Wednesday, July 20, 2011

The economic cliff Part II

Our economy was built on the principal that in order to built wealth; capital from profit is re-invested. Just like the way that an individual can become ‘rich’. Spend less than you make and invest the rest in assets that go up in value. Successful companies are able to re-invest, ones that fail cannot. How well this concept worked was seen as our country prospered like none ever did before. And we impacted the entire world with positive CHANGE. We are not doing this today. Through taxation, our government is limiting the ability of companies to perform this vital function. The money drawn from companies through taxes is spent on much lower productive endeavors. (Entitlements are the worst offender, being paid to not do any productive activity) In addition, the higher cost of doing business has encouraged capital into moving out of our country, a process that has been going on for decades. What is a bigger problem is that our government debt is being sold overseas. This capital outflow is more easily controlled than that which is privately owned. Yet this outflow of debt is continuing to accelerate. Interest on this debt is spiraling out of control.

Think of your mortgage. During the first few years of payment, the principal is paid off at a VERY slow rate. Most of the payment is interest. The last few years are almost entirely of capital re-payment. This is the basic economic theory that our country ran upon until the mid-20th century. Since then, the United States has been spending more than it takes in. (Reversing the mortgage, if you will) Taking your mortgage example, you now lose your job. Now you don’t make enough to maintain the house, let alone feed everyone. How long could you maintain this, even if your home was completely paid off?

You would borrow against the value of your home. As time went on, the interest on your debt would become so high that you could not even make payments on the interest, leave alone the re-payment of the capital that you have borrowed. You no longer own the house you live in. This is close to where we are today. And we have enough people in our country in denial to prevent a valid solution.

When I was in high school (1972-1976) my father had told me not to expect anything from Social Security. It would be broke by the time I reached that age. The financial problems were well known even then. In the 1980’s, the Republicans attempted to at least slow the problem down with some fixes. The population of the United States said very loudly: ‘NO!’ The attempt was made again in the early 2000’s but the Republicans got the same answer from the population of the United States. We want our entitlements, even if our financial future is in jeopardy.

Back in 1992, I was working for a bank when the lower levels in Chicago flooded. Our building had water fountains that were unusable for 6 months. During that time, the company inserted water bottles to supply fresh drinking water. After the city water was declared safe to drink, the company removed the bottles. Uproar resulted. At a meeting to discuss this issue, the company said that the 3 buildings that it maintained cost $180,000 a year to supply water in the bottles over what the city water cost. So if the bottles were maintained, they would have to lay off some staff to cover the cost. Out of 40-50 professionals (We were NOT union, we were computer programmers and analysts with college degrees) I was the only person who did not raise my hand to vote for keeping the bottled water. I asked several people later why they voted the way that they did. The reply was: “I don’t believe them.”


Companies have gone bankrupt because a union that represented the workers did not believe the financial trouble was as bad as the management believed. When unions do give in, it is because they finally understand the financial trouble the company is in. Many times, even then what they do is very reluctantly done. The very minimum. This is the same attitude that I see in the Democrat party (And the American public in general) concerning the financial trouble our country is in today. For the most part, a complete misunderstanding of the position we are in and even if understood, a lack of agreement with what it would take to reverse the process. Hence an economic cliff.

1 comment:


    One of the funniest things I have read in a long time. Sad but true.