Wednesday, January 7, 2009

Budget Deficit to hit $1.2 trillion. Are we stupid?

Mr. Dirksen, we salute you!

To modernize Everett Dirksen’s economic observation, “A trillion here, a trillion there, and pretty soon, you are talking real money.” Remember, however, that he was talking about “a million” here and there.

Some people have little idea how to actually picture a trillion dollars. It’s a million millions. So imagine a city of a million millionaires. While that sounds like a dream, consider that reality has a price associated with it. Someone, or a lot of someones, actually, had to empty the pennies of their pocket to make someone else a millionaire.

Remember the old monetary axiom: “easy come, easy go?” Right now, a lot of the millionaires that made an easy million have already lost it. That easy money is drying up faster than water in the desert. And with it is also going a lot of the hard-earned cash too.

Hard Numbers

The U.S. government will have a shortfall of $1.186 trillion dollars in the 2009 fiscal year. Fiscal year 2010, which begins in October 2009, will also have a shortfall, of an estimated $703 billion.

However, this lower figure does not take into consideration emergency funding for natural or economic disasters, or unplanned security and defense spending due to international events.

The U.S. government’s debt at the beginning of the Bush administration was $5.7 trillion. It will now stand at $10.6 trillion.

By the numbers above, it is clearly rising towards $12 trillion.

That stands in stark comparison to the estimated U.S. Gross Domestic Product of $14.334 trillion, and a Federal budget receipts (income) of $2.66 trillion.

A More Personal Weight of Debt

If the U.S. federal government’s budget revenues of $2.66 trillion were shrunk down to the typical U.S. household median income of $50,233, the current debt load would be felt like having a $200,000 loan hanging over you. The problem is actually only about half that bad in reality (which I will show later), but that’s how it would feel.

However, rather than paying down your loan every year, you got more debts. The U.S. deficit of $1.186 trillion, if that were reduced to a personal finance level, would be like paying off nothing but interest payments, and then taking on another $22,400 debt on top of what you already owe. And then next year, planning on taking on another $13,275.

The October 2008 per capita debt estimate (for every infant born, every child, every young adult, every adult and every senior) was $31,700 (Source: Wikipedia). That’s bad enough. Yet by FY2010, the U.S. federal budget will be $12.489 trillion in debt. Distributed amongst the projected population of 308.9 million in that year, that would be a per capita debt load of $40,425.

Distributed amongst the roughly 116 million households of the United States, the average household debt burden of the United States government in 2010 will be about $107,000.

In other words, to afford to pay off the U.S. government debt at the present time would require, from every household in the nation, the equivalent of selling off your home or taking out a small mortgage.

How Much Money Do We Got?

Another way to look at this issue of debt in terms of scale is that the money supply. If a waiter brings you a bill, you look at the money you have in your wallet. How much is in it?

The M2, which combines all cash, checking, savings accounts, CDs up to $100k, and money market accounts, only totals around $7 trillion. That is the rough amount of money in the hands of citizens around the nation.

Once the amount of currency you have to redeem in an economy is less than the amount that you theoretically owe, you are in trouble.

A key issue of ecomonic policy not being addressed is: where is the money these days, and who is holding onto it?

For instance, the M2 is not entirely complete. There is more money. In the M3, which measures a broader index. Plus in the stock and commodities markets. Yet this broadens the definition of who bears the burden of our national economy to include institutions and businesses.

Yet the Federal Reserve ceased tracking the M3 during the Bush administration. Tracking of this broader index, which measured more institutional money supplies, as well as eurodollars and repurchase agreements, was halted in 2006. This index measured the accounts used to meet monetary demands of the economy. The Federal Reserve cited the cost to gather the information, and that the data was not very useful.

Though this was often left for policy wonks, arguments against increase of the M3 as a percentage of the economy, and concern over the tracking of the M3 built up over time. Stopping the monitoring of the M3 alarmed many. Because the M3 focused on visibility of the total, actual money supply. An example of the early alarms include Guy M. Lerner’s 2004 article, ”M3 Money Supply: Support of a Different Kind.” For an example of the more recent criticism of the lack of tracking of the M3, see Jerry Mazza’s 2008 article, “Follow the M3 to hell.

Once these institutional investments were not tracked, the total money supply could not be really understood. If the M3 can be increased without being monitored, it could depreciate the money supply without oversight.

Since the Federal Reserve Board ceased tracking M3, private organizations have attempted to maintain a watchful eye on the M3. shows the bubble of growth in M3 during 2007-2008 after the Fed took their eye off the index:

Chart of U.S. Money Supply Growth

As you can see, physical currency (cash) is rising incredibly fast in the latter half of 2008 (what is known as M0), while the spike in M3 is slowing. Note that the M3 is stil growing. Just not as fast. And it peaked in growth 2007-2008, no sooner than the Fed took its official eye off the ball.

The housing bubble, combined with the oil price shock, definitely took the wind out of the sails of the economy.

Ride the Wave from Micro to Macro Scale

Just as the world seems to wash over us individually, there are theories that these situations, on a macroeconomic scale, follow their own patterns of behavior. These long-term economic, social, technological and political cycles are called Kondratiev waves. Study of such waves, if they exist, and if scientifically analyzed, would fall under systems theory, game theory, and cybernetics.

One of the truths of scientific observation is that when something is studied, it changes behavior. Even if it is not aware of being studied, the fact that it is being observed changes the operations of the universe. Things that could have gone unnoticed now are salient to the senses of the observer. The very fact that there is an attention being paid to the subject changes the subject. The subject might not know or care. Or perceptibly know or care. According to other theories, including some more spiritual than scientific, the fact that you are watching a subject, or that some divine entity is watching, alters the outcome of the universe.

Yet if a system is aware, or becomes aware, it is being studied, it behaves quite differently. This is fundamental to cybernetics, which requires a system to have cognizance of feedback to its environment, as well as its own behavior or performance. Don’t you act differently when you know someone is staring at you? Don’t you act differently when you know no one is watching? Well, the world, and the human populace thereof, act the same way. It, and we, become more self-conscious when studied. We can ignore our own behavior when left to our own devices. Yet when someone else watches us, generally we act on that truth. Our own internal feedback is amplified when someone else is present. Or at least, it should be.

Stupidity Theory Meets The World!

One of my favorite theories to arise in recent years is stupidity theory. James F. Welles generic black-and-white little book, Understanding Stupidity, was released a few decades ago, in 1986. You can read the book online these days. Yet while it is book-length, the basic premise and summation of the book is simple:
...within the microcosm of each particular cultural group, the self-deceptive language/perception complex, a social commitment to norms and pressure toward groupthink all can contribute via the neurotic paradox to setting up a positive feedback system which carries a given learning pattern to self-defeating excess. Contrary to prevailing Darwinian dogma, this normal learning mechanism can render human behavior maladaptive, with different groups of people and individuals commonly vying and dying to display their own particular form of the general phenomenon we call stupidity. Resultant behavior is properly termed stupid when it is justly construed as failing according to and because of the ends (purposes) and/or means (methods and morality) of the reference group.

(Author’s emphasis maintained.)

Welles does not maintain that all behaviors that lead to failure exhibited by humans as stupid, “just those which betray a compromise commitment to perceptual accuracy and social integrity by going to an unnecessary extreme.”

In terms of our economy, the frenetic drive the U.S. and other nations around the world exhibit simply to maintain the perception that our economy is growing, healthy, and stable would be the fundamental root of our stupidity. For the longer we maintained the illusions of a prosperous economy, all-the-while fueled on a ballooning federal and personal debt load, the more painful the eventual acknowledgment of the reality of our situation.

The cure for stupidity is to admit the truth, face failures, to step back from the worst of our failures, and to establish plans for a new, more sustainable and healthy future.

We are in an unprecedented level of public and personal debt on a global basis. There is no model that mirrors what state we are in, for never before have there been 6.7 billion people on the planet owing this level of money to each other in a complex system of credits and obligations. We cannot go back, in the U.S., to our Founding Fathers, because they did not face the same problems we face. While we can look to the past for inspiration and for prudence in times of crises, in the 21st Century, we must chart our own future, and posit a method to maintain a sustainable national and world economy.

The height of stupidity is to not change behavior, even when people are studying you. Staring at you. Asking you questions. Telling you that this behavior is in your own worst interest.

We must, as a society, ask ourselves if we are being collectively stupid. An increasing number of us cannot afford education. Healthcare. Housing. Yet the entertainment and luxury goods markets of our nation continue to expand their offerings, to the distraction of fundamental elements of life-and-death, personal nourishment and the global environment, social ethics, and economic solvency. If so, what can we do to smarten up?

How can we “live lean” in the next few years to bring down our ballooning debt? Or how can we “earn more” or “value better” what we do so that we feel adequately recognized and are not squabbling over diminishing pie crumbs?

We will either face this with creative solutions, or reap the whirlwind. Or, as usual, muddle through as a collective species doing quite a bit of both.

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