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In 2005, the Delaware Department of Correction signed a contract with the company Correctional Medical Services (CMS) to provide medical services to inmates in state prisons. The promise of cost savings quickly evaporated, and the state was left with low quality healthcare for inmates. Inmate health deteriorated under the new contractor and several deaths resulted from lack of adequate medical care. The contractor’s performance has forced the state to spend extra time and money associated with litigation arising from the substandard care.

Today the Port of Wilmington faces the same fate… as it is about to be privatized by a large oil/gas conglomerate: Kinder Morgan

LET US BRIEFLY REVIEW THE MYTHS REGARDING PRIVATIZATION.

Myth #1: Privatization saves money.
The Truth: Privatization often raises costs for the public and governments.

Myth #2: Private companies do a better job than the public sector.
The Truth: Many examples show declines in service quality under private contractors.

Myth #3: Privatization allows governmental entities to better anticipate and control budgetary costs.
The Truth: Cost estimates are extremely unreliable and privatization can cause result in unforeseen budgetary consequences.

Myth #4: Privatization allows governmental entities more administrative flexibility.
The Truth: Privatization requires substantial administrative resources for monitoring and oversight.

Myth #5: The public still maintains control over a privatized asset or service and the government retains the ultimate ability to make related public policy decisions.
The Truth: Privatization can bind the hands of policymakers for years, allowing private companies significant control of a privatized asset or service and the ability to dictate important policy decisions.

Myth #6: If anything goes wrong, the government can easily fire the contractor or adjust the contract.
The Truth: Reversing privatization involves huge costs and service interruptions.

Myth #7: Companies are chosen for privatization contracts on the merits, not based on political or financial connections.
The Truth: Government for profit opens doors to unscrupulous behavior by politicians and businesses.

These were compiled by the group In the Public Interest and if you wish further information or explanation, I would suggest a deeper reading here.

The one truth coming out of all privatization plans, is that privatization winds up costing taxpayers more, as well as disrupt the services we need to survive.

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Business Is Up At Wilmington's Port
Courtesy of Maersk Lines

To privatize or not privatize Wilmington’s own ocean-going port; that is the question now up for debate. Talks begin next week.

One the port loses money; turning it over saves money the very year it gets dumped.

Two, privatizing the port, will cost union jobs and their pension fund, dearly. There is no way any company will not want to “own” that pension fund.

Three, as a private business, the port must be taxed, earning revenue for the city.

Four, safety, upgrades, competitiveness with other ports, all take back seat to revenues acquired per quarter.

Five, the city will have another major business knocking its doors down asking for new major concessions.

Bottom line, is whether the city wants to sell out those working, taking the financial hit that will cost it, or to pay the extra each year to keep the port running….

In this day and age, it appears selling out the people, carries far greater risk and impacts the area with a greater negative, than simply paying for the shortfalls year after year.

Let’s us remind ourselves what actually “is” privatization….

In privatization schemes to outsource traditional governmental functions, taxpayer dollars are diverted from the building of public assets and institutions to create long-term revenue streams for corporations. Privatization has resulted in the loss of public sector jobs that have been crucial to the growth of the middle class, and instead has created a system that favors lower wage jobs and new profit centers for CEOs and investors.

Here is how privatization works. I buy a field next to your house. I live in a tent. I watch your house while you are away on vacations. You’ve paid off the house, and now, having retired, you live in Florida, and the house taxes are backing up here in Delaware. You sign the deed over to me, so you don’t pay taxes anymore….

I just stole your property. All that money you put into it, was essentially, wasted. Your assets, drop by $500,000. Mine jump $500,000. You could have put the house on the market… That is what most people do… But no. You just gave it away. Thank you, btw.

That is privatization. Giving something free to corporations, a handout, that they only get, because they just happened by at the right moment…. Here you go, bud… have $45 million dollars… Run a business! Welcome to corporate America.

That is privatization. Of course, it is framed these three ways: …. “let me take that off your hands…;” “I could take care of that awful problem for you;”…. ” You, know, I could make that “problem” go away..”.

And in the heat of the moment, that investment that years of hardworking people have put into, gets whisked away…. So of course privatization is going to be sold hard. Who wouldn’t want a free $50 million dollars?

Bottom line, there are some entities in public society that are there for the common good. The public funds them… Take roads for example. If Delaware privatizes 95 into to Wilmington, every commuter pays an extra $2 a day to make the trip. Every commuter pays $2 X 5 X 50 on the average, or $500 a year. At roughly 60,000 commuters a day, $30,000,000 is sucked from all other businesses in New Castle County per year, and given to the new owner of interstate 95…. Primarily to prevent that, was why a long time ago public funding and ownership, was deemed to the better approach. Furthermore, repairs and potholes, suddenly get low priority status; skimming off the top becomes number one…..

The choice of privatization boils down to the following…. Which is better? A choice of higher business activity, or a choice of keeping the wages of those working now?

This can best be seen in Greece. The Greeks farmed one half of this port, the container side, over to a Chinese company. They kept the lucrative part, the cruise ship side, for themselves. What has happened is that business on the Chinese side as doubled. It is becoming one of the busiest ports in the world. The Greek half is languishing. Lacking the money to invest, their side has, by not going forward, fallen backward.

The Chinese have invested in new ideas and new technology. But, being Chinese, one can rightly expect they don’t invest in human capital.

On the Greek side, some worker’s salary and benefits amount to $181,000 a year. Obviously a full work force paid that much would soon force closure of the port. The Chinese pay $23,000…. and have no job security plan. They also do not abide by Greece’s union regulations and safety requirements. Currently they have no trouble filling workers when they need them. (Greece is in the imploding stages)…

And there you have it. One simply has to plug in whether the lease amount and tax revenue from a thriving port on top of the diminished payroll purchasing power of all its ex-employees, is greater or less than…. the diminished tax revenue from a mediocre port, on top of the purchasing power all it’s unionized employees possess…..

It appears that the one best option, is to have Government upgrade the port, meanwhile keeping government ownership, thereby keeping its workers employed and their money flowing through their economy… That option maximizes the most money flowing out of the port, and into the city.

The problem for unions is, that as long as wages are consistently high across the Seaboard, then that is the price of doing business in America’s ports. But let one port hire 7/8th less per worker, then in all other ports to remain competitive, all workers will soon also have to be working at that level. 7/8ths less of economic clout per worker, needs to be quantified in dollars, before knowing the full economic benefit.

There is one more thing. If the business running the port loses money, even one dollar; they can just shut the port down and walk away…. Then there are no winners.

If you gotten any mail from your homeowners or business insurance pull it out now.  Go to usually the third from the last page and look for flood damage.  Often like bills flowing through the House or Senate, these policies simply tell you to  “delete these words” and “substitute these words’.  Unless you have an old policy to cross reference, you probably do not know  where you stand. Your friendly Democratic reminder.  These were put in place by Republicansand were buttressed against the Democratic assault to change them, by the Tea Party…   Their motto:  Private companies Know Best, won the day. Here is what to look for.

  • Homeowners’ insurance typically doesn’t cover floods; do you have a flood insurance rider?
  • Check the definition of “flood”.  Does it cover  storm surge, burst pipes, water seepage, and basements filling up with water?
  • Look for “anti-concurrent causation“;  does your insurance policy cover simultaneous events? From both wind AND water?
  • How much will your insurance pay?  Renew like new? To make it livable? Or to offer “some” financial assistance.
  • How high is your deductible.  When you bought, it was 50 dollars.  Today claimants are discovering it is $10,000…..
  • Does your coverage only cover hurricanes?  Sandy was only classified as  a depression when over Delaware.

That is what those who have private insurance through Bain Capital invested companies are discovering today….  Those fortunate to be in a Federal Disaster Area, have access to complete coverage through interestingly FEMA (the Federal Emergency Management Agency) which does provide insurance through NFIP (the National Flood Insurance Program). Romney said get rid of FEMA and give it to the states, or even better to private insurance companies…. which he owns, of course…. Bottom line, check your policies and if you see any Republican in your daily travels,   tell them STFU….


Right click to open full image… Pictograph Courtesy of Viral..

So, can someone tell me again, why we shouldn’t tax the rich, and instead, balance the budget on the backs of everyone else?…….

I seem to be missing that little detail where that all makes sense……

There are two choices before us:

One, we tax the top 1% and live the quality of life we deserve…..

Two, we continue the tax cuts, allowing the top 1% to not pay their fair share in taxes, and continue the quality of life we’ve suffered since 2001..

Simple microcosmic view: find a pothole in today’s state road system… You can’t, it’s covered up with stimulus funded new pavement… Nice, crisp, sharply painted blacktop, as far as the eye can see….

Compare that to the Bush Era… Potholes galore and getting them fixed was like pulling teeth…

Now pull back and look at your entire lifestyle with all it’s moving parts…. first see one where everything outside your control is operating smoothly like clockwork ( a Visa commercial comes to mind), and the other where it is all cacophonous and catastrophic…..

So, in which type of lifestyle do you prefer to live?

Decide and vote.

I predict by the end of May we will be discussing shutdown of the federal government. Based on today’s comments I foresee the next fiscal year rolling over without capitulation by either party. For a while at least, there will be no funding.

I think it is a good thing if we do shut down the Fed. . It will take politics from a parlor sport out into the real world.

The argument will be simple.

Republicans: we are shutting down the government because it spends too much.

Democrats: They are shutting down the government because they don’t believe in Social Security, Medicare, Health Care Coverage, or believe that the government should fix your roads, pay for your teachers, invest in new technologies, or anything else.

It would be interesting to see how long the Republicans last when they return this summer to their districts and have to answer questions as to why all the spending that has supported their districts economically since WWII, is because of them, now no longer available…..

Their answer: because we don’t think the rich and wealthy 1% should pay for it…

It will be an interesting summer and should finally prove to everyday Americans, that republican philosophy is hot air aimed simply “to do what benefits our wealthy benefactors.” … period.
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The report comes out tomorrow…..

January 20th, Inauguration Day 2009.. Wow, it’s been two years…..

So…. what did he accomplish? And what did the Republicans accomplish by Inauguration Day 2002? At the same point in their tenure?

The answers are damning for Republicans, that’s for sure…

First of all, we must all remember. One president walked into a budget surplus, full employment, a roaring economy, and took over the nation that was the most respected in the world. ( That of course would be the Republican, because he had the good fortune to come in after 8 years of solid Democratic leadership ) The other president, took office that was deeply in debt, the economy was in a massive free-fall, we were losing two wars simultaneously, GM and Chrysler were belly-up, all our banks had collapsed, people could not keep up on their mortgages, and health care was out of control with insurance dropping paid-up people off their roles, simply because they got sick………..

One president had the world handed to him; the other came in owing the world….

At the end of his midterm, George W. Bush was rated by historians as the worst ever… Among some of their reasons… were:

the doctrine of pre-emptive war, crony capitalism/being “completely in bed with certain corporate interests,” bankruptcy/fiscal irresponsibility, military adventurism, trampling of civil liberties, and anti-environmental policies.

On the contrary, the Obama administration drove and got passed, the Recovery Act, which is the largest infrastructure investment since Eisenhower, the largest educational investment since Johnson, and the largest clean energy bill, since….. George Washington.

Similarly, with the help of Delaware’s Ted Kaufman, the Obama administration enacted Wall Street Reform, which empowered both investors and consumers, stopped predatory lending practices, brought trades into light, and…. ended tax payer funded bailouts…

The Recovery Act also reduced taxes for 95 per cent of working families. Very necessary unemployment benefits were extended for those who lost their jobs through no fault of their own.

Credit Card Reform banned retroactive rate hikes, implemented new protections for young people who were enticed to spend more than they could afford, and required credit card companies to explain their terms in plain language. It also stopped banks from manipulating your balance to trick you into going over your limit, then socking you with excessive amounts of late charge fees.

New clean emissions standards and new mileage requirements rejuvenated the auto industry, causing it to undergo rapid development and growth in that sector, making America’s cars the envy of the world again. America’s auto industry was on it’s deathbed when Obama took over. Now, that sector is doing well, even better than Toyota.

At the midpoint of his first term, …George W. Bush, had at this time, ……….

Presided over the loss of approximately three million American jobs in his first two years in office, the worst record since Herbert Hoover.

Overseen an economy in which the stock market suffered its worst decline in the first two years of any administration since Hoover’s.

Transformed almost universal respect for the United States into worldwide condemnation. (One historian made this point particularly well: “After inadvertently gaining the sympathies of the world ‘s citizens when terrorists attacked New York and Washington, Bush has deliberately turned the country into the most hated in the world by a policy of breaking all major international agreements, declaring it our right to invade any country that we wish, proving that he’ll manipulate facts to justify anything he wishes to do, and bull-headedly charging into a quagmire.”)

Misled the American public about weapons of mass destruction and supposed ties to Al Qaeda in Iraq.

Failed to follow through in Afghanistan, a military situation where we won, then abandoned that area allowing the opposition to regroup and become more powerful than ever. We are in Afghanistan today, solely because we did not finish what we started.

Insulted and ridiculed other nations and international organizations and now has to go, hat in hand, to those nations and organizations begging for their assistance.

Completely miscalculated or failed to plan for the personnel and monetary needs in Iraq after the war, so that he sought and obtained an $87 billion appropriation for Iraq, a sizable chunk of which is going, without competitive bidding to Haliburton, the company formerly headed by his vice president.

Inherited an annual federal budget surplus of $230 billion and transformed it into a $500+ billion deficit in less than three years. This negative turnaround of three-quarters of a trillion dollars is totally without precedent in our history.

Cut taxes three times, sharply reducing the burden on the rich, reclassified money obtained through stock ownership as more deserving than money earned through work. The idea that dividend income should not be taxed—what might accurately be termed the unearned income tax credit—can be stated succinctly: “If you had to work for your money, we’ll tax it; if you didn’t have to work for it, you can keep it all.”

Severely curtailed the very American freedoms that our military people are supposed to be fighting to defend. (“The Patriot Act,” one of the historians noted, “is the worst since the Alien and Sedition Acts under John Adams.”)

Called upon American armed service people, including Reserve forces, to sacrifice for ever-lengthening tours of duty in a hostile and dangerous environment while he rewards the rich at home with lower taxes and legislative giveaways and gives lucrative no-bid contracts to American corporations linked with the administration.

Proclaimed himself to be a conservative while maintaining that big government should be able to run roughshod over the Bill of Rights, and that the government must have all sorts of secrets from the people, but the people can be allowed no privacy from the government.

Against that negative backdrop, in two years Obama has done what progressives since Roosevelt have wished for: Health Insurance Reform, a simple law that returns decency and forces humanity back into the insurance industry. It returns things like they used to be.

It used to be.. if you got sick, your insurance would cover you. Thanks to Obama’s Health Insurance Reform, it is that way again. It used to be… that insurance would cover your check ups to keep you from getting sick. Thanks to Obama’s Health Insurance Reform, it is that way again. It used to be, that one’s children in school, were covered under their parents insurance… Thanks to Obama’s Health Insurance Reform, it is that way again. Since Obama’s Health Insurance Reform brings back the benefits of the Health Care we had growing up,… it is truly, the true conservative Health Care bill.

SCHIP was increased to cover 4 million more American children. Healthier children, lower medical expenses for all of us… in the future.

As for national security? Whereas Bush led us into fighting two wars, one completely unnecessary as well as a complete failure, since we didn’t get any legal oil from out that country, ( it still goes to Europe and China), under Obama, we have removed 100,000 troops from Iraq, and are currently reinserting ourselves into Afghanistan, to undo the damage that Republican president created.

In education, Obama saved American taxpayers 68 billion on student loans, over the next ten years, by making student loans more affordable and less profitable for banks. Under Bush, banks were pocketing most of the Federal guarantee money covering very high interest rates.

Whereas under Bush, we had “no child left behind” which meant that “no child ever moved forward”, under Obama, we have initiatives like “Race to the Top”, “Educate to Innovate”, which have a better chance at giving our nation’s students a competitive edge against the Chinese.

Like Harry Truman, the new GI Bill makes education more affordable for our veterans. Whereas “W” Bush sought to cut veteran’s benefits, as every veteran can attest from their real life history, Obama has tried to improve the lot of America’s finest…

Likewise, Obama ended “Don’t Ask, Don’t Tell”, provided law enforcement new tools to deal with hate crimes, and made it easier for women to challenge unequal pay practices.

And to do all that? Obama in the worst of times, has added $201 billion to our deficit. The policies of Bush “W”, are responsible for the other $1.862 Trillion spending spree towards of this nations deficit, half of which is owned by our good friends, the Chinese. Thank you China for saving our ass from what the Republicans did to our nation…….

In just these two years, it’s obvious that we have a really great man… versus the Republicans abysmal failure…

Truth talks.

(Plus I just invested a big chunk into Kimberly-Clark, the maker of Depends, because obviously, … a lot of republicans are going to be needing them……… )

The easiest way to become rich, is to take other people’s money and give none of it back… — kavips

Leap back two years ago. In a speech given before the New York Bankers Association (NYBA), OTS (Office of Thrift Supervision) Director John Reich expressed concerns about weakening credit quality at some financial institutions. Specifically, he identified inadequate loan documentation, misaligned loan pricing relative to credit risks, declining underwriting standards, liberalization of loan terms and an increasing reliance on wholesale funding as areas of concern to OTS. (Article from Mortgage Banking: May 1, 2006.)

It appears that banks have (two years too late) finally taken up his advice. Now that our economy is collapsing and the Federal Reserve is trying every trick it can think up to loosen credit, the amount of loans going out into the commercial market, can be best described in three words: shrink, shrank, shrunk.

As the new owner of $172.5 billion of preferred shares and warrants in 208 U.S. financial institutions, the Treasury Department hasn’t succeeded in thawing frozen credit markets, leaving taxpayers propping up an industry that won’t lend to them.

More than 8.5 trillion has been pledged by the Federal Reserve and U. S. Treasury to back up financial institutions. Instead of making it easier to obtain a loan, getting approval has become more difficult. Fed reported that about 85 percent of U.S. banks said they had tightened standards on commercial and industrial loans to companies with more than $50 million in annual sales, up from 60 percent in July. Ninety-five percent said they increased the cost of those loans. About 70 percent said they made it more difficult to obtain prime mortgages, and almost 65 percent said they did the same for consumer loans.

Not the best statistics to get the economy going again..

While mortgage rates have declined, they haven’t fallen as fast as bank borrowing rates, meaning financial institutions are demanding more profit for every dollar they lend.

Average rates on 30-year residential mortgages fell to 5.14 percent last month, according to data compiled by McLean, Virginia-based Freddie Mac. That’s down from 6.67 percent in June 2007, before the worst turmoil in the housing market. At the same time, the spread of mortgage rates over the 10-year Treasury bond yield rose to 2.958 percentage points from 1.567 or soared inexplicably 88.7%!

With the exception of GMAC, which immediately began offering loans to GM customers with lower credit scores in order to halt the decline in auto sales, most financial institutions that received TARP funds have been reluctant to lend.

If they can’t make loans, many banks may hold on to the government capital until stability returns — or use the money to finance takeovers of weaker rivals. Pittsburgh-based PNC Financial Services Group Inc. did that last month when it acquired Cleveland-based National City Corp. — hours after receiving approval for $7.7 billion from the government.

But had they opened the gates holding back credit, last week’s evidence shows what might have been the economic outcome of doing so…..


Mid-Michigan General Motors dealers say the loosening of credit requirements by GMAC Financial Services has prompted an increase in traffic to their showrooms.
CNN reports that some dealers reported that 40% of their sales for the month came in the last two days. It was on Dec. 29, that the U.S. Treasury Department gave GMAC $5 billion from its $700 billion Troubled Asset Relief Program, and agreed to lend GM up to $1 billion to support GMAC.

“I’ve got a showroom full of people,” Jim Messick, general manager of Graff Chevrolet of Mt. Pleasant, Michigan, said earlier this week. “It’s really helped.”

“It’s beyond hopeful. We have already seen an increase in sales by 20 percent. It’s almost equal to what we were down,”
Machunsky said of his sales in New Hampshire.

With the economy slowing, banks are seeing a big decline in the number of people seeking loans because nervous consumers and small businesses are scaling back their borrowing.

In fiscal 2008, the number of small business loans issued by banks plunged 30 percent compared with the previous year, according to the U.S. Small Business Administration. Over the same period, the dollar value of those loans fell from $20.6 billion to $17.96 billion, a 13 percent drop.

The pullback is partly a result of tighter credit availability among lenders and declining creditworthiness among borrowers. But it also reflects a big drop in consumer spending that is forcing small businesses across the country to put off expansion plans and cancel orders for new equipment.

The reluctance to take on loans boils down to fear.

The Treasury’s goal is to revive lending — and thereby stem the credit crisis — by freeing up potentially massive amounts of loans. For every dollar a bank keeps as capital, it can lend out as much as $10, which means the $250 billion injection could in theory result in $2.5 trillion in available loans.

But banking experts say lending such a vast amount would be almost impossible given the economic downturn.

If small businesses see that the bailout is starting to take hold and confidence is returning, they will be more likely to seek loans, helping kick-start the economy’s recovery, according to experts.

One example of a business owner looking for signs that it’s safe to borrow again is James Duran, CEO of a Silicon Valley staffing company that does business with big tech companies like Google Inc. and Yahoo! Inc.

Last year, he had as many as 200 employees. Today, he’s got just 15 — cutbacks that mirror job losses across his industry.

He said he has a $1 million line of credit to help build back his company but that he would be “crazy to use it now.”

“Once I see this cloud of uncertainty lift and companies go back into hiring mode, I’ll start using that money,” he said. “But we’re not even close to that.”

What we are seeing is a circle of borrowers and lenders each depending upon the other to make the first move.. Banks are depending upon the economy to signal it’s safe to lend again, and customers who seek those loans, are depending upon the economy to signal that it is safe to again apply for a loan. Neither one is moving until they see a change in the economy.

It’s the economy… stupid… all over again. And it goes further back than that: FDR said in speaking of the 1933 crises…. we have nothing to fear, but fear itself.

Since the practice of calling in loans greatly precipitated the Great Depression, a review of 1930’s history is appropriate today in anticipation of what can again become our fate if we make the same mistakes, and follow the same choices.

When the stock market fell in 1929, brokers called in their loans, leveraged 10 to 1, which of course could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or simply not used. Bank failures led to the loss of billions of dollars in assets. Outstanding debts became heavier to bear, because prices and incomes fell by 20–50% while the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.

Bank failures snowballed as “desperate” bankers called in loans which the borrowers did not have time or money to repay. With future profits looking dismally poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves by making fewer loans, which exponentially intensified deflationary pressures. A vicious cycle developed; the downward spiral accelerated.

The liquidation of debt could not keep up with the fall of prices which it caused. The mass effect of the stampede to liquidate, increased the value of each dollar owed relative to the value of declining asset holdings. The very effort of individuals to lessen their burden of their percentage of debt, effectively increased it. Paradoxically, the more the debtors paid, the more they owed. This self-aggravating process turned a 1930 recession into a 1933 great depression.

Today, in order to open access to short term credit, our real focus must be focused on the psychology of how to alleviate that fear of losing one’s money… Something that is simply said……but is hard to do.

Conclusion:

The economy must be fixed, or more appropriately..must be perceived to be fixed, before the buyout strategy to loosen credit within the markets can begin to take effect. As we saw with GMAC’s bold move, loosening credit coupled with great deals, does move out old inventory. But as we still see today, the problem is in getting banks to do what GMAC just did. After all, it goes directly against the advice given to them two years ago…..

If we could owe this debt to ourselves instead of others, we’d be rich from all the compounded interest we’d be paying back… — kavips

There is nothing that a strong dose of morphine can’t cure…. at least to the person receiving the injection ….. Damn… No legs…. Ahhh… no problem…..

Obviously the long term plan is the one we need to tackle first, so short term fixes like the one above, are seen as steps in the right direction, and not random neural contractions found during a soon-to-be-eaten chicken’s last minute.

Long term:

1) We need to spend within our means, both personally and as a nation.

2) We need to pay down the deficit, reducing our national interest payment.

3) We need to control our spending on entitlements: Social Security and Medicare.

4) We need a better trade balance with our trading partners.

5) We will need more cash in order to do all of the above.

We have been lulled into believing that we can spend money that we do not have… Hell we’ve been doing it for 8 years now… We did it for twelve years before that, starting with Ronald Reagan. And it was working fine up until late September…. Why can’t we keep on the same path?

As we have now found out, there is a small problem with taking out loans…. It’s called paying them back. To pay back a loan, some of the money that you are currently making needs to go back to those who invested in you at the beginning. Wait you say… why can’t we get more people to invest in us, and use that money to pay off those who invested in us earlier?

It’s been tried. And someone Madoff (made off) with a lot of other people’s money by doing just that. But eventually somewhere along the line, one cannot find enough new people to pay off the old, and crash, the system collapses.. Sort of like our Social Security system today ….

So if we have a loan, we have to pay it back?

Yes, that seems to work best. Although often loans can be forgiven after it becomes clear that they will never be repaid, and that further attempts to repay will collapse the entire pyramid where everyone loses everything… In those cases, sharing the risk by writing off some of the debts, allows one to begin making money again at some point in the future…..

But choosing to default, or not paying off the loans, also makes it impossible to get loan money later when you really need it.

So how much do we owe?

That depends on how you want to count it.. When you get a loan, there is a price tag attached that is called interest. One pays back the loan plus the interest to the party that fronted the money. After all, that is why people lend money in the first place… to make more of it… So if you bought a loan for $100,000 dollars, you could pay $100,000 the next day and be done.. That is one way of counting how much you owe. But, over time, that house you are buying is going to cost you 2.15 times its amount, because of compounded interest. So saying that you owe $215,000 is also correct….

The current U.S. obligations as of September 30th..( before any of the bailouts were passed by Congress) stood at 56 Trillion dollars. Every man, women, and child now owes $184,000 dollars. If we pay that back over 10 years, that is $18,400 per year of our income going just to the Federal government. Which means that if your family is struggling on $60,000 a year right now, that you had better start planning on how you can survive on $41,600 over the next ten years.

It may not be as bad as it seems. If free health-care becomes a reality, a yearly out of pocket savings of $7800 is a step in the right direction. Now we have just $10,600 to make up…. And if we cancel further investments into our 401 K for ten years, depending on how much you put in yearly, that accounts for somewhere between another $2000 to $10,000 dollars of which you will soon be out of pocket.. One had better hope that Social Security is still there for you when you retire…..

This is not something we have options on. This is a reality that must happen. Of course we can choose to pay it out over a longer time frame and survive with less money leaving our household per year, but over the span of a long time, we will ultimately pay a lot more… It seems better to knock out the debt, learn to live within our means, and once that debt is paid, prosper again after hopefully having learned our lesson over not paying as you go…..

That means that any new money pouring in from the “tax to the max”, must all be designated toward paying down the debt, and not be split off to other much needed projects. That is a hard choice to say no to… but once all debt is gone, less money will be required to be collected to fund those projects on a pay as you go basis. Our tax burden will be much less, giving us more money to spend, yet we will have ample money to fund the projects being built. The economy will grow in that scenario.

Of course this $184,000 is a shock figure designed to wake America up with a dose of reality. A bulk of the repayment will be paid back in the form of corporate taxes… starting as high as 50% and climbing perhaps to 90%. But the American consumer eventually also pays for those in the higher cost of each item he buys, since that payment will be embedded in the price he pays at the cash register.

The corporate rates mentioned above, were the same levels applied to corporate incomes after WWII, which continued and were not relaxed until under John F Kennedy’s administration. Over this time frame, corporations will have to settle for just being in business. After all,… that is what most small businesses do; they are grateful each day they open their doors. There is going to be a new reality that permeates the American corporate business world.

The essence of our nation’s problem is that we have lived off a credit card; one that will be paid by our children and grandchildren. And it has not just been our government that has done so.. Private debt, corporate debt, as well as government debt have all elevated our spending beyond where it should naturally be. This has been going on for so long that most investors thought that this debt/GDP ratio could continue rising indefinitely without ever overwhelming the economy and corporate earnings. In fact, the way it kept growing, we also started wondering if this could also go on forever. The total debt in round numbers is almost $52 trillion. This was not much changed this year due to the credit freeze, but rose $4.3 trillion in 2007, which was over 5 times the rise in GDP. The composition of the debt is $25 trillion in Corporate debt-both financial and non financial, $14 trillion in Household debt, and $13 trillion of Government debt-Federal and State & Local) and the GDP is $14.4 trillion. These debt composition numbers are rough estimates but all would agree that we currently owe 3.6 times our entire GDP….

This debt cycle really started in the early 1980’s when the U.S. savings rate peaked at over 10% and continued downward until this year when it troughed at a negative savings rate. People once again spent everything they made and then some last year, pushing the U.S. personal savings rate to the lowest level since the Great Depression more than seven decades ago.

As anyone who has been on the wrong side of debt can tell you, once the savings rate goes negative, it becomes a lot harder on the next round to change it. For then we have to pay charges on that amount which we spent beyond our means… So not only do we have to cut back to live within our means, but we need to further cut back in order to live within our means AND pay back those pesky charges…..

Under compounded interest any wait to pay back the cost is expensive; sooner is better than later. If we borrow a dollar and are charged with 3% interest, we pay back that dollar and the three cents of interest we owe… If we wait one year and are charged 3% on the dollar-and-three-cents we owed but did not pay back, we now owe a dollar and six cents. That may not sound like much, but when it comes to big numbers, that 3% on our national debt of 10.6 Trillion, becomes $318 billion dollars. One chuckles when Republicans find themselves up in arms over bailouts costing these amounts, but yet when the same figure is just interest, it is just considered the price we pay for living “la-de-da” beyond our means… At 3%, want to know how much interest we will pay on just that 3% interest itself, if we skip a year? $9.8 billion just to pay the interest, on the interest, that we are too broke to pay… “Deficits don’t matter” said Dick Cheney. When no one has money… where do we find that additional $9.8 billion to cough up?

But debt can be eradicated. Here is proof from a fellow posting his strategy.. It is a personal story to be sure, but it shows the proper mental attitude that must be created if one is about to embark on changing his lifestyle for the better….

Just the numbers of consumer debt are startling…. U.S. Household debt soared from 4.2 Trillion in 1990 (the first Bush president) to $13 trillion in 2008. During this period, the average American household dramatically increased its home mortgage debt, from almost $2.5 trillion in 1990 to nearly $10.5 trillion today. Similarly, consumer “revolving” or credit card debt quadrupled from $239 billion (B) to about $950B today. Moreover, the growth of U.S. credit card debt is substantially under-reported by the official U.S. Federal Reserve statistics, due to the tremendous volume of mortgage refinancings that were transacted between 2001 and 2005. At least $350B in consumer credit card debt was paid off through mortgage refinancings, home equity loans, and cash proceeds from the sale of real estate over this five- year period. This is consistent with the findings of Alan Greenspan and James Kennedy, who report that equity extraction was used to repay an average of about $50 billion of mortgage consumer debt between 1991 to 2005, about 3% of the outstanding balance of that debt at the beginning of the year.” Significantly, it averaged only $25.2B per year prior to 2001 (link to Manning’s work)

So how do we responsibly pay down our national consumer debt? Judging from the data provided above, it cannot be done. But a reasonable approach would be to isolate consumer debt into three categories: a) Chapter 7 Bankruptcy; b) substantial debt relief in the range of 60 to 80 percent; and c) repayment of the full balance over a 5 year credit management plan. The first category (a) is for those right on the edge; we know bankruptcy is inevitable, so we get it done and over so that they can start their ten years of rebuilding their credit as soon as possible. The second category (b), is a win win for both lenders and debtors. Just enough of their debt is forgiven allowing them to be debt free in 3 years.. The third category (c) is solvent enough to pay all their debts over a 5 year period on a managed plan. As is done with any bankruptcy, applicants for these programs are mean tested to determine into which category they fall … We can dream that all debts may someday be repaid. That is unrealistic. A practical approach moves forward, determining which debts are solvent and which are not, expeditiously processing those that are not, and in just a short time, all debt is secured and we know what our economy has to work with. No more surprises.

You can determine how your family finances can be resolved by using this calculator provided by the same Manning mentioned above.. I recommend that if you have unsecured debt, you play around with the credit card repayment section, seeing the differences that occur if you contributed your coffee fund, you movie allowance, your HBO bill towards paying down your credit card debt. Those little totals often taken for granted, can make years of a difference in pulling yourself out of debt.

We often hear pontificating towards our governments, local, state, and federal, end with the admonishment that since American consumers live within their means…. why can’t the federal government do so as well…

That is not exactly true. We do a lousy job compared to our parents.

They and their parents bought savings bonds… Which brings us back full circle to our best idea of paying down our national debt… What if a percentage of everyone’s pay check went toward buying themselves savings bonds. Unlike a tax, at the end of maturation, they get the entire bond returned to them with nominal interest tacked on.

Kind of like our parents and grandparents implemented for us growing up. A forced savings plan… “Oh but I want to spend it….” “No, we’re putting it in savings”… With this plan, like a tax, the government has access to increased funds, but unlike a tax, it pays us back. This has three things going for it.

One it helps us save. The American saving’s rate was negative last year. That means individuals spent more than they had… Obviously when the time comes to pay it back, it will not be good for the economy.

Two it provides a intermediate source of funding for our government. Instead of cutting taxes, this plan augments taxes… Since the money must be paid back upon maturation, the government needs to get a rate of return higher than what it is paying back..

Three. Using this money to decrease the Federal deficit, is a win win for all. Essentially we are using this program to buy up our own stock. It will be us who have control over our nation’s destiny, and not…. it’s foreign creditors…. Applying the entire amount bought in this fashion, to paying down our National Debt, will give us lower taxes in the future. The legislation initiating this program could earmark all revenue from these mandatory bought savings bonds, go towards decreasing our National Debt.

It will take great leadership to change our behavior. The bully pulpit is needed now more than ever. Since the 1980’s, we have funded our economy by borrowing. Anyone can be given an unlimited credit card and then tell us he is living well. For a long time this nation has placed the acquisition of corporate profits as the prime gauge rating the welfare of our nation. Now, with acknowledgment that it will take 4 years of GDP to pay off all debt, private, corporate, and governmental, we understand our predicament.

Simply put: to survive, we need to acquire more money than we spend and use that extra amount to buy down debt. Once our debt is down, we can use that extra amount to spend again, exploding our economy through the roof of expectations.