Tag Archive | economy

The National Debt: The United States Government is NOT a Household

USDebtI keep seeing this around the internet:

This puts the U.S. national debt in perspective:

• U.S. tax revenue: $2,170,000,000,000
• Federal budget: $3,820,000,000,000
• Current deficit: $1,650,000,000,000
• National debt: $14,271,000,000,000
• Budget cuts: $38,500,000,000

Now, let’s remove 8 zeros and pretend it’s a household budget:

• Annual family income: $21,700
• Money the family spent: $38,200
• Additional charges on the credit card: $16,500
• Current credit-card balance: $142,710
• Budget cuts: $385

The trouble is, this doesn’t put the US national debt in perspective at all. In fact, it’s completely uninformed.

Though it is tempting to do so, the economics of the United States Government (or any government) cannot be compared to a private household.

First, a household in this example would owe money to an external credit card company. US debt is actually principally held by domestic entities. As of 2011, 47 percent of the US debt was held by foreign sources, who also happen to be our major trading partners (Japan, China and the UK).

So, according to this analogy, more than $75,000 or this household’s debt would not be to credit card companies, but actually to household members themselves. The remaining $67,000 would be owed to family members (outside the home), local businesses, good friends and neighbors, who depend on the household’s continued support.

This would be akin to a situation where household family members pool money from their own savings to purchase a new family car, and expect that money to be paid back into the pool at some later date at interest. Not many households would do this, making the analogy even more useless.

Second, the interest rates on credit cards are typically between 7 and 36 percent in the United States. The United States Government can currently borrow money for a fraction of a percent, meaning that, with inflation, lenders are paying the US government to hang on to their money. Over time, the US government will pay back less than it originally borrowed. Some people freaking out over the debt don’t seem to notice that the world still seems ready to invest in the US. Despite low returns, lending money to the US is a safe bet. I’m not aware of many households which have credit cards that allow money losing interest rates for very long.

Third, the US government has the luxury of being able to print money. Government debt is held in dollars. If any of you know of a household that has its own legal currency press, let me know.

The US could theoretically, print a boat load of dollars, and pay back the entire debt in a day. Granted, worldwide economic calamity would ensue if done in a day, but it is practically possible in small increments.

Be aware, countries do this. One of the reasons that Spain is hurting so bad in the European economic zone is that, using the Euro, it can no longer devalue its currency (through an injection of newly printed money) to pay down its debt.

I don’t think I have to point out that a household can’t do this.

Fourth, the assets of the US Government are vast. Estimated at approximately $200 trillion dollars, the tangible and intangible assets of the US are nearly 15 times the GDP of the entire country. One of the reasons that people are happy to loan the US money despite low returns is the security of the investment. In a bind, the US can certainly print money (an asset in itself), but can also start selling land, arms, contracts or anything else it possesses.

There’s a reason that the US has an easier time raising money than a cash strapped country like Malawi. Its assets far outstrip its debt. In fact, the national debt, at $11 trillion only a fraction of its total assets.

Face it, if you had $2 million dollars in assets, faced an income shortfall and financial obligations, and somebody came to you and offered to lend you $110,000 at a rate which meant that you would pay back less than what you initially borrowed, you’d be a complete idiot not to take it. Unfortunately, most households don’t have this option.

Finally, the US Government has what most households don’t have: certainty. The US government, though indebted, has the strongest economy on the planet behind it and faces no retirement. We can hem and haw about China, but the truth is that China’s economy is much less certain than that of the US since, lacking a strong domestic economy, it relies too heavily on exports and is insufficiently diversified.

I can’t speak to the relative merits or demerits of the level of debt and debt trajectories, but the truth is that the national debt following the worst economic crisis since the depression should be expected to rise. It still has not reached the levels of debt which followed WWII and we have a much stronger economy now than then.

These ridiculous comparisons of the US economy to a poorly managed household have to go. They are fine for fun political comedy, but too reductive to foster any real discussion.

Today’s Readings 1.1.2013

1. 2012 in Charts, Congressional polarization, health care spending quickens, median incomes decline (NYT)
2. De-worming medication may kill biting bed bugs (NYT)
3. A writer claims that US Universities’ research output is useless by producing an example from Shakespeare (Bloomberg)
4. Stock returns grow in 2012, bond returns are unchanged, but isn’t that what bonds are supposed to do? (Bloomberg)
5. Why we drink champagne on new years (Bloomberg)
6. Gaijin language teachers sustain an 11 month strike and (amazingly) win (Japan Times)
7. Why capitalism is moving away from the market stifling, paternalistic conservatism(NYT)

Today’s Reading

1. Federal deficits and surpluses are driven by financial markets through rising inequality (NYT)
2. Mali’s first female Mayor appeals to the US for help to abate a worsening situation (NYT)
3. The Central African Republic may soon cease to exist (NYT)
4. The year in charts – emerging market growth flattens (Economist)
5. Business obstructs local high speed networks, and US government refuses to pony up pennies to give every American world class access (Bloomberg)
6. Short history of public sector labor unions (conservative analysis but interesting) (Bloomberg)
7. US becomes major gas exporter (Bloomberg)
8. Who are the exemplary African armies? (Africa Report)
9. Investing lessons of 2012, uncertainty is the new certainty (The Reformed Broker)
10. Extremism on the rise in Zanzibar (Financial Times)
11. Tanzanian reality TV teaches people to farm (Economist)

Thoughts on WalMart, America’s Ectoparasite

An ectoparasite is an organism which lives on the exterior of a host’s body, completely dependent up the host for nourishment. WalMart (like corn) is such an organism.

WalMart is one of the world’s most profitable companies. It sells household goods at competitively low prices, while at the same time doling out 20% of its massive earnings to stockholders. It is able to do this by 1) offering bottom of the barrel wages for workers 2) outsourcing manufacturing to China, for basement level prices and 3) lobbying to manipulate government programs and the tax code to enable its business model.

As discussions of walkouts and strikes by WalMart workers rages, WalMart’s stock is doing better than ever.

WalMart’s low wages are, of course, part of it’s business model. Customers go to WalMart to buy goods at low prices. WalMart employees are poorly paid and recieve 10% off of purchases at WalMart, meaning that their wages are simply fed back into the company, creating an awful vicious cycle that cripples local economies.

WalMart depresses wages. Opening a single WalMart can depress the average wage in a county by up to 1%. This effect, of course, is additive. According to a U Berkeley study in 2000:

With an average of 50 Wal-Mart stores per state, the average wages for retail workers were 10 percent lower, and their job-based health coverage rate was 5 percentage points less than they would have been without Wal-Mart’s presence.

Wages in 2012 are even lower. If we repeated the study, we might find that the situation now is even worse.

Besides the more than $1 billion in real tax subsidies that support the opening of new WalMart stores, the federal government picks up the tab for benefits in the form of EBT payments and Medicaid.

One oft repeated right wing mantra is that WalMart workers choose to work there. What happens to them is their own fault. As the entry of WalMart devastates the local business community in rural areas, there really aren’t many jobs to “choose” from anymore. I’ve been through plenty of rural towns where the only employer is WalMart.

The opening of a WalMart has also been shown to increase poverty. Increases in poverty are, in the end, merely shifts of capital, which could go to education or small business ventures, from the group of the bottom to the top.

WalMart bleeds communities dry through schemes that minimize its property tax burden:

This first-ever investigation of Wal-Mart’s local property tax records finds that the retail giant systematically seeks to minimize its payment of taxes that support public schools and other vital local government services. Online appendices with lists of stores and distribution centers examined.

The moral of the story is that local businesses can’t compete, potential entrepreneurs lack capital to start businesses and localities are bled dry of resources to support community investment.

After reading this post, I found that I didn’t develop the idea of WalMart as blood sucking parasite very well, but it’s there anyway.

Wal Mart Stock, Nov 25, 2012

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