US Fiscal Cliff simplified for everyone. This puts things into a much better perspective as to the present US economic situation..

Lesson # 1:

* U.S. Tax revenue:      $ 2,170,000,000,000
* Fed budget:        $ 3,820,000,000,000
* New debt:        $ 1,650,000,000,000
* National debt:      $14,271,000,000,000
* Recent budget cuts:    $ 38,500,000,000

Let’s now remove 8 zeros and pretend it’s a household budget:

* Annual family income: $ 21,700
* Money the family spent: $ 38,200
* New debt on the credit card: $ 16,500
* Outstanding balance on the credit card: $142,710
* Total budget cuts so far: $ 385

Got It ?????

OK now,

Lesson # 2:

Here’s another way to look at the Debt Ceiling:
Let’s say, You come home from work and find
there has been a sewer backup in your neighborhood….
and your home has sewage all the way up to your ceilings.

What do you think you should do ……

Raise the ceilings, or remove the shit?

This is the problem with many people. If you have a cash flow ‘problem’, actually it is a personal behavior problem. If you are earning 21,700 per month and spending 38500 per month…you have to soon find a Godfather who will bear the gap EVERY MONTH. It better be your dad, because NOBODY else is going to. Now the best solution, OBVIOUSLY, is to spend less. However for the past 10 years your dad has bailed you out EVERY MONTH, you will ASSUME that he will continue to do it for the REST of your life, correct? Wrong assumption, yes, but has worked for the US so far….

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  1. This post is so brilliant when you put it in the context of a household budget. The best solution is ofcourse to start living within your means but does the average American really understand this? Will the budget cuts really make the average American squeeze their pockets?


  2. “Wrong assumption, yes, but has worked for the US so far….”

    Dear Subra, Why do think this worked for US for far ? Why there are many God Father mostly Chinese bailing out everything ?

    I read somewhere that Chinese has to bail out to keep their own economy from busting. So they are selfish too. But wanna hear from you in a layman terms for my own understanding…

  3. Nice post!

    I am now curious to know,
    1. How does it benefit the godfather (China) to bail the US?

    2. Similar numbers for India.

  4. Question… who is US’ dad who is bailing out every month?if its only chinese then i have the same doubt as that of Mahesh’s question above.

  5. the problem is not whether they can. The respect for what they print goes down that is all. If u think the US is over printing, remember it has STILL gained against the rupee. Shows how much the world has for the Rupee. Increased supply reduces value – does not require a PhD in economics to know that, does it?

  6. Subra you have a way of telling a story. Nothing simpler could have defined the mounting Fiscal Cliff and the glass of water the congress has offered to douse the Fire at Wall Street.

    But it still is remarkable these Americans can still sell their debt and an equally troubled with problems of plenty Chinese government keeps buying it.

    You have already defined the pitiable condition the India Rupee is in. Despite the Fed printing machines working overtime, the Rupee devaluvates further ( A paradox which even MMS fails to correct).

  7. Subra,

    I think this analogy is wrong, because :
    a) a government or economy is not like a household. “My” spending is “your” income and vice versa, so if everybody – private sector & government, all cut down spending & investments (ie practice austerity), at the same time, then the economy as a whole will go down. The fiscal deficit can actually go up; government revenues come down more than the spending they cut. This is the paradox Keynes refers to back in his writings in the 1930s. With private sector consumption down, private sector not investing because the economy is in recession or not growing, the only sector that can spend is the Government.

    The argument therefore, is that the time to practice austerity and cut the government deficit, is when times are good. We can argue that nobody does that, but that is no reason to practice something that will make the situation worse.

    (Of course you have to adjust for net exports here, but with other economies also in doldrums, the US cannot grow via exports while cutting the fiscal deficit. Germany did that through the reforms they implemented, and were successful because the rest of the world grew in the late nineties and early 2000s).

    b)Secondly, the US and European economies are at a place where their real interest rates are negative or near zero – the zero lower bound. Until they overcome this, through a growing economy, increased debt will not result in spiking interest rates (or inflation). Japan is a case in point.

    Over the last three years the US monetary base has tripled; still interest rates have gone down. They are able to fund their deficit – and that is what is happening – at even these low low interest rates. This is also because of the demand for safe assets from their private sector which has some way to go as deleveraging is still strong. With Europe in an equally bad shape, there is the TINA factor also at work here for other countries who need to park their surplus(China).

    The Economist recently had an article that said it is difficult to pin down how much debt is too much for a government, many countries can afford significantly higher debt to GDP ratios. This is probably more true if the debt is denominated in its own currency. (Which is why the US debt is not a danger like Greece and Spain whose debt is an “externally” denominated currency).

    Fiscal deficits are a danger when interest rates are ‘normal’ when government borrowing competes with private sector borrowing. (ie government spending increases cost of money because of lack of supply of such money or because government prints money). It is also valid when the debt is denominated in an external currency. But in their current situation inflation is not a worry for the US, otoh unemployment is. Inflation worries are stoked by capital owners who are worried about their assets depreciating but they have been wrong in their predictions. In the medium term once the US economy recovers they should address debt; the time for that is not now.

    To be sure, this analysis does not hold for India, the government debt here is a real danger for us if we do not control it.

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