Deficits, Debt and Interest on the Debt 1988-2012

Posted by PITHOCRATES - March 26th, 2013

History 101

Congress printed so much Money that the Continental Dollar became Worthless

The American Revolutionary War lasted eight years.  And eight years of war ain’t cheap.  It took money to buy arms.  It took money to buy uniforms.  It took money to pay soldiers.  And paying for these for eight years required a lot of money.  Which the Americans didn’t have.  They were at war with Great Britain.  Who was their major trading partner.  And pretty much their only trading partner.  As the Americans were a British colony in the days of mercantilism.  Which meant the Americans sent raw materials to the mother country.  On British ships.  Through British ports.  Britain then transformed those raw materials into finished goods.  And exported them.  On British ships.  Through British ports.  Throughout the world.  And back to America.  Before the Revolution, that is.

Thankfully for the Americans there was a nation that hated the British.  And had been in a near perpetual state of war with them since about forever.  And they had just recently lost their North American territories to the British.  Which they wanted back.  So the French had other interests than American Independence.  But American Independence was a good opportunity to settle the score with their old nemesis.  And when the Americans defeated a British Army at Saratoga the French thought that just maybe the Americans could pull this off.  And if so they wanted to be in on the spoils of a British defeat.

So the French financed a large part of the American Revolutionary War.  But it wasn’t enough.  The Continental Army was poorly fed and poorly clothed.  Even leaving bloody footprints in the snow as the Continental Congress couldn’t put boots on their feet.  Nor could they pay them.  So they turned to printing money.  Unleashing a brutal inflation.  No one wanted the currency.  The inflation was so bad that it lost its value before they could spend it.  So no one wanted to accept the Continental paper dollar.  Giving rise to the expression ‘not worth a Continental’.  Everything had two prices.  A low price if you paid with hard currency (gold and silver coins).  And a very high price if you paid in Continental dollars.  They printed so much money that the money became worthless.  So the Continental Army just took what they needed from the people to keep their men from starving to death.  Leaving the people with an IOU.  That Congress would redeem one day.  Maybe.

The Percentage of Tax Receipts going to Pay the Interest on the Debt has fallen as the Federal Debt Rose

Today hard currency is a thing of the past.  It’s pure un-backed paper these days.  This paper money has no intrinsic value.  And you can’t exchange it for gold or silver that does.  But you sure can print it.  Well, the government can.  And they do.  They borrow and print money like there’s no tomorrow.  Allowing them to spend money they don’t have easier than ever before.  And it’s not just for feeding and clothing our soldiers.  But just about everything under the sun.  Causing the federal debt to soar.

Think of the growing federal debt like a credit card with a growing balance.  And these balances grow fast because each month they charge you interest on your past purchases.  And on your past interest charges.  Which is why if you let that credit card balance get too high it’ll grow beyond your ability to pay it off.  A lot of people who do find themselves filing a personal bankruptcy.  Because the interest charges just balloon their monthly payment.  With the interest in their credit cards consuming an ever larger portion of their paycheck.  As should the interest on the federal debt consume an ever larger portion of federal tax receipts.

Debt and Interest as Percentage of Receipts

(Sources: A History of Debt In The United States; Interest Expense on the Debt Outstanding; Historical Amount of Revenue by Source)

Interestingly, the percentage of federal tax receipts going to pay the interest on the debt has in general fallen as the federal debt rose.  Odd.  The more debt one has the greater the interest one pays.  That’s how it works on our credit cards.  When the debt was approximately $6.2 trillion in 1991 the percentage of total tax receipts going to pay the interest on the debt was 27.1%.  But when the debt soared to $16.1 trillion in 2012 the percentage of tax receipts going to the interest on the debt fell to 15%.  The federal debt grew to be 2.6 times what it was in 1991.  Yet it appears we are paying less interest in 2012 than in 1991.  Something doesn’t seem right.

Interest Rates will Rise as the Purchasing Power of the Dollar Falls, Raising Prices and the Cost of Borrowing

A couple of things could explain this.  And the first thing that comes to mind is tax revenue.  The reason why interest on the debt as a percentage of tax receipts has fallen while the federal debt grew is, perhaps, that tax revenues grew even greater.  So even though interest on the debt could be soaring along with the soaring federal debt the government could be awash in tax revenue.  And if the number you’re dividing by is larger than the number you’re dividing into it than you get a smaller percentage.  Simple arithmetic.  The driver of the federal debt is the annual deficits.  So let’s compare interest on the debt to the deficit.  To see if the interest on the debt rises with the deficit.

Interest on the Debt and the Deficit

(Sources: Interest Expense on the Debt Outstanding; Table 1.1—SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS (–): 1789–2017)

And it doesn’t.  In fact, the interest on the debt almost held constant when the deficit plunged into a surplus.  And when the deficit soared to a record high.  It seems like there was some other factor involved here.  Something actually keeping the interest on the debt down.  Even when the deficit soared after 2007.  What could do this?  Well, there is only one other thing to look at.  Interest rates.

Interest on the Debt the Deficit 10 Year Treasury

(Sources: Interest Expense on the Debt Outstanding; Table 1.1—SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS (–): 1789–2017; Market yield on U.S. Treasury securities at 10-year constant maturity, quoted on investment basis)

And we have our answer.  Interest on the debt has not kept pace with the debt because of bad monetary policy.  Keynesian economic policies introduced permanent inflation into the economy.  The Keynesians in government kept interest rates artificially low to stimulate economic activity.  Those low interest rates stimulated so much economic activity in the Nineties that it created a dot-com bubble.  And when it burst it created a painful recession in the early 2000s.  Also, President Clinton’s Policy Statement on Discrimination in Lending lowered lending standards in the Nineties setting the stage for a great housing bubble that burst into the subprime mortgage crisis in 2007.  And the Great Recession.

The Keynesians have been increasing the money supply (i.e., printing money) in a desperate attempt to pull the economy out of recession.  Which is why the market yield on a 10-year treasury has fallen as the deficit soared in the early 2000s.  And fell even more as the deficit soared even further after 2007.  With the yield falling to as low as 1.8% in 2012.  Even though the demand for so much borrowing should have raised interest rates.  Which would have happened had the government not been increasing the money supply.

And this is why interest on the debt as a percentage of receipts has fallen.  Despite record debt.  Some may look at this and think it’s a good thing.  As it lets the government borrow more money.  So they can give us more stuff.  But printing money causes inflation.  Which has been kept at bay for now thanks in large part to the Eurozone sovereign debt crisis.  As investors everywhere are desperate to find a safe harbor for their money during these uncertain times.  But that won’t last forever.  Eventually those interest rates will rise as the purchasing power of the dollar falls.  Raising prices.  And the cost of borrowing.  A lot.  Because of that record debt.  And when they start selling new treasuries at higher interest rates than the ones they’re replacing a very large portion of our tax receipts will go to pay the interest on the debt.  Just like when people charge too much on their credit cards.  Pushing the country closer to bankruptcy.  Just like people with overextended credit cards.  And like countries in the Eurozone.

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Why the Deficit and the Debt Matter

Posted by PITHOCRATES - March 25th, 2013

Economics 101

Keynesian Economists say there is Nothing Wrong with Running a Deficit or a Growing National Debt

We had the sequester.  Before that it was the fiscal cliff.  Before that it was the debt ceiling debate.  We hear these things.  But it’s like water off a duck’s back.  It doesn’t sink in.  We hear but we don’t understand it.  In one ear and out the other.  In fact people are tired of hearing of how we go from one financial crisis to another.  Enough already the people say.  Enough.  Pity, really.  As there are some serious consequences to the decisions our politicians are poorly making.

Part of the problem is that these economic issues are difficult to relate to for average Americans just trying to take care of their families.  A trillion dollar deficit?  A debt reaching $16 trillion?  A lot of people don’t know the difference between the deficit and the debt.  Including many of our television news talking heads.  And then the sheer magnitude of the word ‘trillion’ is just difficult to fathom.  We know it’s big.  But no one uses it in their personal lives.  We know a $200 utility bill is expensive.  An $8,000 property tax bill is expensive.  A $40,000 car is expensive.  But a trillion dollar deficit?  It is hard to make a connection to the size of a trillion dollars.

Compounding the problem are all these Keynesian economists who say there is nothing wrong with running a deficit.  Or the growing national debt.  Despite the financial debt crisis in the Eurozone.  Where running a deficit and growing national debt have caused great problems.  But the Keynesians say that can never happen here.  Because our economy is so much larger.  And the U.S. can still print money.  So people don’t know what to believe.  The government and their economists sound like they understand this stuff.  While a lot of people don’t.  So the people who don’t are more inclined to believe those who sound like they understand this stuff.  Which makes it easier for the politicians who are making all of these horrible decisions to make even more of them.

Over time Interest Charges run up the Outstanding Balance on our Credit Cards

So to understand deficits and debt it would be better to bring it down to our level.  And once we understand it at our level then we can understand better what’s happening at the national level.  So let’s do that.  Let’s imagine a person earning $30,000 a year.  Or $2,500 monthly.  Let’s further assume this person’s earnings are not enough to support their lifestyle.  So they turn to their credit card each month for an additional $100 in spending.  Which is this person’s deficit.  The amount they spend over what they earn.  Or money they spend that they don’t have.  So they charge it.  For this example we’ll assume a credit card with a 24% annual percentage rate.  In the following table we crunch these numbers for 120 months.  Or ten years.

Personal Deficit Spending and Cummulative Debt R2

The columns in the table are fairly self explanatory.  Each month we start with $2,500.  We start borrowing money in month 1 so there is no interest in the first month.  We subtract the interest from the monthly income to arrive at income less the interest charge on the credit card.  Our spending budget each month is $2,600.  Requiring $100 in credit card purchases in the first month.  Each month this increases by the amount of interest charged each month.  The last column is a running total of the credit card balance.

Over time the interest charges run up the outstanding balance on the credit card.  Because we are paying interest on both our purchases and our interest.  So as time goes by this increases our credit card balance at an increasing rate. Soon the interest charges take a larger percentage of our monthly income.  So much so that we need to borrow more and more to maintain our current level of spending.  The interest charge on the 120th month equals 38% of our monthly income.  Chances are that it would never get this bad as we would be unable to make our monthly payment long before the 120th month.  And with an outstanding debt approaching our annual income we probably would have filed for bankruptcy protection long ago.  For at these interest rates it wouldn’t take long before that debt grew beyond our ability ever to pay it back.

Deficit and the Debt Matter because Income is Limited

We can see this better if we graph these numbers.  We can see the cumulative debt growing at a greater rate over time.  Just as does the percentage of our personal income going solely to paying the interest on our debt.  Truly wasted money.  Spending money for things we purchased long ago.  And if we spent it on restaurants and vacations we have nothing tangible to show for this.  Nothing we can sell to get our money back.  Just interest payments that seem to go on forever and ever.  For something that gave us a few hours or days of pleasure.  Which is the worst kind of debt to have.  As there is no way to pay it down other than with current earnings.  Meaning we have to make sacrifices today and tomorrow for spending we did long, long ago.

Personal Income Debt and Interest as Percent of Income R1

On the chart we have a horizontal line for monthly income.  And one for annual income.  We can see that it only takes 21 months for our credit card balance to exceed our monthly income.  Not even two years.  But only 1.9% of our monthly income is going to pay for interest on the debt.  Which doesn’t sound that bad.  So we keep charging.  Just after three years of doing this we break $100 in interest expense.  Requiring 4.2% of our earnings to go to pay the interest on the debt.  It only takes another 2 years to break $200 in interest expense (8.4% of earnings).  It only takes another year to bring the interest charge to $300 (12.3% of earnings).  In 99 months the interest charge breaks $600 (24% of earnings).  And the total outstanding credit card debt is now greater than our annual earnings. Making it very unlikely that we’ll ever be able to pay this balance down.

Anyone who charged a little too much on their credit cards knows what this feels like.  And what those phone calls from collection agencies are like.  Not good.  Anyone who charged anywhere near this example no doubt brought great stress into their lives.  They might have lost their house.  Their retirement savings.  Their kids’ college funds.  Or had no choice but to file a personal bankruptcy.  But when we run our debt up this high there comes a point where we cut up the credit cards.  Making a serious cut in our spending.  Because that’s all we can do.  We can’t just earn a lot more money.  And we can’t print money.  If we could do either we would not have a debt problem in the first place.

This is where average Americans and the federal government differ.  Average people have no choice but to be responsible.  While the federal government can allow the problem to grow and grow.  For they can arbitrarily raise their income.  By raising taxes.  And they can print money.  Unfortunately for average Americans both of these options make life worse for them.  Raising taxes makes us cut our personal spending as if we ran up our credit cards.  Forcing us to get by on less.  And printing money causes inflation.  Raising prices.  Which, of course, forces us to get by on less.  This is why the deficit and the debt matter.  For income is limited.  Whether it’s ours.  Or the federal government’s.  And when you spend more than you have more money goes to paying interest on the debt.  Which is money pulled out of the economy and thrown away.  The ultimate cost of spending money you don’t have.  Money thrown away.  And, of course, potential bankruptcy.

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FUNDAMENTAL TRUTH #78: “It’s a dishonest politician that sneaks sneaky legislation into a bill.” -Old Pithy

Posted by PITHOCRATES - August 9th, 2011

The Devil is in the Details and the Sneakiness is in the Fine Print

You know what they say.  Buyer beware.  Because they’re out to get you with their sneaky advertising.  Which you need to read closely.  Because the devil is in the details.  And the sneakiness is in the fine print.  That print that no one reads.  Like credit cards that send you those checks. 

They may offer 0% interest for six months when you write yourself a check for $5,000.  Wow.  Sounds great.  But if you don’t pay that off in that 6 month period look out.  Through the miracle of compound interest, that $5,000 debt will grow.  And that growing starts the moment you cash that check.  Because in the fine print the credit card company notes that after the 6-month period they will begin charging interest at 27.24% APR.  Starting on day one of the 6-month period.

People may wonder how credit cards can make any money if they don’t charge interest.  Well that’s the secret of the zero-interest offers.  They don’t expect you to pay it off within in that 6-month period.  And the second that 6-month period ends they book $720.84 of interest income on that $5,000 they loaned you.  That’s a short-term loan that yields 14.42%.  And there ain’t any 6-month investment out there that can match this yield.  But it doesn’t end there.  The yields on the credit card loan will continue to grow.  If you owe that $5,000 for 1 year, that yield rises to 30.91%.  And instead of owing $5,000 you now owe $6,545.59.

A zero-interest offer seems to be good to be true.  That’s because they are too good to be true.  Which you’ll see when you read the fine print.  If you read the fine print.

You have to be Sneaky to get People to Agree to Things that will Hurt Them in the Long Run

Now it’s obvious why they do this.  Be sneaky.  Because they can make a lot of money by doing this.  And the more people that take them up on these zero-interest offers the more money they can make.  So they put the things that would sour most people on using these checks in the fine print.   In hopes few will read it.  And few do.

You see, you have to be sneaky to get people to agree to things that will hurt them in the long run.  You just can’t be honest.  They can’t tell you that this loan will cost you nothing at 11:59 PM on the last day of the 6-month period.  And that it will cost you $720.84 one minute later.  Worse, your minimum monthly payment will jump about $125 as they calculate this loan into your payment.  And compound interest will make that credit card balance swell like a beached whale to the point that you’ll never be able to pay it off. 

You’ll lose sleep as your minimum monthly payments grow.  You’ll struggle to get that balance to go down.  Of course it never will.  And the more those minimum payments grow the less money you have for groceries and gas.  So then you’ll start paying less than the minimum due so you can put food on the table and drive to work.  Then the collection calls start.  It’ll get to the point that your stomach turns every time you hear the phone ring.

So you can see why they put this kind of stuff into the fine print.  I mean, if they advertise that they are going to ruin your life, are you going to use one of those checks?  Probably not.

The Founding Fathers hated Democracy with a Passion

So you really have to be sneaky and devious to get people to voluntarily destroy their lives.  And speaking of politics, politicians are the worst.  For a credit card company may try to get as much money from you as possible.  But that’s just business.  And they don’t swear oaths to protect you.

Thomas Jefferson hated bankers and merchants.  Partly because he was forever in debt.  But mostly because they can buy themselves favors.  And the seller of favors is, of course, government.  Jefferson was a well read man.  He knew history.  And he saw how combining money and government led to bad things.  Corruption.  Patronage.  Privilege.  War.  Money gave government power to do its worse.  And allowed a ruling minority to oppress the people for personal gain.  Now even though America was founded on the principle that all men are created equal, Jefferson knew that money could, and would, change that.  This is one of the reasons why the nation’s capital was located on a swamp a long, long way from the nation’s financial center.  New York.

This is also a reason why the nation is a republic.  And not a democracy.  We have representative government.  Not direct participation.  For the Founding Fathers hated democracy with a passion.  Why?  Because all democracies fail.  Once the people learn they can vote themselves whatever they want.  That’s why the Founding Fathers put enlightened/educated representatives between the treasury and the people.  Who will be rational and logical.  And not give in to base desires.

But the Founding Fathers were a special breed.  Who came along at just the right time and place.  And they created something perfect as far as governments go.  But as they passed from memory, the ways of the Old World became hard to resist. 

You have to let Others Steal from the Treasury if You want to Steal from the Treasury

As the nation grew so did its tax base.  More people meant more tax revenue.  First through import tariffs.  Then the income tax.  And other various taxes.  A little bit of tax from a huge population meant a lot of money for politicians to play with.  And play they did.  With the power to control these vast sums of money, they played God.  Just as Jefferson warned.  Money and government created a ruling minority.  Or a Ruling Class.  Much like the Founding Fathers fought so long and hard to end in the New World.

Of course, people won’t willingly support a Ruling Class that oppresses them.  So they have to be sneaky.  And hide much of what they do from the general public.  By burying it deep in pages of legislation.  Pork barrel spending we call it.  To get a part of the population to support you by promising them free stuff.  Then you honor that pledge by attaching a rider to a bill to house and feed orphans, for example.  When the final bill gets passed into law not only do we house and feed orphans (which everyone supports), but we also shower select constituencies with federal dollars for their help in getting out the vote during the last election (which only those select constituencies support).

Of course you know how this plays out.  If you oppose the excess spending in this bill you hate orphans.  And who wants to be labeled an orphan hater?  Probably not many.  But chances are few will oppose it.  Because to get pork you have to give pork.  You have to let others steal from the treasury if you want to steal from the treasury.  And this is why representatives and senators vote to pass thousand page bills without reading them.  They know they’re full of shameless pork barrel spending.   But as long as they include their pork they don’t care.

Short-Term Gratification with Long-Term Consequences

Politicians are a lot like those credit card companies.  Promising great short-term gratification.  With long-term consequences that will be a bitch.  They both want our money.  The credit card companies want us to go on a spending orgy so they can book fat profits on the interest they charge us.  Politicians just want to go on a spending orgy with our money.

So who’s worse?  The politicians, of course.  They’re supposed to be looking out for us.  Besides, when the credit card companies are screwing us, at least we get to enjoy the ride before the crash.  Taxpayers don’t.  Because their money typically goes to people who don’t pay income taxes.  So they don’t get to enjoy the ride.  They just suffer the crash.

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FUNDAMENTAL TRUTH #72: “Moms are a lot like CEOs. Only with more responsibility, longer hours and less pay.” -Old Pithy

Posted by PITHOCRATES - June 28th, 2011

Thinking and Deciding

Boy, do people like to demonize CEOs.  I mean, they really hate them.  These chief executive officers.  Overpaid and underworked.  And then there are all those stock options.  Making them bazillionaires.  By increasing the value of the company to shareholders.  Without a whit of concern for the little guy on the factory floor doing the work.  It just isn’t fair.  Sitting in their plush offices.  Flying in their private planes.  Staying in 5-star hotels.  Living in mansions while vacationing on some island paradise that they might in fact own.  Living champagne and caviar lives.  For doing what?

Actually, for doing quite a lot.  Mostly thinking.  And deciding.  Making decisions that will impact every employee of the company.  Now.  And years into the future.  Decisions that will determine if there is even a future.  For a corporation is like a ship.  It is large.  Complex.  And has momentum.  It can’t turn on a dime.  One decision today could steer that ship into open waters for clear sailing.  Or into an iceberg. 

The world is a changing place.  Nothing is static.  Including the economy.  And consumer spending.  For the consumer can be a fickle person.  We know what they’re buying today.  But no one knows what they’ll be buying tomorrow.  And that’s the problem CEOs face.  The things they’re making today will sell tomorrow.  Or later.  In fact, factories they build today will make things that will sell years later.  So the decision to build that factory had better been a good one.  Based on some good market research.  Objective analysis.  With no personal prejudices involved.  Such as laughing at new innovation.  Saying there’s no way it will replace the current industry standard.  Such as a phone company not getting in to the cellular business because everyone will always have a landline into their house.  In fact, they’ll have a few.  One for their phone.  One for their fax machine.  And one for their dial-up modem.  “And what could ever change that?” said the fat-cat phone executive while chomping on a cigar.  Shortly before the board of directors fired him.

Pay not Commensurate with Responsibilities

Moms are lot like CEOs.  They, too, have to look long-term.  And it starts with choosing a husband.  When they are ready to settle down and raise a family.  And they’re not going to waste their time with men who don’t want to settle down.  Like Beyoncé says, “if you liked it then you shoulda put a ring on it” (Single Ladies).  It’s no longer about dating for fun.  It’s now about finding a life partner.  And women will choose carefully.  They’re looking for someone with a good job.  Someone who is responsible.  Someone they can trust.  Someone who is healthy and will sire healthy children.  Someone who is strong and self-confident.  Who can be both a provider and protector.  Perhaps someone who goes to church.  So they can bring their children up with strong morals.  They’ll start choosing their dates based on these criteria.  Then love can enter the equation.  Which it does.  And it’s often a deeper and more long-lasting love.  Because attraction is based on all of these things.  Not just physical appearance.

This decision is important to be a good mom.  Because it will affect the next 20+ years of her life.  And it will affect the lives of her children.  So she has to weigh a lot of things in making this decision.  Like a CEO’s vetting process choosing his or her officers.  Because it’s for the long haul.  She’ll work 7 days a week.  And must be available at all times of the day.  Even if she is sick.  Like a CEO.  Only NOT with pay commensurate with her responsibilities.  Unlike a CEO.  And those responsibilities include raising her children.  And managing the household.  While her husband works.  Old school.  Like Paula Cole says.  “I will raise the children if you pay all the bills” (Where have all the Cowboys Gone).

A CEO has a chief financial officer (CFO) to manage the finances.  Mom just wear another hat.  And manages the finances, too.  The husband works.  But he gives his wife the paycheck.  For although his earnings pay the bills, she writes the checks.  And balances the budget.  Which often take a little finesse.  Because there isn’t a lot of money in the beginning.  And raising children and owning a house can be very expensive.  So managing cash-flow becomes a fast learned skill.  Because groceries, school supplies, clothes, utilities, insurance, mortgage and taxes don’t all come due in pay periods equal to the amount of the paycheck.  Which means she has to put a little aside each pay period (like a sinking fund in corporate America) to pay the big things that come due at various times throughout the year.  Or tap her line of credit (i.e., credit card), making cuts in the monthly budget to service the new debt and pay down the high-interest loan as quickly as possible.  Oh, and she cooks and cleans, too.

“Are you wearing Clean Underwear?”

Some may belittle the classical housework of being a mom.  The cooking and cleaning.  But when raising children they can be the most important of her responsibilities.  Of all the animal kingdom, human offspring are the most helpless.  And they’re helpless for the longest time.  It takes 18 years before they leave the nest.  And they’re growing that whole time.  Fueling that growth with three meals a day.  Two if they buy lunch at school during the school year.  This is something a CEO doesn’t have to worry about with employees.  Being accountable for everything they eat or drink.  And not getting them sick in the process for food preparation is a dangerous business.  Especially when working with raw chicken.  So she’s health inspector.  And dietician.  Managing their growth with the family doctor.  Making sure they eat their vegetables.  Drink their milk.  Because it all matters.  To make sure their bones are strong and healthy.  And to have strong immune systems.  For the old maxim is true.  We are what we eat.  Which is a challenge for a mother.  Because kids don’t like eating healthy.  Or being clean, for that matter.

Yes, it’s true.  Mothers want their kids to wear clean underwear. But it’s not just to save them the embarrassment should their child be in an accident where someone may see his or her dirty underwear.  (Well, maybe a little.)  It’s because poor hygiene kills.  And there are few things more unhygienic than pooping.  These are some nasty germs.  They cause outbreaks of cholera when they contaminate drinking water supplies.  And cause E. coli food poisoning when transferred to our food supply (that’s why there are signs in restaurant bathrooms saying that all employees must wash their hands so they don’t kill anyone with their food).  Nasty stuff.  So mothers are fanatical about bathing their kids.  Making sure they wash their hands after using the bathroom.  And that they wear clean underwear.  Also not to pick up food that fell on the floor (that 5-second rule is a dad rule).  Or put things in their mouths that they shouldn’t.  And they’ll keep all their cleaning and plumbing supplies locked up and out of reach of their children.  Their medicines, too.  Because kids like to put things in their mouths.  And will eat or drink anything they find that isn’t a vegetable on a plate.

As protective as she may be, her child will most probably get sick.  Some other kid may sneeze in her child’s face.  Or some other kid may not wash his or her hands after using the bathroom.  Or use a door knob when they have a cold.  Or pass the measles to her child.  Then mother becomes nurse.  Carefully administering medicines.  Emptying barf buckets.  Cleaning her child and the bedding when he or she misses the barf bucket.  All the while cooking and cleaning.  And managing the household. 

Leading by Example

And the responsibilities never end.  There’re good manners to teach.  Honesty.  Morality.  Good behavior.  Inside the home.  And when out of the home.  The mother instructs constantly.  And sets a good example.  Dad, too.  When the kids are around they’ll watch their language.  Because they don’t want their kids to have potty mouths.  And Mom and Dad will treat each other with respect.  Because they want their children to grow up as ladies and gentlemen.  For boys to treat girls with respect.  Not to hit them.  Or objectify them.  And no matter what Mom may have done on spring break when she was in school, she will not do anything now that will set a bad example for her daughter.  Or give ideas to her son.  Like getting girls drunk so they make bad decisions is okay.

This is something moms share with CEOs.  Leading by example.  Because perception in the corporate world can make or break a company.  That’s why they have zero-tolerance policies for bad behavior.  Because a reputation of bad behavior (racist, sexist, hate speech, etc.) will give a corporation bad press that can take years to overcome.  Especially if it’s a high-level manager.  Or an officer.  In fact, it’s worse at that level because of the vetting process.  Like choosing a husband, these people are chosen for the long haul.  And bad behavior in these people reflects poorly on the CEO.  Because he or she chose them.   If your CFO is arrested for tax fraud it shows that you are a poor judge of character.  And have a poor handle on your business operations.  And if you’re CFO is committing tax fraud under your nose, you probably are doing a poor job.  And no doubt the board of directors will be looking for a new CEO.  As one of the best ways to get over a scandal is by cleaning house.

Being a CEO is hard.  So is being a mom.  There’s a lot of on the job training.  Which is more of just figuring things out as you go along.  You learn from your mistakes.  All the while being overworked.  And underpaid.  Working horrible hours.  With little sleep.  On call 24/7.  With no breaks or vacations.  Yes, there may be family vacations.  But Mom will still be working on those vacations.  Same responsibilities.  Just a different setting.  At least the CEO has a staff to handle things while on vacation.  At best a mom gets a quiet bubble bath while the kids are at school.  Or a quiet moment on the toilet.  Safe behind a closed door.  For a few quiet minutes. 

Moms and CEOs have their differences.  But their responsibilities are the same.  A corporation’s success depends on the good decisions of its CEO.  Just as the success of a family depends on the good decisions of Mom.

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FUNDAMENTAL TRUTH #51: “The longer you wait to balance your books the harder it will be to balance them.” -Old Pithy

Posted by PITHOCRATES - February 1st, 2011

Compound Interest and ‘Usury’ Rates Keep Credit Card Balances High

You ever get those checks from your credit card companies?  Write yourself a check at 0% interest for 6 months?  And then in the fine print they note that if you don’t repay the money within that 6 month period you will be charged interest from the day you cashed that check at something like 30% APR.  Compounded monthly.  So if you write yourself a $5,000 check and pay it back the day after that 6 month period ends, you’ll find that you’ll have to pay back close to $15,000 for that $5,000 loan.  That’s the miracle of compound interest.  Working against you.

So, in 6 months time, it will be much harder to balance your books than it would have been before you borrowed that money.  This is the worst thing about credit card debt.  High interest charges that are rolled into your outstanding principal.  This makes the outstanding balance grow faster than a lot of people can pay them off.  Car and house payments, on the other hand, have fixed balances and lower interest rates.  We usually can pay those off.

People will say that credit card companies are charging usury interest rates.  They think that we should have laws to force them to lower their interest rates.  If car and house loans can be under 10%, why can credit cards charge interest rates as high as 30%?  Well, in a word, collateral.  If you fail to pay your house or car payments, the bank will take your house or car.  They will then sell them to try and get their money back.  Credit card debt is unsecured.  It’s pretty hard to take back restaurant dinners and hotel stays and sell them to get your money back.  So when people default, the credit card companies get nothing.  So they have to charge higher interest rates to cover these losses.

Living beyond our Means Despite our Parents’ Wise Advice

So using credit cards to make up for a spending deficit is not a good thing.  Granted, there are emergencies where some have no choice.  But a lot of us just seem to spend more than we earn.  Or take bigger debt risks.  We may like the bigger house better than the more affordable one.  We may like a new car better than a good used one.  Of course, those things come with bigger monthly payments.  And we may have no problem paying for these things.  Unless a spouse loses their overtime.  Or their job.  Or the ARM on your mortgage resets to a higher interest rate.  All of a sudden, then, those monthly payments begin to hurt.

But not everyone gets into trouble because of a change in income or interest rates.  For some it just happens.  Gradually.  Money’s good.  You take some vacations.  Eat out a few times.  Buy some nice things for the house.  A home theater.  A nice patio with a twin BBQ and some nice furniture.  Next thing you know you’re living beyond your means.  You notice that your credit card balances are growing larger.  And your monthly payments are growing smaller.  Which in turn makers your balances grow larger.  All of a sudden, you have trouble paying your bills.  And you can’t understand this because you were making such good money.

Parents are often critical of their children’s spending.  Go back some 20-30 years and they were very critical.  Those parents who grew up during the Great Depression and went without during World War II know the value of not buying anything until you saved the money for the purchase.  A lot of kids got tired of hearing this.  “You shouldn’t be spending your money on that.  You should be saving it.”  But a lot of us wouldn’t listen.  Because we wanted things and we didn’t want to wait.  So we bought them. Spent our money.  Ran up our credit cards.  Got ourselves into trouble.  And went back to Mom and Dad for help.  Why?  Because they saved their money.  Lived well within their means.  Were able to retire comfortably.  And can now afford to help bail you out of your troubles.

Rising Immigration and Birth Rates Encourages Entitlement Spending

What’s true for people is true for governments.  Earlier governments knew the value of not spending money they didn’t have.  Thomas Jefferson slashed the federal budget when he became president.  He feared that a perpetual federal debt only empowered a federal government.  If the debt became permanent, then so must the government.  Alexander Hamilton liked debt for that very reason.  Not Jefferson.  Hamilton wanted to create an American Empire to give the British Empire a run for her money.  Jefferson just wanted people to own and farm land.

So in the beginning, and through the middle, Washington operated on a shoestring budget.  Kept its spending manageable.  And it’s debt minimal.  Lincoln exploded spending to pay for the Civil War.  And subsequent presidents did likewise for the two world wars.  But things really started to change in the 20th Century.  First with Wilson’s Progressives.  Then FDR’s New Deal.  Then Johnson’s Great Society.  Federal spending grew at an alarming rate.  Because America came into her own in the later 19th/early 20th century.  We became a rich nation.  A world leader.  And there was a lot of other people’s money to spend.

Thus the era of entitlement spending had begun.  Immigration was swelling the U.S. population.  We were having lots of kids.  All of us were working hard.  And paying our taxes.  America was like that 2-income couple working lots of overtime and buying lots of things.  The good times looked like they would just go on forever.  So America was ‘buying’ Social Security for everyone.  And Medicare.  Medicaid.  And lots of other stuff.  But then a strange thing happened.  Our population stopped growing.  We closed Ellis Island.  Immigration was down.  Birthrates plummeted.  Neighborhood families didn’t have 10 and 12 kids in their houses.  A Baby Bust followed the Baby Boom.  Or, more accurately, a taxpayer bust.  For the aging population was growing at a greater rate than the taxpaying population.  Which meant fewer and fewer people were paying for more and more people collecting Social Security, Medicare and Medicaid.

Are Social Security, Medicare and Medicaid Unfixable?

And this is a problem.  And the problem grows greater with every day that goes by.  Because with every day that goes by, more seniors start collecting Social Security, Medicare and Medicaid benefits.  While fewer new people enter the work force to pay for these programs.  And despite raising taxes and cutting benefits, costs continue to exceed revenue.  So the government takes out its ‘credit card’ to finance this deficit.

Of course, we call these programs ‘third rail’ programs.  That is, if a politician threatens to cut any of these programs they can kiss reelection goodbye.  So they don’t.  They just kick the can down the road.  And the problem grows ever more costly to fix.  Both monetarily.  And politically.  Which makes them just want to keep kicking that can down the road to let someone else worry about them.

But like our credit cards, we keep running up our outstanding debt.  The debt is so high now that the interest on the debt is a major budget item.  We have to fix this problem.  We can’t keep kicking it down the road.  Greece tried.  And look what happened to them.  The European Central Bank (ECB) had to bail them out.  And Greece is still not out of the woods.  Now Greece is a great nation.  A lot of history there.  But it’s not quite as big as the United States.  Being small has its advantages, though.  It’s easier for others to bail you out.  We don’t have that luxury.  There isn’t anyone big enough to bail us out.  Except, perhaps, an old enemy.  Communist China.  Imagine that.  One of the last communist nations in the world having to come to the rescue of the most powerful (and once most capitalistic) nation in the world.  If that ain’t a fine how do you do.

We should have listened to our Founding Fathers.  Because our parents always knew best.  Pity we don’t learn that until after we make a mess of things. 

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