Notes on a tailspin

From Mish's Global Economic Trend Analysis

"Suppose you want to spend more money this month than your income. This situation is called a 'budget deficit'. So you borrow. The amount you borrowed (and now owe) is called your debt. You have to pay interest on your debt. If next month you don't have enough money to cover your spending (another deficit), you must borrow some more, and you'll still have to pay the interest on the loan. If you have a deficit every month, you keep borrowing and your debt grows. Soon the interest payment on your loan is bigger than any other item in your budget. Eventually, all you can do is pay the interest payment, and you don't have any money left over for anything else. This situation is known as bankruptcy."

My comment:

It's been the policy for the last several years to buy votes by talking up tax cuts. Given there are two basic sources for revenue available to the government, taxes or selling bonds (selling debt), we've financed two wars on borrowed money. On the consumer front, individuals have borrowed to the hilt, leveraging the equity in their homes by taking mortgages for the "full valuation" and spending the money on other things.

The credit cards are MAXED OUT!

Be suspicious of anyone who tells you they want to cut taxes. Those things taxes paid for ... the military, the infrastructure including roads and waterways, education, medical care (Medicare), social security ... represent a meter running. The money is committed. Cutting taxes without cutting the spending that dictated the taxes forces borrowing to cover he difference. The money has to come from somewhere.

Be suspicious of anyone who tells you that financing a country is somehow different than financing a household. The only difference is the number of zeros.

Some calculations concerning the current stimulus package indicate that the net effect will be on the order of .5% of GDP ... that is to say, insignificant ... and I think the .5% calculation is optimistic. I'd rank it right up there with prayer which allows you to do nothing while still feeling you're having a positive effect on the universe.

Spend your rebate at Wal-mart and you'll do more to stimulate the economy of China than you will to do to stimulate the economy of the US.

If you spend your rebate on debt reduction; making an extra mortgae payment or paying down your credit cards, you're paying for the past ... for things you already "consumed". Personally, I think debt reduction is the wise move ... but it's not going to stimulate any segment of the economy ... but you'll be better off for it.

Other calculations that have crossed my attention suggest that a stimulus package involving the extension of unemployment insurance would net a $1.75 return fr every $1 invested. It was rejected.

For every dollar invested in the the food stamp program would net $1.55 return. That was rejected, too.

The current $150 billion stimulus package that gives checks to individuals and families is calculated to yield $1.25 of positive benefit to the economy. Given a $13.86 TRILLION GDP, the $187.5 Billion positive effect isn't a lot of leverage.

In the meantime, the administration promotes tax breaks to industry ... which sounds like a great idea. However, given the time frame involved for any changes in the corporate welfare system to take effect, the net impact of $1 invested in that direction has a $.33 net positive effect.

What are the priorities? You tell me.