Life gets better with cash to spend – until you have to pay it back

Hold firm. For the next couple of months – maybe even for the next couple of years – you’re going to hear things are getting better, President Obama’s plan is going to work. As a matter of fact, I just heard a commentator on Fox News note things are getting better so why would we want to stop what is being done!

This is not unexpected and there is a good explanation. Hold firm.

If I loaned you $1 million, would your life be better today? Tomorrow? What about next week? Eventually you would need to pay back the $1 million – with interest of course – but the point is there could be an influx of good things in your life. You could buy a new car, boat, mountain bike, and maybe even one of those fancy iPhones without the two year commitment.

Of course, if I loaned you $100, you’re life could be better today as well, but there is a much better chance you would be able to pay back that loan, and that is where we are right now.

The government is printing and handing out money so fast that nobody in Congress can tell you where it is going or what is being done with it. The problem is nobody knows how, when or if it can ever be paid back; and nobody seems to care.

The plan truly is generational theft and the end to any fiscal responsibility. The Constitution is – quite honestly – being ignored. Click on the popular chart, released by the Obama administration, showing the huge increase in the projected deficit.

But you have to look at the other side of the ledger as well. How much is the country producing and how does that compare to what the government is spending. For this figure, we use a chart showing the deficit – or surplus – as a percentage of gross domestic product (GDP).

The second chart to the right (click for full view) shows we are quickly jumping to 8+ percent (deficit) in 2009. We averaged about 2.5 percent (deficit) since 1970. This can be simply described as selling you an expensive car based on the assumption your income is going to get much better within the next few years.

We can use the example of a home mortgage. Normally, banks want to ensure you can afford to pay back a loan before they grant the mortgage. This is partially done by reviewing your debt to income ratio. If you have good credit, a bank will be comfortable with a debt ratio of about 30 percent.

That means the loan principal, interest, property taxes and insurance should not exceed 30 percent of your gross income. If you make $100,000 per year, you would be limited to payments of no more than $30,000 per year or $2,500 per month. Would a bank feel comfortable providing you a debt ratio at 50 percent? Probably not.

And neither are the Chinese.

The government is setting its own rules and tripling the accepted debt ratio. Between 1988 and 2008, the deficit as a percentage of GDP averaged 2 percent (deficit spending). The “bad years” came with the excessive spending after 9/11 and between  1988 and 1993. Of course, it was not to good in the mid-1980s either, but the best ray of hope was just after the 1996 Congress came to power.

Truth is stranger than fiction. The gingerbread house built by the Budget and Fiscal Services department of Honolulu collapsed. What a symbol of 2008. Image courtesy Quasic at Flickr

Again, you’d be perfectly comfortable loaning money to someone at a debt to income ratio that makes sense, but this ratio does not make sense.

Hold firm.

As a conservative, I want you to remember that Congress – not the president – holds the purse strings for the country. Second, a huge portion of the federal spending is not authorized by the Constitution.

With that in mind we need to concentrate on our congressmen and women at home, put the pressure on them to end the federal spending that is not authorized by the Constitution.

Yes I know, people tell me that boat sailed long ago – FDRs New Deal headed us out of the harbor – but we must fight to take that power away from the federal government and bring it back to the states and the people.