Investing in Precious Metals 101 Ad

How to explain to friends the current economic situation

Login or register to post comments Last Post 16362 reads   27 posts
Viewing 10 posts - 1 through 10 (of 27 total)
  • Sun, Mar 13, 2011 - 07:24am

    #1

    rhare

    Status Silver Member (Offline)

    Joined: Mar 29 2009

    Posts: 397

    count placeholder

    How to explain to friends the current economic situation

I’ve been working on 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 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. 

Given the following US fiscal information:

Assuming you are a well off (not rich) but professional making $100,000 / year.  How would your fiscal outlook compare to the US Federal Government?

You make $100,000 a year, but you are spending $149,181 a year and your prospects of making $100,000 next year look kind of bad.  Good chance you will get a pay cut. 

Unfortunately, you have been over spending for quite awhile and have charged up $591,264 on credit cards.  You have been lucky and been able to get some low low teaser rates and when the rates expire on a credit card, you have been able to get another card and transfer the balance to the new card as well as keep getting low rate cards to charge the $49,181 / year you are spending beyond your paycheck.  Hopefully the credit card companies will keep letting you roll your balances over with low rates and keep getting new cards or things could get expensive due to higher interest rates really quick.  You really hope you don’t have to start paying the evil credit card companies that %30 interest.

But, that’s not the worse problem you have.  Unfortunately you met with the mob and told them how great you would be at investing money for them.  You told them to give you a portion of their income and you would pay them regular payments in the future and cover their medical care when they get older and can no longer do their mob business.  You however, spent all the money they gave you and now are about to have to start paying the mob their money.  In order to meet your promises you would need $6,047,879 sitting in a bank account earning interest at a rate that keeps up with inflation, but you have $0.

So, what are you going to do?  Well, the Republican side of you being extremely fiscally responsible has decided to really cut the spending so you can get things under control.  There are lots of things you can live without so your going to cut $2,583 / year from your spending.  The Democrat side of you is really worried that the Republican side of you is going to far.  It will be great hardship to cut your spending that much and instead thinks you should cut your spending by $273 / year.

So, what does your future look like?  Does it look like you are going to be able to continue on this path much longer?  Do you see any possible solution other than bankruptcy?  What will the mob do to you when you have to tell them you lied?

To recap your situation:

  • Revenue:  $100,000 /  year
  • Budget:   $149,181 / year
  • Deficit:     $49,181 / year
  • Debt:        $591,264 (on short term revolving credit)
  • Unfunded Liabilities:    $6,047,879
  • Republican Proposed Budget Cut:  $2,583 / year
  • Democrat Proposed Budget Cut:   $273 / year

 

 

  • Sun, Mar 13, 2011 - 10:23am

    #2

    Poet

    Status Platinum Member (Offline)

    Joined: Jan 20 2009

    Posts: 976

    count placeholder

    Love It!

 

I love it! Makes total sense when broken down like that.

May I borrow and use for my friends?

My contribution might be, that I’d mention to people about a friend of mine whom I’ll call “Sam”. And I’ll present his predicament and ask for advice…

Poet

 

  • Sun, Mar 13, 2011 - 04:05pm

    #3

    rhare

    Status Silver Member (Offline)

    Joined: Mar 29 2009

    Posts: 397

    count placeholder

    Absolutely

[quote=Poet]

May I borrow and use for my friends?[/quote]

Yes, please, exactly why I posted it.  I actually sent it off as a letter to the editor as well.

[quote=Poet]

My contribution might be, that I’d mention to people about a friend of mine whom I’ll call “Sam”. And I’ll present his predicament and ask for advice…[/quote]

I like the approach. Smile

 

  • Sun, Mar 13, 2011 - 06:43pm

    #4

    darbikrash

    Status Gold Member (Offline)

    Joined: Aug 25 2009

    Posts: 297

    count placeholder

    Let’s get started

As further guidance to the explanation of our current situation may I add the following comments:

Leaving aside the highly controversial subject of unfunded liabilities for just a moment, I have a few more numbers to add to the mix. Previous commentary has attempted to show that taxation of wealthy individuals and high income parties is insufficient to make any meaningful contribution to the Federal deficit and the 14T debt burden. Here are some figures to challenge and correct this assumption.

Consider that when we examine the far more meaningful income and taxation values for US based corporations, we can see a very different picture:

The most recent values I can get for corporate statistics are for FY 2007-2008.

Source.

1.)    Total assets of US corporations $81.5 Trillion

2.)    Gross (receipts) revenue: $28.8 Trillion

3.)    Income Subject to tax: $1.248 Trillion

4.)    Total tax paid after credits: $343 Billion

5.)   Total deductions allowed : $27 Trillion

Now, let’s unpack these numbers for a closer look. At first blush, the total tax rate appear to be a rather sensible 27.5% (Item 4 divided by Item 3). But what draws my attention is the total deductions allowed, which I break out as item 5, which is $27 Trillion in deductions allowing the corporations to draw down the gross revenues resulting in the taxable income figure of $1.248T. Pretty neat trick. Now to be fair, the IRS gives us a break out for Cost of Goods Sold, which decrements out of the total deductions, and to a large degree, I would be amenable to accept these values, (although there is game playing here as well) so let’s accept these at face value as legitimate deductions, to the IRS reported value of $15.5 T. So this leaves $11.5 Trillion in annual itemized deductions that US corporations are using to reduce their total tax liability.

I would say that this is a very significant sum of money that would have a profound and meaningful effect on the total Federal deficit, and the federal debt.

Some other numbers to throw in the pot:

a.)    Total number of corporate tax returns for the noted period was 5.9 million (active corporations).

b.)    Of these 5.9 million, 4.0 million were pass through entities, e.g. sub chapter “S” or REIT that pay no corporate  tax at all, rather, they pass through profits to individual shareholders.

c.)    Many corporations that have significant sales in the US pay no tax at all, for example, Exxon Mobil got a tax refund for the noted period, so did Bank of America, despite enormous profits.

d.)    Many other corporations deferred huge sums of income, using the so-called “double Irish” shell game strategy to move income producing assets to countries with low or no tax (such as Ireland) while placing operations entities that shed off only expenses in US jurisdiction. An example might be Goggle, with an effective tax rate of 2.4%.

e.)    I took the time to sum the total taxable income of the top 25 corporations and their taxation for the most recent tax year, with results as follows;

a.      Total taxable income: $243 Billion, total tax paid $46.4 Billion, average effective tax rate 19.1 %.

Source.

I’d sure like to have an effective tax rate of 19% in my business wouldn’t you?

So I’m quite sure all of this will get the usual name calling (Marxist, Statist, blah, blah, blah) but to pre-emptively clear the air, let me state what the point is here. It is not to transfer the costs of inefficient government to corporations, but on the other hand, it is most certainly not acceptable to conclude that all is lost and the government must be shut down. To realize this, reasonable and rational people would take a measured and sequential approach to this problem:

1.     Step 1. As a citizen and a (fully invested) shareholder of the assets of the United States of America, I am not receiving fair compensation for the resources of my country when they are being used by multi-national corporations for the express purposes of creating profits. I demand a fair and equitable return on my investment, and the current government is not providing adequate stewardship or advocacy to guarantee an acceptable return. As in any corporation with shareholders, changes must be made, and these changes are movements of replacement, with more efficient and directed management the objective, not dismantling. In addition, I demand a reconcilliation with an eye to resource sustainability, and these limits be factored into coporate growth strategies. No longer will we accept growth as driven by so-called free market limitless constructs.

2.     The first basis of any “turn around” in a troubled business is to insure that invoices are being sent out, and that the customers are being fairly charged. In our case, they are not. The invoices are not being sent out, the customer has paid off the accountant to ignore, waive or otherwise mark down the invoice values. No other action may initiate until this has been corrected as a first order of process.

3.     Once fair and complete recompense has been re-established, the eye turns to the Proft and Loss statements, and a re-assessment of the expense side of the ledger can begin in earnest. Unnecessary costs must be contained or eliminated, and redundancy removed. No cuts are allowed that will damage the profitability or core values of the entity.

So when did you want to start?

  • Sun, Mar 13, 2011 - 07:04pm

    #5
    Rihter

    Rihter

    Status Bronze Member (Offline)

    Joined: Dec 27 2010

    Posts: 47

    count placeholder

    re: darbikrash

Thank You.

Now spam congress with it. They seem to forget that revenue is part of the equation.

 

  • Sun, Mar 13, 2011 - 09:46pm

    #6

    Travlin

    Status Gold Member (Offline)

    Joined: Apr 15 2010

    Posts: 524

    count placeholder

    Rhare This is a simply

Rhare

This is a simply brilliant way to illustrate our problem.  I have one suggestion to add to Poet’s.  I believe you calculated one ratio to apply to all the numbers to bring them down to a comprehensible scale.   To end the story of Sam dramatically we can say, “Now multiply these numbers by X, and this accurately describes the financial situation of the United States Government.”  So what number is X?

Very nice work Rhare.

Travlin 

 

  • Sun, Mar 13, 2011 - 09:49pm

    #8

    Adam Taggart

    Status Platinum Member (Offline)

    Joined: May 25 2009

    Posts: 2553

    count placeholder

    Now featured as a WSID post

Given its spot-on usefulness, this post has been promoted to the What Should I Do? featured module on the CM.com home page. Feel free to add to the discussion in the comments there.

Again, great work, Rob.

  • Sun, Mar 13, 2011 - 09:51pm

    #7

    Poet

    Status Platinum Member (Offline)

    Joined: Jan 20 2009

    Posts: 976

    count placeholder

    Revenue Matters, But Less Than Lobbyists and Politicians

 

I always tell people that we shouldn’t measure our debt in terms of GDP, but rather, in terms of Federal revenues.

Unfortunately, I don’t think we will see taxes rising on corporations. You’ll likely see it rising on people – if not with income taxes, then sales tax and “fees”. But most likely of all is printing money, which is what is happening right now, because raising taxes and fees is just spitting into a bucket with a big hole in the bottom.

That said, Darbikrash, one BIG question I have for you is if you know know if (and if included, how much of) of that $27 trillion in business deductions includes depreciation deductions spread across multiple tax years for the expense of purchasing depleting assets (like a rock quarry), buildings (office building), and equipment (computers, machinery, cars, trucks). Do you think that depreciation deductions are unnecessary?

Poet

  • Sun, Mar 13, 2011 - 09:51pm

    #9

    NZSailor

    Status Member (Offline)

    Joined: Oct 04 2008

    Posts: 20

    count placeholder

    A great job…

This is a great analogy rhare!  As you say, so many people don’t get it when the numbers get large.

One of my pet peeves is to hear about a “budget cutting plan” on the news and the newscaster reels off a number without any reference to how this relates as a percentage to the overall budget.  Without that comparison it is only so much hot air devoid of any actual information (and in most cases if you actually calculated the true value of that plan it should probably be accompanied by a laugh track).

I will be forwarding copies of your explaination to friends as well…

Chip

 

  • Sun, Mar 13, 2011 - 11:36pm

    #10

    goes211

    Status Gold Member (Offline)

    Joined: Aug 18 2008

    Posts: 287

    count placeholder

    Great stuff

[quote=rhare]

To recap your situation:

  • Revenue:  $100,000 /  year
  • Budget:   $149,181 / year
  • Deficit:     $49,181 / year
  • Debt:        $591,264 (on short term revolving credit)
  • Unfunded Liabilities:    $6,047,879
  • Republican Proposed Budget Cut:  $2,583 / year
  • Democrat Proposed Budget Cut:   $273 / year[/quote]

Very good analogy but I think there are couple types of people that will take issue with it. 

First there are the bankers and their minions that will say the amount of debt does not matter, all that matters is if you can continue to make payments on it.  They have no problem with average people becoming debt slaves because that is actually how they want the system to work.  Debt slaves make for docile people.  For an example of this thinking see Hugh Hendry rip Jeffry Sachs a new one on Greece debt.

The other people that will take issue with this analogy is the sovereign currency supporters (Ellen Brown or Byron Dale).  They seem to believe that there is always a very simple fix to all these monetary problems, just have the sovereign create the needed money debt free.  Although I can see why they believe that this could work in the short term, this always seemed to be a long term disaster because it would completely divorce money creation from any sort of reality.  Money creation based upon the needs of the creator (governments in this case) verses the needs of the moneys end users (the people) would quickly become distortionary and and lead to misery.

Viewing 10 posts - 1 through 10 (of 27 total)

Login or Register to post comments