With all the occupy Wall Street news and movement going on right now, I think we need to reflect on what the average household debt has looked like over the years. While we are in a culture of finding others to blame, it is important to realize we also have ourselves to blame. Since the 2000 house hold debt as a percent of disposable income has held at a very high level. Below is a great graph to understand this issue.
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.
There is always a lot of talk about the nation debt and a lot of the talk can be hard to understand. The nation debt currently stands at 13 trillion. That is over 43k for every U.S. citizen. How is your savings account coming along for this? Click on this link for a break down of current running amounts. Depending on when you read this the numbers maybe a lot higher (hopefully years from now it is actually lower).
Ok so what does this really mean and how can I understand it. I recently found this video which greatly helps explain how the national debt has grown through out the years and how quickly it grew under different presidents.
http://www.youtube.com/watch?v=P5yxFtTwDcc&feature=player_embedded
Now that we know how fast the national debt has been growing why do we care? How does a large debt effect us? If there is any lesson this country and its citizens should have learned from the economic collapse of 2009, we should have learned why it is bad to be leveraged to high. Financial leverage is the degree to which one is utilizing borrowed money. 
The U.S. debt compared to the national GDP tells us how leveraged the U.S. is. The chart to the right shows the history of Debt .vs GDP since the 1800. The spike right after the 1940s was to fund World War II. You can see that in 2010 we are gaining quickly on that all time high spike in the 1940s.
The government sells its debt by selling U.S. treasury bonds. Almost anyone can buy U.S. treasuries. They basically give the government money for a promise the money will be paid back with interest over a certain number of years. The U.S. government itself owns about 52% of these treasuries. This is where most of Social Security and Medicare savings account money is. After that China ($846 billion), Japan ($821 billion) and the U.K. ($374 billion) hold most the rest of the debt.
Some how the world’s richest nation has got in a position where it has to borrow form some of the world’s poorest. Just like in 2009 when banks ran out of money, or decided it was to risky to lend money anymore, the bubble popped. When countries like China and Japan stop lending us money it will drive up interest rates, cause home prices to drop more then they already have any could cause a run on the dollar. “If foreign central banks become net sellers of Treasurys, the demand for dollars needed to buy them would plummet.” If there is one rule most people remember from economy class, it is supply and demand.
Foreign countries have already started raising the risk level associated with lending to the U.S. It is time to get our spending under control.
Many people, myself included, have been looking back at the Financial Crisis of 2008 and asking the question, "What the hell happened?" The information landscape of finance is a difficult one made even more difficult by political agendas. Having interest in both financial markets and politics I have been reading and listening to many sources to try and understand the event. Even though I spent three years at Fidelity Investments as a brokerage trader, had my series 6, 63, 7, and 4 licenses to trade securities, and being a political junkie for the last 15 years, I would not call myself an expert in either arena. What I do well is listen to very smart people and evaluate their arguments and their evidence calmly and rationally to come to a conclusion about an issue.
Due to the complexity of this particular issue I have chosen to share with you all the sources I have used to inform myself and my opinions rather than create a summary or specific conclusion. I think it is extremely important for us as citizens to understand to the best of our ability the events that shape, and shock, the world in which we live so that we may have the most accurate understanding of the forces at work. Even if we are unable to derive 100% concrete conclusions.
To begin, I would suggest you start with the following podcast:
Russ Roberts on the Crisis – Russell Roberts is Professor of Economics and the J. Fish and Lillian F. Smith Distinguished Scholar at the Mercatus Center at George Mason University. Roberts has a clear style of speaking that provides a great place to start. He doesn’t lose his audience with technical jargon and even shares the possible concerns as to why his theories could be incorrect (a sign of someone that is after the truth). If you prefer to read instead of listen, this podcast is based on his paper Gambling with Other People’s Money, feel free to start there instead.
After you have listened to Roberts, you may desire more as I did. Here are other sources to get more insight, analysis, opinions, and perspectives on this issue:
SHOWS:
PBS FRONTLINE: Inside the Meltdown
PBS FRONTLINE: Breaking the Bank
PODCASTS:
EconTalk and John Taylor
EconTalk and Charles Calomiris
EconTalk and and many other thought leaders discussing the crisis
BOOKS:
Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy
A Failure of Capitalism: The Crisis of '08 and the Descent into Depression
House of Cards: A Tale of Hubris and Wretched Excess on Wall Street
