Economic Update: 4/22/11

How to Explain the Current Economic Situation to Friends & Family

Sunday, March 22, 2011, 4:46 pm, by James B. Driscoll

Given its simple elegance in addressing a question frequently asked on this site, this post has been elevated from the forums section. It has been updated by site members driscoll and smith since its first appearance (the original post can be read ).

I've been working on a way to get across to friends and family how bad the economic situation has become. I find one of the biggest problems is that when numbers are in the billions and trillions they are very hard to imagine, and people get this glazed/deer in the headlights look. So I decided to try to scale the numbers in a way that can be more easily visualized. 

Below is an updated version, with many thanks to members of ChrisMartenson.com community who suggested changes/corrections, and particularly to Travlin for rewording much of the message to make it a better story. Hopefully this version will help convince others of the serious nature of the US fiscal outlook. 

My Troubled Relative 

I need your advice. I have a relative who is in financial trouble. He makes $50,000 a year, but he spent $74,591 last year, and his prospects of making $50,000 this year look kind of bad. There's a good chance he will get a pay cut.

Unfortunately, he’s been overspending for quite a while and has charged $295,632 on credit cards. He’s been lucky enough to get low teaser rates, and when those have expired, he’s been able to transfer the balances to other low-rate cards. So he keeps charging $24,591 per year beyond his income. If he can’t keep rolling over his debt at super low rates, the interest will quickly eat him up.

But, that's not his worst problem. He convinced his family he was a great investor. His parents gave him a portion of their income for many years, and he promised he would make regular payments to them and cover their medical care when they got too old to work. The problem is, he spent all the money. He also has dependents who are poor, and he promised to help them out, too. To cover those promises, he should have $2,372,953 sitting in a bank account earning an interest rate that keeps up with inflation. But the money is all gone.

So what should he do? Well, his Republican friends, who say they are responsible with money, have decided he must really cut spending to get things under control. There are lots of things he can live without, so they say he should reduce spending by $1,292 per year. His Democrat friends say that’s too much. They feel it would be a great hardship for him to cut spending that drastically, so reducing it by $137 should be about right.

So here’s the picture:

·         $50,000: Income

·         $74,591: Expenses

·         $24,591: Deficit

·         $295,632: Short-term revovling debt at artificially low rates

·         $2,372,632: Unfunded promises

·         $1,292: Republican friends budget cuts

·         $137: Democrat friends budget cuts

So, what does the future look like for my Uncle Sam? Do you think he can keep going like this much longer? What about his family who are counting on the promises he made to them? Do you see any possible solution other than bankruptcy? 

Multiply the above numbers by 47,620,000, and you get the fiscal picture for the United States Government in 2010:

·         $2.381 Trillion: Revenue

·         $3.552 Trillion: Budget

·         $1.171 Trillion: Deficit

·         $14.078 Trillion: Debt

·         $113 Trillion: Unfunded Liabilities (Social Security, Medicare, Medicaid)

·         $0.0615 Trillion ($61.5 Billion): Republican proposed budget cuts

·         $0.0065 Trillion ($6.5 Billion): Democrat  proposed budget cuts

Sincerely,

James B. Driscoll

God Bless America