2/28/2014 AZ Republic by Dr. Harold Wong
One of Warren Buffett’s favorite sayings is “Be Greedy When Others are Fearful and Be Fearful When Others Are Greedy” Buffet wants to sell when a company value is high and buy when others are afraid and the value is low. He became the controlling shareholder of Berkshire Hathaway in 1965. Since 1965, Berkshire’s stock has appreciated nearly 600,000 percent versus 7,400 percent for the S&P 500 stock market index, or 81 times better than the S&P 500. Berkshire Hathaway has averaged a compounded annual gain of 19.8 percent since 1964. Each dollar invested has grown to $400,863, versus less than $10,000 if invested in the S&P 500 index (Source: Warren Buffett’s Railroad, found in http://www.investmentu.com/warren-buffetts-railroad.html)
During the 2008-2009 stock market crash, when the nation was in a total panic, he invested $5 billion with Goldman Sachs and got a terrific deal. According to “What Buffett deal says about Goldman Sachs”, 3-28-2013 Forbes, Buffett agreed to give Goldman $5 billion in late September 2008. In return, Goldman handed over $5 billion in preferred shares and a warrant that would allow Buffett to purchase an additional $5 billion shares at a price of $115, even though the shares were trading at $125 at the time, so in the money from the beginning.
For the preferreds, Goldman agreed to pay Berkshire a yearly 10 percent dividend, with option of buying back the stock at any time for 10 percent more than what Berkshire had paid, which Goldman did in April, 2011 for $5.5 billion. Linus Wilson, a finance professor at the University of Louisiana at Lafayette, who has looked at the Goldman deal, puts the dividends at $1.3 billion. So that gives Berkshire a total return of $1.8 billion on the preferreds.
Now come the warrants. In the deal struck on Tuesday, Buffett’s firm won’t have to put up the $5 billion to buy the 43.5 million shares it has a right to purchase, which would be worth $6.4 billion today. Instead, Goldman is going to give Buffett the difference in stock at the time of the deal. Buffett’s return is the same, but he’s left with a much smaller stake in Goldman. All told, that means Buffett is walking away with a $3.2 billion profit on his four-and-a-half-year-old investment in Goldman, for a return of 64 percent. A classic value investor move. Swoop in when others are selling, and pick up dollars for pennies. Buffett’s legend is secure.”
The investing public might need Buffett to remind them to “Be Fearful When Others are Greedy”. In a September, 19, 2013 interview on CNBC, Buffett said that “Stocks are more or less fairly priced now. “We don’t find bargains around but we don’t think things are way overvalued either. We’re having a hard time finding things to buy.”
The stock market reached its low around March 9, 2009, and it’s been more or less a booming market for almost five years. However, January 2014 saw the Dow-Jones stock market index dropped 5.3 percent and the S&P 500 slid 3.6 percent, their worst monthly percentage declines since May 2012. “When the first month of the year is negative, the chances of finishing the full year in the plus column drop to roughly 50-50, according to the Stock Trader’s Almanac (Source: “S&P 500 ends January with a loss: Bad 2014 Omen?” by Adam Shell and Kim Hjelmgaard, found in 1-31-2014 USA Today).
Free Seminar “Secure Your Financial Future: Lessons from Warren Buffett” will be held March 6 and 8, 2014 at the Golden Corral in Surprise; March 21 and 22 at the Golden Corral, Mesa; and March 15, 2014 in Tempe. All times are 10 A.M. to 1 P.M. To RSVP, call 1 (800) 955-2490.
2/14/2014 AZ Republic by Dr. Harold Wong
A previous article, “What Baby Boomer Women Should Know About Money!” was published January 24, 2014 in The AZ Republic. The article covered four major topics: (1) You should not depend on a marriage certificate for your desired lifestyle; (2) Women should plan to be able to live on their income only; (3) Women must understand Spousal Continuation; and (4) Financial and tax knowledge, not diamonds is a girl’s best friend! This article will explore some other financial issues that are important for women.
Don’t Overspend on Your Kids. It’s admirable to want to pay for your child’s college degree, but does that leave you enough for your own retirement? I met a lady, age 60, from Italy that met an American, got married, and then moved to the U.S. She eventually was divorced, but fortunately pursued a career and got a decent job working in engineering for the State of AZ. She had one son that was going to undergrad college at Gonzaga U. in Spokane, Washington. The estimated 2015 total costs included: full-time tuition ($36,040), room ($5,040) and meals ($4,540); $495 fees; and $1,074 for books and supplies. When one adds airfare to return to AZ three times a year, and a little for spending money, the total is $53,000. She covered this expense for 4 years, at a total cost of $212,000. Luckily, she had invested in 4 rental houses starting 20 years ago. To cover his private undergrad college expenses, she sold 2 of her rental houses.
While it’s mainly only the middle-class and affluent that even dream of paying for a child’s private college costs, I also see what happens at the other end of the economic pyramid. Several years ago, I met a divorced lady, age 70, who lived in a $120,000 mobile home in Sun Lakes, AZ. She was surviving on about $2,000 of combined monthly income from Social Security and a small pension. She only had about $150,000 of life savings. Her semi-unemployed son was living with her. He was not paying any rent and she paid for all the food and most of his car expense. Recently, I heard that he had appropriated for his own needs $50,000 and she had spent $25,000 on him during the last 3 years. So, her life savings was down to $75,000.
Understand the cost of long-term care. According to AARP and other sources, only 6 percent of those who are age 65 or older own a traditional long-term care (LTC) insurance policy. Americans refuse to buy LTC because they don’t think they will need it. However, there’s a 50 percent chance that one of the spouses will eventually need heavy-duty home care or eventually will have to move into an assisted living facility. The normal stay is 3-4 years. The monthly cost can range from a low of $3,000 to $10,000, depending on whether one wants Motel 6 or Ritz-Carlton facilities and amenities. Let’s say that the 3.5 years, at an average cost of $7,000 monthly, or a total of $294,000. If you do not have LTC insurance, you will have to pay this from your life savings.
Warning: the husband usually dies first. In American, the man typically expects the dutiful wife to take care of him when he has serious illness or needs LTC. Then he dies. She is not only physically and emotionally drained, but substantial life savings have been used for his care. Now, what does she do? Re-marriage is really not an option, as by age 80, at least 50 percent of women are non-married.
Summary: Over-spending on your kids and not planning for LTC expenses are two major reasons many senior women wind up in financial hardship. Baby Boomer women should make plans to avoid these two landmines.
(1/24/2014 AZ Republic by Dr. Harold Wong)
Baby Boomers, those 80 million born in the U.S. from 1946-64, had a different experience than the Silent or Greatest Generation. In most households with a Baby Boomer couple, both work for most of their adult lifetime until retirement. After meeting tens of thousands who have attended my financial, tax, and economic seminars over the last 33 years, here are some observations that apply to Baby Boomer women.
- You should not depend on a marriage certificate for your desired lifestyle. The marriage statistics are sobering because only about half of the marriages last forever. For Baby Boomers, it’s not unusual to have 2 or 3 different marriages. Each time there’s a divorce, both spouses decrease their living standard. Although an even split of community property is the norm, the legal fees and emotional damage can become permanent. Now the two ex-spouses have to pay for 2 households; 2 big screen TV’s; and 2 sets of furniture when they split up. When one takes a vacation, the hotel room costs the same, whether there are one or two occupants.
- Women should plan to be able to live on their income only. The divorce courts have changed their opinions about spousal support. Unlike 40-50 years ago, the courts expect the woman to work. There may be temporary alimony until kids reach age 18 (sometimes age 23 if they go to college) or for 5 years so that the woman can go back to college. However, the divorce courts expect each spouse to cover their own living expenses on a long-term basis.
- Women must understand Spousal Continuation. An older couple recently came into my office. He has been a retired federal government employee for the last 30 years. He has a federal pension $35,000 per year. Each spouse only had $5,000 of Social Security income. She had never made much in her working life. His Social Security retirement benefit was severely decreased because he had a federal pension. Their total steady income, not counting investment income, was $45,000 and they spent $35,000 annually. However, upon his death, his wife will only receive $4,000 per year from his pension, and there will only be one Social Security check. The family steady income will drop from $45,000 as a couple to only $9,000 for her.
If you or your spouse is lucky enough to have an old-fashioned defined benefit pension, you need to contact the pension administration firm and ask them to give you the answers to these 3 questions in writing: (1) How much should my pension be and show me the formula? You know how much you have been receiving but how do you know you have not been shorted. (2) After I die, how much pension income does my spouse get? (3) For how long?
- Financial and tax knowledge, not diamonds, is a girl’s best friend! Because women tend to outlive men by 4-6 years, at some time in your life, you will be responsible for managing assets that may have taken a lifetime to build. It may be financial investments, a small business, the family farm, or an inheritance from previous generations. It’s an awesome responsibility and 77 percent of women say they need help, “Financial Experience & Behaviors Among Women, Prudential Financial 2008 study”. Women who use a financial advisor feel 50 percent more responsible, confident, and optimistic about their finances, but who do you trust? You may love your kids, but do they have extensive training in tax, investments, and business?
Summary: It’s not unusual that women expect to live until their 80’s and 90’s. The best way for women to prepare for the future is expecting to earn their own money and having the knowledge to manage their investments.
(1/10/2014 AZ Republic by Dr. Harold Wong)
Home Prices: Phoenix has had a huge boom over the last 3 years and particularly during the last 2 years. In March, 2000 the median Phoenix AZ area home price was $125,000. Then there was the crazy real estate boom and the peak occurred in June, 2006, when the median price hit $264,800. In May, 2011, the median price bottomed out at $108,300. In July, 2013, the median price rose to $185,000, which is a staggering 71 percent increase. In November, 2013, the median price was $185,000.
However, the real estate market has slowed considerably, especially during fall, 2013. Mortgage interest rates have increased by at least 1 percent since summer, 2013. The new Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed by Congress in 2010, is expected to fundamentally alter how the U.S. mortgage industry functions. The bulk of the rules take effect January, 2014 and will make it harder to qualify for a mortgage. In 2014, Phoenix real estate prices for houses could stay flat. This will require investors to get even bigger price discounts when they buy in order for their formulas to be profitable.
Sellers Have Not Got the Message Yet: It may take sellers at least 6 months to realize that it is no longer a seller’s market and that they will have to substantially lower prices. I talked to a realtor who listed a 2,500 square-foot house for $485,000 six months ago. The house has not sold and she believes the price will have to be lowered to the $410,000-420,000 range in order for it to sell. A neighbor of mine listed his 1,920 square-foot Tempe house for $375,000 and it sat on the market for over 9 months. He claimed that it had all sorts of upgrades. I recently met the new owner who paid $315,000 and is gutting the place so it can be remodeled. She said the house was dated and nothing major had been done to it since it was built around 1995. With increased inventory on the market and substantially lower demand from investors, sellers have to lower their price expectations.
Gold forecast 2014: (found in 1-2/2014 www.moneycontrol.com). I have absolutely no idea where gold prices will go, after about 26 percent losses in 2013. This was the first annual year with losses since 2000. However, here are forecasts by 3 giant investment companies.
J.P. Morgan cuts 2014 gold forecast by 10 percent
Analysts at J.P Morgan Cazenove lowered their forecasts on gold prices – by 10 percent to USD 1,263 an ounce for 2014 and by 12 percent to USD 1,275 for 2015, according to their research note. Next year will be characterized by tapering and low U.S. inflation, with the downside exacerbated by the re-emergence of producer-price hedging, the analysts said. They left their 2014 and 2015 forecast for silver unchanged at USD 21.38 and USD 22 an ounce, respectively.
Goldman predicts steep losses for gold in 2014
Goldman Sachs predicts a “significant decline” in gold in 2014, following losses of around 26 percent in the previous metal so far this year. Bullion is set to fall at least 15 percent next year
Morgan Stanley in October predicted that gold will extend losses in 2014 amid expectations of a further paring of U.S. stimulus – a prediction that proved prescient considering the USD 10 billion cut to QE announced on December 18. The investment bank said bullion will average USD 1,313 an ounce next year, compared to its 2013 forecast of USD 1,420, Morgan said in its quarterly metals.
Conclusion: Gold and real estate have historically been used as a hedge against inflation and economic uncertainty. With the economy improving and changing fundamentals, these 2 assets have cooled off.
(12/27/2013 AZ Republic)
As 2013 ends, it’s traditional for Americans to have New Year’s Resolutions for the upcoming year. The most common are “Quit Smoking” and “Lose Weight”, and most will NOT do what’s required to achieve their goals. Let’s list some financial and tax resolutions that, hopefully, are easier to implement.
Calculate Your Retirement Goals in Dollars: This involves determining how much annual spendable income you need in your retirement years. I advise people to ignore the conventional financial suggestion that you can live on 70 percent of your working income. Why would you plan on spending less? Do you want to cut back on eating out and entertainment by 25-50 percent? Do you want to take no vacations instead of the normal 2-3 week you get while working? When you retire, you now have unlimited time to pursue your dreams.
Understand the Effects of Inflation: If you think you need $50,000 of after-tax income for your first year of retirement, look at the effect of various levels of inflation. The U.S. government says that over the last 50 years, average inflation has been around 3 percent. I believe that’s a conscious understatement. In the 1970s, the U.S. government developed the Core Consumer Price Index, which excluded goods with high price volatility, such as food and energy. According to Wikipedia, “on January 25, 2012, the Fed announced they would stop using the core CPI and rely instead on the Personal consumption expenditures price index (PCE).” If one looks back to 1992, this PCE index rises one-third percent lower than the CPI index.
Dr. Wong comment: I’d like to see anyone in Congress live one month without any food, gas, or utilities. If you use a future 5 percent inflation projection, which may be very realistic for seniors as their medical bills increase, spending $50,000 today would require $81,444 in 10 years; $103,946 in 15 years: $132,665 in 20 years; and $216,097 in 30 years. Many Baby Boomers want to retire by 65 or younger. Actuarial studies show that there’s a 50 percent chance that at least one of a 65-year-old couple will live till 93. Your money may have to last for 20 to 30 years in retirement.
Understand Risk vs. Return: Let’s suppose that your life savings is $800,000 of liquid funds, whether it is composed of money in the bank; brokerage accounts; mutual funds; individual stocks and bonds; or cash value of annuities and permanent life insurance. If you risk your funds with Wall Street, and your funds increase 50 percent to $1,200,000, you are excited. Ask yourself whether this will significantly increase your happiness in retirement. On the other hand, if you lose 50 percent on Wall Street, you now have $400,000. Will this now significantly decrease your ability to pursue your dreams, such as: overseas travel; helping grandkids pay for college; or pursuing expensive hobbies? Everyone wants to dream about profits, but few understand how losses will affect their retirement lifestyle. Remember, Warren Buffett’s Number 1 Rule is: “Don’t Lose Money!” His Rule Number 2 is: “Don’t Forget Rule Number 1!”
Save Taxes: Most people think of January through April 15 as tax preparation time. Instead, this should be when you implement tax planning strategies so that by December 31, you have reduced your taxable income and therefore your income taxes due when you file your tax return by next April 15. If you have a profitable business, pay your kids for work and deduct travel, entertainment, and car expenses. Start a family 401(k) and/or a defined benefit pension plan. If you don’t have a business, start a side business in addition to your job.
Conclusion: Use the Holidays to write down a concrete financial and tax plan for 2014. Your retirement future depends on this.
(Special to the 12/13/2013 AZ Republic by Dr. Harold Wong)
I was invited to the annual AG Horizons Conference, held 12/3/13 and 12/4/13 in Pierre, SD. Seven different small agricultural associations have their joint meeting. Of the three different talks to the group, this article will highlight some of the material from “Secret Advanced Tax Strategies”.
Farming has changed from when I was a kid, 60 years ago, growing up on the outskirts of rural Joliet and Kankakee Illinois. Then, many small-time farmers could support their families with a 160-320 acre farm and a part-time job during the winter. Today, farms are huge enterprises and some of the folks I met farm 3,000-10,000 acres. Machinery is costly, with combines costing $300,000 or more. So, one needs a lot of acres to amortize the high cost of machinery.
In the past 5 years, there have been record crop prices, reaching as high as $7 per bushel corn; $16 per bushel soybeans; and $10 per bushel wheat. With high crop prices and large farms operated, net profit form farming is no longer small potatoes. A number of the farmers have net profits of $250,000 to $1,500,000 in a good year. So, they now have more cashflow than ever and therefore tax problems. They also have the cash to do things for the family that were previously unheard of. Let me cover their concerns as well as advanced strategies that are solutions:
- I have big profits and want to save income tax: Earlier in 2013, a big farmer came to one of my Mesa, AZ seminars, as he’s a snowbird with a house in Mesa. He’s had as much as $1 million taxable income in the past. The solution was to establish a 401(k) plan and defined benefit pension plan. We added his wife to the payroll and the combined contributions to his July 1, 2012 to June 30, 2013 fiscal year was just under $300,000. This will save him close to $100,000 of tax not just in year 1, but every year that he makes this tax-deductible contribution. As a side benefit, this will also provide a retirement income for the two brothers (non-family) who are his employees and are now currently in their 30’s. For the farmer, his future annual retirement income will exceed $100,000.
- None of my kids or grandkids wants to work the farm and I want to provide lifetime income to them: The solution is the Multi-Generational IRA with the Roth IRA conversion strategy. Here’s how it could work for a farmer with 3 daughters and 4 grandkids. None of my client’s 3 daughters (or their husbands) wants to work the farm. In fact, they have moved out-of-state. The 4 grandkids are too young to work the farm and since they won’t grow up in the farm area, they won’t know how to work it once they become adults. Suppose the farmer has $770,000 between his and his wife’s traditional IRA. Suppose the average age of the 4 grandkids is 9. This strategy will create slightly above $8 million of tax-free income over the life of the 4 grandkids. After the farmer and his wife, currently in their late 60’s, die, here’s the projected income to each of the 4 grandkids: $7,000 at age 25; $11,000 at age 35; $17,000 at age 45; $27,000 at age 55; $43,000 at age 65; $69,000 at age 75; and $90,000 at age 80.
Summary: Farmers in rural areas normally have not heard of tax strategies such as the family 401(k), defined benefit plan, Multi-Generational IRA, or the Roth IRA Conversion. These secret advanced tax strategies can save substantial taxes and provide lifetime income for the kids and/or grandkids. A future article will talk about how to guarantee a lifetime income to the farmers and avoid capital gains tax.
(Special to the 11/22/2013 AZ Republic by Dr. Harold Wong)
This article will be published during the 7-day Thanksgiving week. Millions of Americans are still feeling the effects of the Great Recession. However, Thanksgiving week is traditionally a time for family gatherings and the first major event of the 6-week Holiday Season. Here are my thoughts on what to be thankful for:
You have a job that pays you enough to cover living expenses: Over 10 million jobs were lost during the Great Recession and not all have been regained. Even worse, some reports are that of every three to four middle-class jobs lost; only one has been regained. The average American family has $4,000 less median family income today than ten years ago. Yet, by budgeting, you can offset this $4,000 drop in income.
You have a roof over your head: During the recent real estate crash, millions of Americans lost their home to foreclosure, short sale, bankruptcy, or just mailing the keys back to the lender and voluntarily leaving a house they could not afford. Consider that it does not matter if you are currently renting an apartment or house. When you consider all the expenses of owning a home (mortgage, real estate taxes, insurance, HOA fees, and repairs) it is often cheaper to rent. Understand that you will be able to buy a house in the future. FHA and VA loan programs are the most lenient and will often allow you to buy your next home with these loans only 2-3 years after you lost your previous home.
When you downsize, you find out that at least half of your household possessions are NOT an important part of your life. In a “Hints from Heloise” column published over 40 years ago, she said that you should give away or throw away “any book not read in the past year and any item of clothing not worn in the past 6 months”. If we used this criteria, most people would only need 20-25 percent of what’s in their closet or bookshelf.
You are not going through a divorce and have a stable relationship, whether married or not: If you’re not lucky, you got married and within 5 years (the median life of a marriage), you’re divorced and paying alimony and child support for your 2 kids. By the way, child support does not stop until the kids are 18, and if there’s a provision in the divorce agreement that requires you to pay their college expenses, not until they are 23. Now, you’re broke for the next 13-18 years. Note: 50% percent of first marriages, 67% of second and 74% of third marriages end in divorce, according to Jennifer Baker of the Forest Institute of Professional Psychology in Springfield, Missouri.
Your kids and/or grandkids are financially self-sufficient: According to the latest Census Bureau data, in Sacramento, CA, 36.4 percent of adults ages 18 to 31 were living with their parents in 2011. “The previous record was set at the dawn of the Great Depression, when 35.5 percent of Sacramento adults in that age group lived with mom and dad”. Source: “Boom in boomerang kids: Percentage of young adults living at home in Sacramento at a record high”, by Ellen Le, August 10, 2013, Sacramento Bee. According to a May, 1, 2012 New York Times article by Lily Altavena, one in 2 new college graduates in the U.S. were still either unemployed or underemployed.
Summary: In America, we still have one of the highest standards of living in the world. What is considered living poor here would be heaven to millions in the Third World. Although a record 47 million Americans receive food stamp assistance, they have enough to eat. We have free education for all and more potential for upward mobility than in many other countries.
(Special to the 11/8/2013 AZ Republic by Dr. Harold Wong)
When you read this article, there are less than 2 months to make tax moves that will reduce your taxes when you file your 2013 tax return. Most don’t think about taxes until it’s time to file their tax return. By then, it’s too late and filing a tax return is just about collecting all your receipts for the tax preparer. It’s the moves you make before December 31, 2013 that can reduce your taxes owed for the 2013 tax year. Here’s a list of items to consider.
For Employees: First, find out from your employer whether you have any large bonuses that will be paid to you. If you ask, you may be able to have the company pay you in January, 2014, and therefore that bonus is not taxable income for the 2013 tax year. Second, do a tentative tax return for 2013 and be sure to count all sources of taxable income. See if itemizing your deductions on Schedule A would yield more tax savings than taking the standard deduction. If so, then make sure you give all desired charitable contributions; pay owed real estate tax and mortgage payments; and incur all medical expenses before the end of 2013. Note: for tax year 2013, the standard deduction (used for those who do NOT itemize deductions) is: $6,100 for individual taxpayers and or for those married taxpayers filing separate; $12,200 for married taxpayers filing jointly; and $8,950 for those filing under the category head of household.
For Investors: If you have “dog” stocks (those with capital losses and little chance of appreciation), do some “tax harvesting” by selling them before the end of 2013. You can use these capital losses to offset capital gains, and 2013 has been a year where the stock market has increased substantially. If you have more capital losses (including previous losses carried forward) than capital gains, you can use a maximum of $3,000 as a deduction against your ordinary income (wages, interest, dividends, rents, royalties…).
For Small Business Owners: You have a number of tax planning strategies. The first is your ability to increase expenses before December 31, 2013. For example, if you incur expenses on a credit card in December, 2013, you can deduct them on your 2013 tax return, even if you don’t pay the credit card bill until January, 2014. Example: From November 6-10, 2013, I am going to Key Biscayne, Florida for a financial conference held at the Ritz-Carlton hotel. Luckily, the organization if paying all my airfare and hotel expenses because it wants me there. If I was a ND farmer who was finished with his fall harvest, it would be great to get out of the winter climate and go to Florida for a week. If you attend a business conference, you can deduct virtually all your expenses.
Second, you can pay your kids for legitimate services rendered for your business.
Here’s a summary of the rules. If your business is a sole proprietor or a partnership in which each partner is the parent of the child, and the child is under age 18, you are NOT required to withhold and match Social Security and Medicare taxes on the child’s pay. The child’s wages are not subject to FUTA tax. You must pay the child a reasonable amount that does not exceed what you would pay a stranger and it must be actual work for your business. Your child could use the $6,100 standard deduction to offset the first $6,100 you pay him and thus not owe any personal income tax. Because he has earned income, your child could open a Roth IRA,
Summary: See your tax advisor and implement any tax planning moves BEFORE December 31, 2013. You’ll be happy when you file your tax return by April 15, 2014.
(Special to the 10/25/2013 AZ Republic by Dr. Harold Wong)
On October 16, 2013, Congressional Republicans gave up their bitter budget fight with President Obama and approved legislation ending the 16-day government shutdown. Obama signed the bill on October 17, which also extends the federal borrowing power in order to fund the government through January 15, 2014 and raises the debt limit through February 7, 2014. Did the American people actually win?
A December, 7, 2012 article in The Washington Times, “U.S. borrows 46 cents of every dollar it spends”, goes over the numbers. “The government is poised to post another $1 trillion deficit in fiscal year 2013, which would mark the fifth straight year. Before that, the record was $438 billion, which came in 2008, President George W. Bush’s last full year in office.”
Another source, www.usgovernmentspending.com, shows that the current Federal deficit is about $16,738,158,460,000, or about $17 trillion. This number does not include state and local debt, and does not include the unfunded liabilities of entitlement programs like Social Security and Medicare. The Federal Debt per person is about $51,297. In 2009, our total federal debt finally equaled the total GNP, or gross national production of the entire economy.
These numbers are too huge to comprehend, so let’s put it in the context of a family of 4. Assume that the husband and wife both work and earn $80,000 annual income and net $60,000 after tax. Instead of living within their means, suppose they spend $111,111 annually. This is composed of their $60,000 after-tax income plus $51,111 borrowed on credit cards (46 percent of the $111,111).
After one year, they will owe not just the $51,111 borrowed but also interest. If this was borrowed from credit cards that charged 20 percent interest, that would be $10,222 of interest, or a total of $61,333 owed. In year 2, they borrow another $51,111 because they won’t cut spending. They now owe $61,333 plus $51,111, or $112,444. If one adds 20 percent interest, they will owe another $22,488 a year later, or a total of $134,932. At the end of 5 years, they will have borrowed $255,555 from their credit cards and owe about $153,332 in interest, for a total of $408,887 of additional debt.
If this family were like the federal government, current total debt would equal total family income, or $80,000. When one adds it to the $408,887 of additional debt incurred over the next five years, the family will owe $488,887. Imagine this family could issue a 30-year IOU, like the Federal government does with 30-year Treasury bonds. If they paid 6.5 percent, typical of the average mortgage rate over the last 45 years, the monthly payment would be $3,073.45 or $36,881.41 annually.
To pay off their debt, the family would either have to cut annual spending by 61 percent or increase income by 46 percent. The family would have to earn an additional $46,102 to net $36,881 after taxes. $46,102 is 58 percent of their current $80,000 annual gross income. How many American families could increase their income from $80,000 to $126,102 in one year or cut spending by $36,881 to $23,119?
If this were an old-fashioned family, the 2 teenagers would go to work part-time, both parents would get a second job, and they would cut spending to the bare necessities. They would grow their vegetables in a garden, eat rice for starch, and use meat sparingly. They would sell one of their cars and have 2 new housemates pay rent.
Conclusion: Many of the mainstream politicians have no interest in solving our U.S. debt crisis. They hope they can keep borrowing from Asia and when our creditors cut us off, they will be retired millionaires. Question: Are Americans willing to cut spending, raise taxes, and stop borrowing?