For the first time in the history of this great country the United States of America has been downgraded. We have lost our AAA credit rating due to our levels of national debt and the foolishness on Capitol Hill.

What this means for markets, interest rates, and our economy in general time will tell. Tomorrow and the days that follow could prove frightening, or we might see more of the same economic results that we have seen this year. Which is to say, not good.

I am disgusted by the behavior in Washington D.C.

Every household in the U.S.A. has to balance its budget if they want to be successful in life. Where do these politicians get off thinking they don’t have to live by the same rules? That’s not to say you never go in debt. Everyone knows there are some things that justify it but those things make up a very short list! A home, your education, an automobile, and very little else justifies major debt to satisfy the wants of now and jeopardize the needs of the future. And how much MORE immoral would it be if I were allowed to reach into your pocket to pay for my financial indiscretions?

Running national debt of 100% of GDP or more is a national security risk. We are at the tipping point. Can we recover? Yes we certainly can, but serious challenge require serious solutions! Otherwise the tipping point could go over and we could get crushed under a mountain of debt. Keep in mind our current debt level does NOT include all the future spending commitments that these professional politicians have made and for which the U.S.A. cannot fulfill.

How Might We Limit Washington?

Having a fixed dollar amount debt limit seems silly. As our country has grown and as it continues to grow federal spending will increase. (We can debate if that should be the case, but to deny that reality currently would also be silly.) What should be in place is a structure that makes it harder for the congress and the president to spend money as the debt gets larger (as a % of GDP.) I do not know what numbers should be used but to illustrate the point it would be something like this:

If government debt to GDP was under 40% then new budget/appropriations bills would require a simple majority of 51% to pass congress. If the ratio was between 40% and 75% those bills would now require a super majority of 66% to pass congress. if the ratio of debt was over 75% then those bills would require a massive majority (a term I just made up) of 88% to pass; and if debt was 100% of GDP or higher it would require a unanimous vote.

This would allow for needs which are truly urgent to the survival of our nation, like World War, to get the funding it needed, but slow down and create natural resistance to spending as the debt grew larger. Like I said, those numbers are for illustration purposes only so don’t get hung up on the details.

Would our current congress ever vote for something like this? I doubt it, that’s why we should get rid of the professional politicians, institute term limits and get some rational Americans voted in who can bring some common sense, kitchen table budgeting to that town of gluttony and crony capitalism.

The U.S. has had the idea of a debt ceiling for a long time. Through the 40’s, 50’s, 60’s, 70’s and 80’s the debt ceiling was raised but only by small amounts. Why in the late 80’s and through today has the debt limit been raised so fast? Yes, we have had wars to fund and recession we have tried to spend our way out of, but that does not tell the story of the past 30 years. Surely, we have not needed 20-30 years of record spending. Has the government promised us more then they can deliver in order to get elected?

We all like our promises. We like politicians who make promises to us and we elect them, even when those promises just cost the country more and more.

For years some politicians and others have warned us about our entitlement spending. Do they really know what they are talking about? Are entitlements really a root cause of our spending issues?  To the right is a chart of our government expenditures since 1950. The chart shows what, I am sure you have seen a lot of over the past few weeks. While this shows we have a problem it does not help us understand how to solve the issue. Let’s take this this chart down one more level, and look at government expenditures by major category.  In this chart you can see that entitlement spending in social security and Medicare having been spiking. Nearly headed straight up. Defense spending also has a very steep trend.

I am sure you have heard both Democrats and Republicans blame either entitlements or defense spending for our current issues. While it is a hard message to hear, we obviously cannot continue this spending trend. If we continue to elect only people who say what we want to hear how can we expect this to change. Politicians tell us they will pay for this or buy us that because it helps them get elected. Have we become like spoiled children clinging to which ever parent will buy us the most?

We have to demand more from our leaders? We have to demand more from ourselves. We must be willing to make hard choices and those hard choices cannot be to have the rich pay more taxes. As you can see from those charts, increased revenue cannot keep up with these trend lines without sucking it all dry.

The following video from Bankrupting America does a great job and explaining all of this. May we all, democrat, republican, independent demand more.

The current talk on capital hill can be very hard to understand and all the double talk doesn’t make it any easier. EconTalk recently did a great podcast on this process and the situation we are facing. It does a great job at simplifying what is going on and helps us understand the situation we face. It is important to keep in mind that the President and congress as well as the financial world has seen this issue coming, yet the President and congress have not acted to resolve the issue before we were put up against the wall like this.

The talk in Washington makes it hard for citizens to understand what the government is trying to do and who is playing games. Without a better understanding can we know how to deal with our government over their lack of action? It is very important to understand the debt ceiling is a big part of this conversation, but losing our triple A credit rating (which means our treasure bonds are the most secure bonds in the world) is because our nations debt is raising so quickly and out of control. We have to get our debt under control to keep our rating. At this stage in the game, raising the debt ceiling is required so we can still barrow money while we get our debt under control.

In the podcast they do throw some numbers around that take a few minutes to get your head around. Each year the President is required to submit a budget proposal, which he did. That budget is 46 trillion dollars over 10 years, or roughly 4.6 trillion each year. Currently the government runs on about 3.5 trillion a year. The President’s budget would raise government  yearly spending about 1.1 trilling. In order to help deal with the concern over government spending the President revised his budget to, in his words, reduce government spending by 2 trillion over 10 years. That means a 200 billion reduction in his budget each year. This means yearly government spending would be 4.4 trillion. That is a reduction in government spending based on his proposal. Based on current government spending (3.5 trillion a year) it is still a 900 billion dollar spending increase (it is about a 4% cut in spending from his first proposal). 

That is where the President stands. Now as part of the budgeting process the House and Senate are suppose to pass budget proposals as well. The revised budget both the House and Senate can agree to is voted on and becomes the budget. The house created a budget proposal many call the “Ryan Plan.” What I found interesting was the fact the Senate has yet to create a proposal. This is where the frustration of the Republicans is coming from, since the Republican dominated House has created a plan, yet the Democratic dominated Senate has not. In the last few days a flurry of plans have started to show up but why did the Senate not act months ago the same time the House did? 

Keith Hennessey from Stanford University goes on in the podcast to explain why some people in congress call things a tax hike and some call it a cut. It is all about budget baseline comparison and rather you are comparing against what the tax law is or what the tax policy is. Are you comparing against the current law that they will expire in 2013 or the current policy of extension of those tax rates?

Russ and Keith in their podcast do a great job in explaining the government budget process. I recommend you listen to it. The political posturing makes it almost impossible to understand who is trying to do what. While many like to use the threat of default on our credit to invoke fear and anger towards people, it is clear we will not default on our credit obligations. This does not mean the situation is not serious. These continued threats and uncertainty is holding our economic recovery back. Lets be honest with ourselves and agree the trend in the above graph cannot keep going. Republicans can blame Obama and Democrats can blame Bush. Both presidents have contributed to this trend that is only getting worse. The government has to come up with a plan on how to stop spending money.

With a stagnate economy and between 8.5 and 10% unemployment in the United States for the past 4 years I don’t think anyone thought higher starting salaries for college graduates was coming. Yep, college graduates are starting the recession off with a pay raise. According to the National Association of Colleges annual summer salary survey the average starting salary for a college hire is now $51,018. That is a 4.8% increase over last year. The New York Times recently printed this article though about how times are tough for college graduates.

“Now evidence is emerging that the damage wrought by the sour economy is more widespread than just a few careers led astray or postponed. Even for college graduates — the people who were most protected from the slings and arrows of recession — the outlook is rather bleak.“ Read more

What is going on here? With a high unemployment rate, a slow economy and lots of college graduates looking for jobs shouldn’t this equal lower starting salaries. Classic supply and demand right? That is not what we are seeing. “U.S. employers created the fewest number of jobs in nine months”, yet starting salaries are on the rise?

This looks to be the first rise in starting salaries since 2008. Maybe it is a green shoot (a sign things are starting to recover). The effects of things on the economy are far from perspicuous. The economy is very organic in nature, fed by things which are hard to understand and the impacts hard to measure.

I think the economy really just needs more optimism (and less massive government spending but that is not for this article). So I will focus on this news and the recent stock market rally as a positive green shoot for our economy.

A must read (or listen) for us all.