Debt Free

We all love spending money. Face it, it's a lot of fun. You can buy cool, new stuff, go fun places and generally feel good about yourself. That's exactly how those in the federal government act too. They have to appease the thousands of constituent groups that can get them back to the promised land inside the beltway. Toward this end, they buy cool, new stuff, go fun places, and generally feel good about themselves. A quick look back at the administrations of the past 40 years reveals that there were precious few years that there was actually a federal budget surplus. According to the United States Office of Management and Budget, there have been only 5 years since 1966 that there was a budget surplus. These years are 1969 and 1998 – 2001. Ouch!

In absolute dollars, 2006 is shaping up to be the worst in federal budget deficit in U.S. history, with a projected deficit, according to the OMB, of over $423T! That's a huge chunk of change, but in terms of our GDP, it's not all that bad, compared to some years in the past. Our GDP has risen rather dramatically in the past few years, so $423T only(!) represents 3.2% of the GDP. In 1992 we spent 4.7%, in 1985 it was 5.1%, and in 1983 our government spent an astounding 6.0% of the GDP trying to placate the people!

You can look to the Feds as an example and conclude “Why not just charge up the ole' VISA, get that makeover I deserve, and head to Cancun for a couple of weeks?” The difference is that you don't print your own currency (at least I hope you don't!), don't have the support of the international banking system, and don't have the benefit of billions of dollars in international trade in which to hide behind. In addition, it's a whole lot easier for a country to get people to bend the rules a bit. In fact, it's how the rules of international finance are constructed. For years, the U.S. was able to get away with this in part because we had trade surpluses in most years. Starting in the mid 1970's that advantage evaporated. We now show a cumulative trade deficit of over $6T.

In much the same way as you feel great when you're spending money, even if you're burning plastic, on average the U.S. actually has stronger economic indicators in years that we're running larger trade deficits. Money is flowing out of the country at a prodigious rate. Just as many Americans have achieved the status of credit driven uberconsumers, America as a nation has done likewise. As a nation we can sustain that for a time. As an individual, you can too, but as an individual, your personal consequences will be much more immediate and direct.

You can cash out refinance and pay off your debt. You can get a debt consolidation loan to get rid of the high interest credit cards. You can do these, and other things, and get out of the woods for a while. There are lots of tricks for getting your head above water. One thing you should do ASAP is get out of your ARM, if you have one. That neat little gimmick for getting homeowners into the largest McMansion they can afford is going to be responsible for a wave of foreclosures when the interest rates rise. In the end, though, you must control your spending. This can't be stated emphatically enough. Do whatever is required. You may have to make a rather severe lifestyle change. It's analogous to a diet. You can't go on a diet to lose weight, you'll just go back to your old ways again. It's the same with spending. You have to make a lifestyle change.

While the country can have a policy of deficit spending, you, as an individual, cannot. It will catch up to you, and the consequences will be catastrophic. Let's hope that isn't true for the U.S.A. as well.