rate greater than 2.5 gallons per minute. Is this the proper role of the Federal government? Just like misplaced government spending, it doesn’t work. A plumber I spoke to last week told me that people are installing two 2.5 gpm shower heads in their showers.

    The good news is that the free enterprise system will survive and prosper anyway. People are continuing to invent new technology. There are some great inventions in America’s pipeline. Technology solved our problems in the 70’s. New technology can and will increase our standard of living.

    A daughter, her mother, her grandmother, and her great grandmother were asked to name the most important invention. The daughter said the microwave oven; the mother said the electric can opener; the grandmother said the refrigerator; and the great grandmother said running water.

  2. Joe Michaels August 6, 2012 at 12:49 pm #

    I think Adam Smith’s Wealth of Nations and many economists since would tell us that government spending is not good or bad; it depends on what they spend the money on. It is certainly appropriate for a government to borrow money to build a bridge and then pay that debt off over the life of the bridge. If people benefit from that bridge, the benefit to the community would exceed the cost of the debt service. Borrowing money to pay for and win World War II may have been one of the reasons we won that war. Germany could not sell bonds so they printed money, inflated and destroyed their currency, which many economists believe is one of the reasons Germany lost the war.

    Zero government spending (and government debt) is clearly the wrong number. We need roads, police, national security, etc. But the government spending of this administration is not effective. As an example, this administration has spent massive amounts of government money picking winners among public and private companies. This “move the cheese and you’ll move the mouse” manipulation of the economy has destroyed Americans’ ability to plan. People just don’t feel good about the future because they don’t know where the government will put the cheese next with their big spending in the private sector.

    Excessive government regulations have the same effect. It is a violation of Federal law to sell a shower head that has a flow rate greater than 2.5 gallons per minute. Is this the proper role of the Federal government? Just like misplaced government spending, it doesn’t work. A plumber I spoke to last week who told me about this 2.5 gpm Federal law, also told me that people are installing two 2.5 gpm shower heads in their showers.

    The good news is that the free enterprise system will survive and prosper anyway. People are continuing to invent new technology. There are some great inventions in America’s pipeline. Technology solved our problems in the 70’s. New technology can and will increase our standard of living today and in the future.

    A daughter, her mother, her grandmother, and her great grandmother were asked to name the most important invention. The daughter’s response was the microwave oven; the mother’s, the electric can opener; the grandmother’s, the refrigerator; and the great grandmother’s, running water.

    I suggest that you not be so pessimistic when talking to clients.

  3. Rick Kahler August 6, 2012 at 11:46 pm #

    Thanks, Joe, great comments.

    One of the points of my article is that Americans pretty much want “happy talk” when it comes to the current financial crisis…or anything financially related, actually. Few in politics or the financial press are being truthful because to do so would be to unlease the ire of those who want “happy talk.”

    If you were to poll my clients, they certainly would not accuse me of placating them with “happy talk”. Most have come to appreciate I call a spade a spade and they can trust me to be honest and forthright with them.

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