The Recession, Government Actiion and Consumer Stupidity

Just in case you're the type that isn't all that interested, and wants the bottom line now:
Take the financial activity of the entire country (not just the government), divided by the number of people... Each Person:
-- Makes about $3,826 per month (not bad)
-- Spends about $4,315 (not good)
-- Borrows $488 every month to make up the difference
-- Owes $110,527 so far, and is only making the minimum payments........


This all started with a status update I made during my Econ class:

"According to modern macroeconomic (Keynesian) principles, the real reason behind a recession is that people lose confidence. Why? No one knows... Everyone just wakes one day and decides they're not going to the mall, the stores freak out and call the warehouses to stop orders, the warehouses call the factories to stop production, and the factory fires everyone, so that they can't go to the mall the next day..."

To which Mike (Student of Literature at UCLA) commented:
"According to modern macroeconomics (Keynesian), we need 2 build "a big thing." I don't care what it is it just needs 2 be big. So, that we could employ others 2 work for "it." That would stimulate the economy. I would tell you the specifics, but it's hard to learn economics when you take Econ 101 at 8 in the morning.

To which I replied:
"lol... Can it be a big university? Probly not I guess... What about a big war? Or is that how we got here in the first place?(!)"

Josh (Student of Engineering at PCC and my little Bro) said something silly, Enrique (Entrepe-tographer in the IE) called it a self-fulfilling prophecy, and Mike suggested a war on guns (though the war on drugs, war on poverty, and war on terror didn't really work that well....)

Then things got interesting when Alex (Caltech Alumni and Mad-Mathematician) contributed:
"The problem with trying to spend our way out of a recession is that you have to pay it back eventually. What we don't need is the gov't owning all our businesses, and telling them what to do based on politics, instead of profit. A la GM - let's make small cars no one wants. I'm very sad about the debt burden this administration is bringing to my children. BTW, people lost confidence because their home prices started falling - they were inflated to begin with. But, I remember 2006 & early '07 all the chatter about how owning a home is the way to make real money - and you're a fool to not own. Once it became clear those gains were imaginary, people stopped spending the money they had previously spent by borrowing from the home's equity."

And now for Round 2:

Alex's comment is sage, since it reveals the demon in the closet of our current and long term financial situation in America: Debt, and what Alex so poignantly called "Imaginary" gains. Let's put this problem in it's proper prospective:

According to Federal Reserve documents, the total of everything produced in the US (Gross Domestic Product; GDP) was 3 Trillion dollars in 1982. There isn't even a universal term for the total of all debts, but let's call it GDD: Gross Domestic Debt. Guess how much it was in 1982: about 4 Trillion. So in 1982, 230 million Americans were producing at a rate of about $17k a year (not too shabby) but owed about $23K each - but that was 1982! In 2007 (Before the recession!) GDP was about 14 Trillion, but rather than the 133% of 1982, GDD shot up to 220%, or 31 Trillion... Spread out over the 306 Million Americans of 2007, this adds up to about $45,750 a year produced, and a total debt of $101,307.

To put this in further perspective, imagine earning $46k a year... After all is said and done (all necessary expenses...) you prabably have about $1000 a month to spend as you please... If you really pinch pennies, you have about $1500 a month of disposable income... Let's say you do the smart thing and pay ALL of that toward your debt (nobody here makes minimum payments... right?). Even if you pinch pennies and send all your spare cash in to your debtor every month, it will take you

Even with the recession beginning to bottom out, our GDP is still close to 14 trillion a year, but our aggregate debt, and more importantly our habit of outspending our budgets with operating deficits, makes our position more and more precarious. It will take you about 5 1/2 years to pay that debt off.

But don't forget the interest! Actually, at 5% interest (which takes a credit rating of 900 to get...) it actually takes 6 1/2 years.

Oh by the way, that also only works if you stop borrowing altogether...


Let's recap shall we:

In 1982, you made $17,000 a year, and owed $23,000 (like a CSULA graduate!), and in 2007 you make $46,000 a year, but owe $100,000 (Like a USC graduate!!)

What happened in those 25 years? You spent more than you earned...

You had an operating deficit.

A $3000 a year deficit.

Now what?

Well you have to make a choice, and like any choice, there are two extremes:

1) (Left Wing) Mortgage the house, and try a get rich quick scheme. Spend all your money on lottery tickets... "Invest" in some idea that will magically dispel your debt problems.
2) (Right Wing) Bite the bullet, tighten your belt, start living like an immigrant. Live on PB&J for 7 years, and incur no more new debt until your $100,000 is paid in full.

From between these two extremes you'll have to form some kind of plan... If you're like the average american, you will continue to take some risks, as well as keep plugging away at that debt... In 40 or 50 years, hopefully you'll have it all paid off, and enough saved up to leave the hard work to younger souls...

Let's be honest and admit that Democrats AND Republicans are pretty far to the right... I think Bush's strategy was to invest in Oil, the Military industrial complex and Entitlement. Obama is being a bit more Augustan (at leastsuperficially) and investing in infrastructure...

The problem that I see with these hopelessly Keynesian tactics is that BOTH administrations try to pay off debt with "Investment" which really just means more debt ("for our children to pay" as Fox News might put it...). I think the Ross Perots and Ron Pauls of the world suggest the opposite extreme, but I'm not sure that's even possible, let alone practical...

There are 307 Million People in the US.

Divided evenly, as of May 1st, 2009 each of those people:
-- Produces about $3,826 per month ($45,919 since the last year)
-- Spends about $4,315 ($51,781 since last year)
-- Borrows $488 every month to make up the difference ($5,862 since last year)
-- Owes $110,527 so far...

So....... Now What?

(Not that any of us has the power to do anything about it, but we have the power to make ourselves and our family financially "above average" by avoiding the popularly accepted model of comsumer stupidity)