The so-called fiscal cliff that the US is supposedly headed towards need to be correctly defined. Macroeconomists tend to look only at the Debt-to-Deficit ratio when determining whether the US is in financial trouble. That isn't necessarily a bad thing, but it doesn't give a clear picture of the US's Fiscal Responsibilities. They also tend to look at the General Fund when considering the liability the US has as opposed to the Overall Funds the US shares. Macroeconomists tend group entitlements with that General Fund as well. This doesn't give a clear picture either, though.
So, what is the reality, and how can we determine just how bad our economic outlook is? Does the Economic Outlook of the US tend towards a more negative or positive view? Just how much money does the US actually need to raise in order to become solvent? What is the reality the US faces today? These are all questions many of you might have. Let's discuss some of them so we can better understand what is really happening in the US Debt and Deficit Debates.
When discussing the Debt and deficit Debates, it's better to understand the overall aspects rather than narrowly defining just the liabilities. The best way to understand this is by looking at the Comprehensive Annual Financial Report, or CAFR for short. This shows all the assets and liabilities the US has. Its required by law that the US makes public the Financial Report every year. Unfortunately, not everyone reads what's in it, because it's very taxing to keep all the numbers straight. For example, the US holds 14.2 Trillion USD worth of Liabilities as of Quarter 2 2012. This doesn't give a valid reality of the Overall Net Worth the US has, but it is a huge number for people to grasp so that's why Politicians and others tend to use this. We should dig further if we truly want to understand what the US Economic Projection is, based on the numbers. Simply stated, what can the US do better for its citizens, and how do we reach that goal based on all the real numbers?
The fact is, the US has over 200 trillion USD in Net Worth. That is the number of assets minus the number of liabilities. That should brighten everyone's day when they see a huge number like that. It doesn't because people, for whatever reason, tend to just look at liabilities as a negative rather than allow the Net Worth to make the bright spot. Look at it like this, the US has 14.2 Trillion Dollars in Liabilities, so, if you are an individual, you can never foresee a way out of that debt problem. Now, factor in the total Assets you have, say 210.56 Trillion (the Assets the US now holds). Subtract the Assets from the Liabilities, and you can get a clearer picture of what is being discussed. This is how the actual math is done, in basic terms.
Let's put it a little differently. Let's say in you have a total net worth of about 56,000 USD. In your checkbook you have 1500 USD. You owe about 200 USD to someone. You simply write a check and subtract that from your checkbook. That leaves you with a total of 1300 USD in your checkbook. That brings your net worth down by 200 USD. To maintain that same net worth, you have to come up with the additional 200 USD to balance your net worth. This is probably oversimplified, but it allows for you to better understand what the whole tax rate increase debate leans upon.
Beyond The Math
So, since we briefly discussed the Net Worth of the US, we need to understand why Macroeconomists tend towards the Liabilities rather than Net Worth when projecting the Economic Outlook of the US. People need to understand that not all debt is bad debt. If you are buying a house, that isn't a bad debt (unless the house is literally falling apart that is). If we only take the numbers given by the Media at face value, then we can never understand the whole picture. Macroeconomists tend to only look at the Debt to GDP ratio because that is the best way to indicate the overall Net Worth of the US. It is true that the US has a problem. The problem is that the Debt to GDP is rising faster than the Assets to GDP. That will, in the future, create a period of hyper-inflation. So, when businesses look at the data, they can plainly determine the growth rate, if you have a starting point. For example, if I had a trillion dollar a year business in Net Worth, and I looked at the amount of Liabilities that the Company had, then I could better determine what I needed to do for a greater profit margin for my business. It determines whether the Economic Outlook is positive or negative.
At this point, from the Economic Growth Rate as determined by the starting point (assets) compared to the liabilities (Debt and Deficit) factoring in the GDP (Gross Domestic Product), you get the Economic Outlook. Right now, the Economic Outlook isn't at all that bad. It is negative, but other factors concerning this need to be applied (such as Obamacare and Tax Increases, Unemployment, etc.). I won't get into the numbers right now about GDP, but suffice it to say that the Economic Outlook is negative overall due to decreases in manufacturing and decreases in exports, etc. That doesn't and shouldn't give reason for great alarm, long term. Short term, its horrid to imagine the negative impacts of the GDP to the Net Worth of the US. If you want to look at the current GDP here is a link, http://data.worldbank.org .
We can't seriously discuss the Fiscal Cliff if we refuse to allow ourselves a look at the Solvency in the US. We hear the politicians all talk about the US not being Solvent. We hear them go back and forth about what to do to increase revenue. Heck, we even saw Representative Boehner lie to us in front of the cameras. We are mad as hell that the US seems to be declining. We see them talk about lowering benefits for the poverty stricken. We hear them talk about a lot of restructuring of the tax codes.
Do you remember a card game you may have played where a person says they have a card, and you get to guess whether that person has the card or not? I called that card game BULLSHIT! That is exactly what I'm calling Boehner and others that are saying the US is Insolvent. I call BULLSHIT! While the US does certainly have a negative outlook at the moment, overall, studying the historical data available, it's not insolvent. The US is far from Insolvent. Yes, the Net Worth to GDP is in a temporary decline, but long term, the US still has a long way to go before it is insolvent. Take for example the meme from both parties about Social Security being Insolvent by 2030. That's straight up BULLSHIT!
Its more about what the US wants to sell off than it is about being solvent or insolvent. The US holdings could more than cover the cost of Social Security for every man woman and child in the US till 2030. This is what they are talking about when they give you those numbers. They aren't talking about people working, they are telling you. IF everyone in the US suddenly receives Disability Benefits, Social Security Benefits, etc., then yes, by 2030, the US would be insolvent. That isn't going to happen. People are still going to find work and maintain employment.
Back to Reality
While people are always going to argue over raising taxes, or increasing revenue other places, we should always keep in perspective the percentage of rates increased and decreased. Those numbers mean more than just factual data analysis. Those numbers mean people's livelihoods, their income for housing and food. These numbers have real meaning for real people. We should always balance out those numbers and remember reality when discussing them.
We can be ideological about everything from Free Health Care to Free Housing. It's not entirely impossible for either of those things, financially speaking. We can say that because debt to GDP is low right now the US needs to gain more revenue, and we can argue about how to get that revenue. We can argue about many things. The important fact, the only real meaningful fact we can get from these numbers is that people are not enjoying personal economic growth.
For a closer look into the numbers, here is a website that gives all them, and you can decide what to believe for yourself: http://www.federalreserve.gov/releases/z1/Current/
Dr. Richard Paul, D.D.