Financial Planner - The Debt Ceiling
Surprise, Surprise - The pols in Washington are having a tough time agreeing on how they will cut the federal budget and make ends meet.
It's never easy to live within your means. We always want more.
Any family that wants to shore up their finances knows how hard financial choices can be, but in your family you don't have the extra burden of having to win any popularity contests (like getting reelected) next year. If your kids don't like the fact that you trimmed the cable bill down to size, they can't throw you out of your cushy job (in their minds, not yours I'm sure) as their parents.
As a financial planner, I work with clients every day on cash flow management and these important issues of making ends meet. The principles that help you build wealth and secure a future for your family are the same ones that should be used to manage our country's finances.
Just Too Big
Quite simply, as a percentage of our overall economy the US government sector is just too big.
Historically, when the government is humming along using around 18% of the economy's production everything is OK. When the Big G gets too big, however, it crowds out the entrepreneurs who add vitality and growth to the marketplace.
When the bulk of that government drag comes from just paying down the debts of the past, that's when things really get ugly. No matter what you do, there is pain and doing the right thing doesn't make you feel any better for quite a while.
That's where we are today.
Change is Painful
The first problem with trying to fix any important issue is that change is almost always painful. Trimming government expenditures will likely have a short-run negative effect on unemployment (which is already very high) stock market prices, real estate values and an already feeble economic growth rate.
What often gets missed is that not doing anything will have an even larger negative effect in the long run. Unfortunately, we humans are wired to avoid short-run, immediate pain even if doing so provides long run benefits. We'll sacrifice a +10 event in the future to avoid a -4 event today.
Crisis Management
The end result of this "Immediacy Bias" is that nothing gets done until we're in a crisis. Most American families still aren't saving enough. Only now - under the threat of ratings downgrades - are the pols in Washington trying to hash out some sort of agreement.
Crisis management almost always results in inefficient and expensive reactions ... never real solutions.
What's a Pol To Do?
There is a likely distinction between what the pols SHOULD do and what they WILL do.
Like any financial planning experience, the first step they should take is to acknowledge the situation - we're addicted to spending money we don't have - and to figure out what resoures we have, exactly.
The second financial planning step is to identify the things that are most important to us to have. What's most important? Fighting wars? Taking care of the poor? Health Care for Everyone? The reality is that we can't have it all so let's be thoughtful in order to keep as much of the most important stuff as much as possible for as long as possible.
They Will
The Pols in Washington have too much to lose by making those hard choices. For them, the first order of business is to secure enough votes next November to remain in office. If something they do today could cost them their office next year, they won't do it. They will sacrifice a +15 result in the future if it costs them their seat in Congress.
Expect a back-loaded solution with most of the deepest cuts not happening for years and almost nothing significant until after the elections of 2012.
Will this go to a default on August 2nd? I sincerely doubt it. Somehow some kind of fix will come through and it will be back to business as usual. In the meantime there will be plenty of volatility and I'm pretty certain that even if an agreement were made today, a downgrade of the US financial system is in the near future.