What's Going On With the National Debt?

Here's a very informative article about an interview the House Budget Chairman gave on the state of the national debt and its impact upon the economy.

A Basic Concept of Graphs

Graphs in business and economics visually tell you how two or more variables are related to one another.

In a line graph, the slope of the line tells you how. Remember "rise divided by run". Rise is the change in the verticle axis, while run is the change in the horizantal.

Here's a little homework assignment. On a piece of graph paper (or an excel spread sheet) draw a couple of x,y lines 10 squares across and 10 squares up. x (the horizantal line) = # hamburgers you can buy; y (the vertical line) = number of sodas. Here's your budget: slope = -2. How would you draw the line?

If x = 0, then y = 10. If x = 1, then y = 8. If x = 2, then y = 6. What's the maximum number of hamburgers in the budget? Extending the line to y = 0 will cross the x axis at 5.

Graph analysis get's way more complicated than this but is very useful!

Financial IQ

Economics are important because they describe the environment in which we make financial decisions. They call it "Financial IQ". From Donald Trump:

To me, it means the ability to chart the economic waters nationally and internationally, to be able to look beyond the present and into the future, and to make decisions based on those assessments and insights.

- from page 83.

The Perfect Storm

They believe things are going to get worse, citing:

1. Growing trade deficit. This is like a family earning $5,000 per month, spending $6,000.
   
   
2. Growing national debt. G.W. Bush's administration borrowed more from foreign sources than all previous administrations combined, but he had at least eight years to do that in. Since the book was published before Obama was elected, it is silent on the present administration, but I'm sure he's closing in fast.
   
   
3. Falling dollar. This leads to inflation which causes wealth go drop.
   
   
4. Baby boomers without money. - And they're reaching retirement age.
   
   
5. The entitlement mentality. People look to the government to solve their problems instead of looking for opportunities.
   
   
6. Higher oil prices. There's a point where this could trigger the entire economy to implode due to those other factors.
   
   
7. Tax breaks for the rich. My reaction is "huh?" The facts they present do not justify this statement.

- from page 77

Oil and Gas Prices Going Up

They discuss the general trend of oil prices going up. This is before the great BP oil spill in the Gulf. Obama has shut down other off-shore oil rigs.

With less supply of oil, this means that prices will go up, even if only because we have to replace the domestic output with foreign sources. This is in addition to the general upward trend in oil prices.

Exchange Rates

How many pesos can you buy with one dollar? This kind of question illustrates the concept of exchange rates.

The more you can buy, (dollars appreciated) the more import prices fall and export prices rise. That means that foreign imports are more affordable to domestic purchasers and our products are less affordable abroad.

On the other hand, when the dollar depreciates, the reverse happens. So, it follows that the best way to help our foreign trade is to devalue the dollar to the lowest, possible, right? Wrong. The less value the dollar has, the more dollars it takes to buy things. This is also known as inflation.

In the USA, the dollar’s exchange rate floats on the open market. I once had to do bank reconciliations of amounts held in foreign banks in foreign denominations and compare to transfers to and from U.S. banks in dollars. It was a headache! The exchange rate fluctuates.

The concept of foreign exchange is critical in international business.

Today's Major Economic Problems

What are today’s major problems? (Remember, the book was published in 2006.)

• Dollar is falling
• Debt is rising
• Retirement funds (social security, Medicare, pensions) going bankrupt
• Oil prices rising
• Gap between rich and rest increasing
• Wages decreasing

They say and I strongly agree that the reason for these long term problems when they first arose. Instead people were taught to depend on government to solve their personal problems for them.

How Government Makes More Problems

According to Trump and Kiyosaki, in the 1930’s FDR rolled out social security which is a huge problem for us today. In the 1960’s Medicare and Medicaid came out and now these, too, are huge problems today. In 1971, the dollar went off the gold standard and the falling dollar is another huge problem today.

Many of the economic problems that so bedevil us today are caused by government programs that were supposed to be solutions to problems. They just kicked the can down the road. Now the problems are much worse.

China's 1st. Quarter Growth Is Great

While western economies are reeling, China’s economy appears to have turned the corner. Its GDP grew 11.9% in the first quarter reversing poor numbers from last year.

I see two themes in today’s reporting.

1) Western economists want China to export some of that growth to the rest of the world by increasing the yuan’s exchange rates. Fat chance.

2) Fears of inflation due to the hyper economy. China, unlike Malaysia and India, has not raised interest rates to cool their economy.

They have kept a lid on credit, however. The government cut the 2010 quota for new bank lending 2.1 trillion yuan to 7.5 trillion.

China is now on track to pass Japan to become the world’s second largest economy.

Government Policies in a Recession

What can governments do to improve economies in a recession?

One tool is monetary policy. It can increase the supply of money to increase aggregate demand. In a recession money is not flowing enough to cause inflation but as the economy heats up, then that becomes more possible.

The other tool is fiscal policy. Government can run a deficit. It can do this either two ways: a) spending more money on targeted areas of the economy, or 2) tax reductions. The problem there is that the government then has to borrow money in order to cover the deficit. That means that money is turned back over to the government in exchange for notes.

This indicates a consequent reduction in government operations to cover the costs of its economic management policies.

The Gold Myth

He believes gold to be a bad investment. I agree that the historical rates of return on gold have been around 2% to 4%. Not good on a long term basis.

I disagree with him about what to do in times of economic collapse, though. In those kind of times, gold can be a safe place to stash your cash until times get better. At least you know it won’t loose value.

Fiscal Policy Limits

You're driving a car. Trouble is, there's a time lag whenever you hit the accelerator or the brakes. And, sometimes they don't work at all.

For example, you do not know how much time will elapse between the moment you hit the brakes and the car starts to slow down.

Question: How will that affect your driving? Answer: You will want to drive the car as steadily as possible.

Government fiscal policy is like that.