The Federal Budget Problem as a Family Budget Problem

$14.5 trillion of debt.  $1.6 trillion deficit.  $65 trillion in unfunded liabilities.  Without a calculator and a CPA, many people can get lost in the numbers.  It all becomes meaningless.  Many people don’t understand just how big the Federal Budget problem is.  Few can relate to hundreds of hundreds of billions and trillions of dollars.  There is a disconnect.  

To help make the Federal Budget easier to understand, we are going to put it into terms most people can understand – a family budget.  We are going to do it by simply moving the decimal points over on key data.  The ratios all stay the same and this will give you a better idea of the scope of the budget problem.  On the left are the actual Federal Budget numbers from the Congressional Budget Office and the Federal Reserve, on the right is our Hypothetical Family budget.  

                                                          Federal Govt                    Hypothetical Family    
Annual Income                              $2,228,000,000,000.00                       $22,280.00    
Annual Spending                           $3,708,000,000,000.00                       $37,080.00   

Total Debt                                   $14,593,540,000,000.00                     $145,935.00   

Needed Credit Line Increase           $2,500,000,000,000.00                       $25,000.00    

Our Hypothetical Family has a problem.  They have only $22,280 annual income, yet are spending $37,080/yr.  They have been living well beyond their means by filling up every credit card they could get their hands on.  It is obvious they have a spending problem.  Families across America know the importance of living within your means.  But our Hypothetical family doesn’t get it.  

Thanks to their overspending, they are $145,935.00 in debt.  They have gone to the bank and are asking for a $25,000 increase in their credit limit, which is more than their entire year’s income.  What banker in his right mind would give them any increase in their credit limit?  To approve an increase, do you think the banker would want to see a plan to just reduce their annual deficit or a plan to reduce their total debt through annual surpluses?  Of course the bank wants to see a plan that will reduce their total debt load, before they will lend them any more money.  

The Hypothetical Family tells the banker that they have a plan to reduce their annual deficits over the next 10 years by $40,000.   The banker is unimpressed.  

For one thing, the Hypothetical Family is adding to their total debt to the tune of about $9,470/yr.  That’s $94,700 over the next 10 years.  They are trying to pull a fast one on the banker, making him think that the “deficit reduction” is actually a reduction in their total debt.  In fact, they will be increasing their debt by an additional $54,700 over the next 10 years, only if they are able to reduce spending and increase income by $40,000 over the next 10 years.  

Talk of “deficit reduction” is not the same as debt reduction.  When it is talked about in totals over a number of years, that number has to be divided by the number of years to find out the average annual deficit reduction.  In the case of the Hypothetical Family, their $40,000 of “deficit reduction” only comes to $4,000/yr.  They will still be running a deficit of $5,470/year which gets added to their total debt each year.  
Projected 10yr Deficit Total          Federal Govt                    Hypothetical Family
pre-Debt Ceiling Deal               -$9,470,000,000,000.00                    -$94,700.00
Deficit Reduction Plan             -$4,000,000,000,000.00                    -$40,000.00    
Remaining Deficit Total            -$5,470,000,000,000.00                    -$54,700.00    

Here’s the rest of the story.
They have gone to the bank before with plans to reduce their deficit but failed to do so, once they got their credit limit increase.  In fact, their annual deficits were much higher than projected, forcing them to use up their credit line increase much faster.  The banker would really be a fool to get duped by them again.  

That is exactly what has happened with Washington’s estimated deficits in the past.  Prior to 2009, the White House projected a Budget Deficit of $407 billion.  The actual deficit came in at $1.41 trillion.  Their estimate was only a trillion dollars off.  Prior to 2010, their deficit estimate for 2010 was $160 billion, but came in at $1.29 trillion.  A miss of $1.1 trillion.  The 2011 deficit estimate was $95 billion.  It now looks like it is coming in at $1.64 trillion.  A miss of $1.5 trillion.  

I don’t want to sound cynical here, but who in the world still believes Washington’s hucksters?  They have proven that their deficit projections are usually way too optimistic.  So why should we believe them now when they say they are going to reduce the budget by $4 trillion over the next 10 years?  They were off by over $3 trillion in just the past 3 years.  

If the Debt Ceiling is increased, and a Deficit Reduction Plan is put in place, there will probably be a sigh of relief in the markets.  Unfortunately, it will be business as usual for Washington and the promises they made to learn from their mistakes will have been forgotten just as quickly as it takes to go back to their respective districts and promise the voters tons of pork to get themselves re-elected.  

Risks continue to rise and unfortunately, Washington’s credibility when it comes to budget projects and controlling spending should be questioned.  This is why we firmly believe that even with an increase in the Debt Ceiling and a Budget Reduction deal of $4 trillion, the ratings agencies should have no choice but to lower the rating on US debt.  

The rising risks and lowered rating should combine to produce a much more dangerous bond market which can impact the muni bond market, corporate bond markets, banks and insurance companies.  And forget about a significant rebound in real estate.  

Until the US Government learns to live within its means, we are going to have budget problems.  Outside influences, such as a lowered bond rating, fed-up foreign investors and/or a loss of reserve status for the Dollar may conspire to force the US into an ugly austerity program such as what Greece is facing today. 

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