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.

It’s hard to believe that only a few generations ago the United States of America was the largest creditor nation in the world and today we have become the largest debtor nation in the world. How could we be so careless and to put at jeopardy our future and our children's future and our grandchildren's future and beyond. It’s immoral what we have done.

Imagine a friend who calls you up and says, “I have a financial problem. I make $58,000 a year. I have been spending about $75,000 a year and I have found myself with $327,000 in credit card debt. But I think I have a solution, spend less! From now on I am only going to spend about $72,000 a year.” (adapted from the Dave Ramsey show)

How do you feel about your friend's plan to get back to financial stability? You should feel sick and want to slap your friend in the face. Well folks, this is exactly the situation going on in Washington. The numbers are different but the ratios are the same. This friend is the government of the United States of America. What are you going to say to your friend?

Click Here for an Excellent Visualization of this Problem

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.

A recent study done by the American Revolution Center found that 83% of American’s could not score higher then 44% on a test about the American revolution. That is a failing grade for the majority of all Americans! This should not be an area we are willing to accept a bell curve grade on. Is this a test you could pass? Is this a test people even care if they pass anymore?

“In general, the Survey questions varied in difficulty, but most were designed to assess basic knowledge of the American Revolution and its enduring legacy. At the end of the survey, several contemporary questions were asked in an attempt to understand the magnitude of difference between knowledge of popular culture and knowledge of our nation’s founding history and principles.”

One of the most interesting points called out by this study is that 90% of American’s believe it is important for us to know the history and founding principle of the American revolution, yet almost all of us cannot pass a test on what those principles and history are.

“Sixty percent of Americans could correctly identify the number of children in reality-TV show couple Jon and Kate Gosselin’s household (eight), but more than one-third did not know the century in which the American Revolution took place.

Many more Americans knew that entertainer Michael Jackson sang “Beat It” and “Billie Jean” than knew that the Bill of Rights is part of the United States Constitution.”

Dr. Bruce Cole, President and CEO of American Revolution Center, writes a stirring message at the beginning of the paper I encourage you to read. How can we expect to control our government when we don’t understand our government? This was one of the cornerstones our government was created for. A government by the people for the people. 

“If a nation expects to be ignorant and free, it expects what never was and never will be.” - Thomas Jefferson

The study has a number of shocking revelations in it. It revels that not only do we not understand the revolution but half the people surveyed did not even know the chronological order in which it took place (many listed the Civil War, Emancipation Proclamation or War of 1812  as happening before the revolution).

“More than 50 percent of Americans wrongly attributed the quote “From each according to his ability, to each according to his needs” to either George Washington, Thomas Paine, or President Barack Obama, when it is in fact a quote from Karl Marx, author of The Communist Manifesto.”

How can we seriously expect Americans to elect good leaders in their country when they attribute a quote by one of the founders of communism to one of the American Presidents? This combined with the other finding that 11% of Americans would give themselves an A for their knowledge of the American Revolution and 3 out of 4 would give themselves a B or C, is a truly scary proposition for this country.

How can we as a nation expect to elect qualified and deserving people into office if we don’t really understand the founding principles of this nation? How can we elect a leader of a free nation when 50% of us think a founding principle of communism sounds like something an American president would say?

The PDF for this study includes a lot of very interesting statistics about different questions and how American’s value different rights. In reviewing all the results a few things stood out to me. When asked how important a given right is Democrats are almost always lower in saying that right is essential or important, except for when it comes to the right of privacy in which Democrats are a little higher. Yet, on the right not to have your property searched and seized Republicans are higher (I would really like to talk to these people who say “not that important”).

To the credits of Americans, when asked after the survey if they would like to learn more about the American Revolution  most said yes (maroon is yes and turquoise is no). It is interesting to see what groups had the lowest “yes” responses though.

It is very important that we understand the history of this nation and the principles upon which it was founded. May this be a wake up call to all of us. May we understand these principles and may we demand more clarity out of our government to make sure our elected officials are working to support these principles. 

Mitch McConnell’s proposal to give away congress’s authority to raise the debt limit to the President is childish, and at a minimum borderline unconstitutional if not outright so. The founding fathers setup a divided federal government to enforce checks and balances and to slow down the process by which the government gets things done. They feared unilateral power in one branch of government. One branch of government cannot and should not delegate away their power to another branch – it is blatantly un-American according to the constitution.

The federal budget is loaded with wasteful spending. Anyone who denies this reality is simply not serious or honest. Just like every American family that has to sit down at the table and figure out where their money is going and cancel the Xbox Live subscription, or the Netflix subscription, or sell the ATVs in order to pay for the mortgage and purchase groceries when the paycheck simply doesn’t cover everything, our elected officials should be serious about doing the same. Where are the grownups willing to go through the budget and cut? Who is willing to reform or disband programs that cannot continue without jeopardizing our solvency? Yes, some people will be impacted negatively but that is the price we have to pay to get healthy again.

When it was discovered that my new born daughter was sick in a way that threatened her life and it would required a bone marrow biopsy, a liver biopsy, countless pin pricks to take blood samples, and ultimately chemotherapy to get her well we didn’t hesitate. It took 9 months of struggle but now at age 6 she has been healthy and a light in our life for over 5 years.

America is ours to lose. If we don’t demand our politicians act like adults then as the country gets sicker we have no one to blame but ourselves. Toss out the professional politicians who are blinded by their re-election fund raising and replace them with normal Americans that know how to do the hard work of fixing real problems.