This is a guest post from Mr Credit Card from www.askmrcreditcard.com — who just recently interviewed me on his radio show. Mr Credit Card knows a lot about credit cards, but is going to shift gears a little and focus on Personal Finance. As folks like me are looking to be debt free, Mr Credit Card is extremely frustrated to see our Federal Government continue to spend like money grows on trees. Today, he is going to write about how the government violates sound money principals. If you are looking to apply for a credit card, please head over to his site.
All over the blogosphere, folks are preaching about being financially savvy and having sound money management skills. Yet at the same time our Federal Government is spending money like there is no tomorrow. The difference between the Federal Government and ourselves is that they can get away with irresponsible finances for a longer period of time than us individuals. But they both have the same nasty consequences at the end of the day. In fact, when a country goes broke, there may be even worse consequences.
In this post, I would like to highlight some common money principals (sound biblical principals), then show how the federal government is violating them.
Spend Less Than You Earn
Spend less than you earn is a basic fundamental rule for personal finance — any finance for that matter. If you do not spend less than you earn, you will have to incur debt. Have too much debt, or lose your job and you may have to file for bankruptcy. Or you may lose your home.
Why is it then, that the Federal Government can run on a 3% budget deficit for what seems like eternity? For any Household, running a deficit can only sustain you for so long. Sooner or later, things will fall apart. How?
- Credit Card companies may increase your interest rates – That alone can double your interest payments. If you are living on the edge, that could spell disaster
- Credit Card companies may slash your credit limit
- Your car may be repossessed if you cannot make payments
- You may lose your house to foreclosure if you miss mortgage payments
- You may have to file for bankruptcy
No one, not even nation states can get away with spending more than they earn forever. Iceland went bankrupt last year when the wealth wiped away from their banks’ balance sheets was more than the reserves the country had. Russia went on the brink in 1998 and had to restructure their debt. Various Latin American countries have been through the same cycle and restructured their debt.
The moral of the story is… watch your pennies!
Be thou diligent to know the state of thy flocks, and look well to thy herds. For riches are not for ever: and doth the crown endure to every generation? – Proverbs 27:23-24
Debt is No Good
Generally, debt is bad. If you believe the statistics that the average American has $8,000 in credit card debt, the federal debt is even worse. Over 12 trillion, burdening each citizen by more than $30k!
The rich ruleth over the poor, and the borrower is servant to the lender. – Proverbs 22:7
Being in debt simply means we are restricted in our foreign policy. We cannot talk about human rights to China when they are our main external creditor — for that matter, we cannot talk about human rights since we detain folks for eternity at The Gitmo! Al Queda knows we cannot afford to fight another war. The North Korean President and Iran know we cannot afford to fight another war because we are in debt up to our eyeballs.
On an personal level, when we have too much debt, we become slaves to our job and our boss. We are forced to put up with stuff we would not normally have to put up with. We become hesitant toward tithing because we keep thinking about the mortgage we have to pay, the credit card bills, the auto loan payments. We don’t give joyfully.
So let us NOT follow our Federal Government’s example here by having massive debt. Instead, spend less than you earn and save. Save up to pay cash for your washer dryer, or your car. Do not get low interest rate credit cards just to get cheap financing. Pay your credit card bills in full every month and earn cash back from it rather than paying interest.
Never assume the future is always better
In 1970, the US stock market accounts for 75% of the world’s market capitalization. Today, it is about 50%. In 30 years time, the projection is that the US stock market will only account for 25% of the world’s market capitalization.
Back in the 50s, GM and the Detroit auto makers gave out huge pension benefits to their workers. Back then GM had a massive share of the US market. Not any more though. They are still No1 or 2 (depending on the quarter), but certainly not a 50% market share.
The Federal Government has various programs that will cost an arm and a leg, and are based on certain assumptions. Our social security is based on a pay-as-you go system. This system will work as long as our birth rate and population continues to grow (and yet we have endless immigration debates!). We have a medicare program that will run us broke if we continue to be generous with it. We had the first person walk on the moon! We have nine aircraft carriers (more than many nations combined) and literally drove the Soviet Union bankrupt (and in the process, we may have gone down the same route.)
Are your earnings and salary going to go up forever? Don’t count on it. Many folks who had great jobs during the 90’s dot com bubble have never made the kind of money they made back then. There are no guarantees for the future. So do not make assumptions about the mortgage you can afford based on “future projections”. Be conservative instead.
Have an emergency fund
Did you ever realize that the federal government has no emergency fund? We have 12 trillion in debt, yet no emergency fund. Many other countries in the world have emergency funds. It’s called foreign reserves. How did they get their foreign reserves? By exporting more than they import (earn more than you spend). The US on the other hand, imports more than we export (we spend more than we earn).
What happened during the financial crisis of 2008? China simply took a portion of their reserves and injected some fiscal stimulus into their economy! The good old USA passed a $700+ billion stimulus bill. Where are those dollars coming from? Well, guess we have to borrow them? Or print them? All of which adds to our debt burden and erodes the value of our currency.
Having a huge savings is the only way to gain and preserve monetary wealth. A huge emergency fund also allows you to take advantage of business opportunities. In the UK, their largest soccer clubs are now owned by a Russian Oligarch, an American Tycoon, and Middle Eastern Sovereign Funds.
How much of an emergency fund should you have? Enough for 6 months, 1 year? That is up to you to decide. But sometimes bad times can last a long time. In biblical times (ala Joseph and the coat of many colors) the famine in Egypt lasted 7 years. But through the wisdom of Joseph, the Egyptians stored up enough grain to last through the whole famine!
And Joseph said unto Pharaoh, The dream of Pharaoh is one: God hath shewed Pharaoh what he is about to do. The seven good kine are seven years; and the seven good ears are seven years: the dream is one. And the seven thin and ill favoured kine that came up after them are seven years; and the seven empty ears blasted with the east wind shall be seven years of famine. This is the thing which I have spoken unto Pharaoh: What God is about to do he sheweth unto Pharaoh. Behold, there come seven years of great plenty throughout all the land of Egypt: And there shall arise after them seven years of famine; and all the plenty shall be forgotten in the land of Egypt; and the famine shall consume the land; And the plenty shall not be known in the land by reason of that famine following; for it shall be very grievous. And for that the dream was doubled unto Pharaoh twice; it is because the thing is established by God, and God will shortly bring it to pass.
Now therefore let Pharaoh look out a man discreet and wise, and set him over the land of Egypt. Let Pharaoh do this, and let him appoint officers over the land, and take up the fifth part of the land of Egypt in the seven plenteous years. And let them gather all the food of those good years that come, and lay up corn under the hand of Pharaoh, and let them keep food in the cities. And that food shall be for store to the land against the seven years of famine, which shall be in the land of Egypt; that the land perish not through the famine. – Genesis 41:25-36
Do not Rob your Future Generations
At the rate that the federal government is going, they either have to take a hit, cut back massively on spending, or pay down debts or else the burden of our debt will fall on future generations — most likely in the form of massively higher taxes. Old voters (in general) are less inclined to want scale backs in medicare (even though it is running out of control) or social security.
A good man leaveth an inheritance to his children’s children: and the wealth of the sinner is laid up for the just. - Proverbs 13:22
Are you robbing your child with your spending today? Are you saving enough to help them with their college education? Are you taking care of your health so you will not be a burden to them when you are old? Do you have plans to leave a legacy for your future generations. Not all of us have means to accumulate massive wealth. But the last thing we should do is spend money like there is no tomorrow!
But why does the US get away with running a perpetual budget and having a projected total debt of 12 trillion dollars?
A little understanding of history will hopefully clear things up.
A wise man will hear, and will increase learning; and a man of understanding shall attain unto wise counsels: – Proverbs 1:5
After World War 2 — the United States and their allies emerging victorious — a new World Monetary Order (Brenton Woods) was agreed upon. The world’s currency would sort of be pegged to the US Dollar, which in turned was pegged to Gold. International commerce would take place in dollars since the United States was the dominant economic superpower. Commodities and precious metals are all quoted in Dollars.
The emergence of the United States as a superpower (after being an emerging market back in the 1800’s) was a blessing but also came at a price. Because international commerce was conducted in US dollars, it allowed the US to persistently run a current account deficit and a fiscal deficit without facing the “immediate” consequences that would have fallen other nations. How is that so?
Here is how it works…
Countries who export more than they import will have savings — just like earning more than you spend! These savings are mostly in US Dollars since most international commerce is conducted in the good old greenback. Foreign central banks (or currency reserve boards) have to reinvest their “savings” or “export earnings”. Central banks (and civil servants/government workers) are by nature very conservative. So most of the time, they invest in US treasuries (ie. government bonds – IOU’s). These are perceived to be the safest investments because the risk of the US defaulting is deemed extremely low.
Because foreign central banks are forced to reinvest what their exporters have made back to the US, we are in a privileged position to run a fiscal deficit for a long time. If we come up with a shortfall, we just issue bonds (IOU’s) and we have a pool of willing buyers. That is how we can get away with having massive space programs in the 60’s, massive cold war style defense spending in the 80’s, and other fiscally irresponsible behaviors… like running two wars simultaneously!
…in the early 70’s (when the dollar was still in the gold standard), President Nixon took us off the gold standard because the Europeans were demanding that their dollars be redeemed for gold at Fort Knox (guess we did not have enough – spent too much on the Vietnam war and space programs). Since the dollar is no longer pegged to gold, it opened the floodgates for “printing money” and “inflationary policies”. “Quantitative Easing” – a phrase mentioned very often these days is just a fancy term for printing, ie. central banks printing money and buying government debt — or in our case Fannie Mae’s debt!
Occasionally (and sometimes for long periods), events transpire to make borrowing cheaper for the government. In the late 90s and early 2000s (and I guess now), interest rates were low and some would say rock bottom. The treasury could issue long bonds at 5% yield. T-bills could be issued at less than 1%! The easy monetary policy fed through to the economy. It became cheaper to borrow. Consumers could run up debt and play the 0% balance transfer credit card game. They could get 0% financing on cars, furniture, washing machines, computers! We could get zero down loans for our home purchase, no document mortgages, easy home equity lines of credit. Heck, even credit card companies were jumping on board by allowing students (who have no credit history by the way) to apply for a student credit card!
Cut the Fat from Your Budget – a.k.a. “Entitlement Spending“
Conventional wisdom says that you cannot get elected telling folks that you want to raise taxes or cut expenditure. So federal spending naturally increases. The natural way out of this is printing money (keeping the illusion of wealth) and having inflation as a natural consequence.
Since the 30s, we have passed massive entitlement spending bills – social security, medicare. The bills keep piling higher and higher. And yet it is political suicide to talk about cutting benefits. But spending on these items is going to have serious consequences for all of us sooner or later.
Do not be like the government!
People elect government officials. They are accountable to voters. We are not accountable to any voter… but rather to God — so follow the sound money principals laid out so plainly in the bible! If you need to cut your vacation expense, do it. If your child cannot have any more golf lessons, so be it. If you do not need such a big house, then don’t buy it. If the refrigerator is still working, don’t change it! Better to be prudent than reckless.
Withhold not correction from the child: for if thou beatest him with the rod, he shall not die. – Prov 23:13
But what if the world loses confidence in the US Dollar?
If the US Federal Government continues down this insane path of financial irresponsibility, there are going to be grave consequences. One of them is that our currency will be massively devalued. The world is worried because international commerce is conducted in a currency backed by a country that runs a persistent budget deficit (and more to follow because of the projected increases in medicare expenditure). If the world stops using the dollar as an international currency, then there would be a flood of dollars on the market (since nobody needs it) and the dollar would weaken dramatically (more supply than demand). We would face inflation in our country. The risk of that happening near term is quite remote since there is no near term viable international currency. But it is a risk that we must be aware of.
Aside from the currency, if politicians have no appetite for cost cutting, then raising taxes is the only viable alternative to close the budget gap. But as the world gets more competitive economically and uses lower taxes as an economic advantage, higher taxes will burden our future generation more than we may currently realize. The wealthy folks will end up simply investing in municipal bonds (or federal tax). There will be less investments in venture capital and businesses because of it. Rest assured… our future generation will suffer.
The Federal Government is like an irresponsible parent
Even if you are prudent financially — you save, you spend less than you earn, you tithe joyfully — the actions of our Federal Government can still affect you dramatically. Countries who have had their currencies massively devalued faced high inflation and saw the value of their hard earned savings disappear!
I challenge everyone who is remotely interested in personal finance, whether you are a blogger or not, to voice these concerns. The ways the Federal Government manages finances is totally against biblical principals and for that matter any sound money principals. And the potential consequences could have a massive impact on us… even if we have worked hard and saved. I’ll end with my own anecdotal little story: “The US Federal Government is like an irresponsible father who owes too much money. Collections come knocking on the door at night, threatening physical harm, no longer accepting any more IOU’s. Instead, the children gathered, took all their savings and paid off as much of their father’s debt as they could. But that was not enough, even the grandchildren had to work to continue paying off their grandfather’s debt! And Joseph said unto Pharaoh, The dream of Pharaoh is one: God hath shewed Pharaoh what he is about to do. The seven good kine are seven years; and the seven good ears are seven years: the dream is one. And the seven thin and ill favoured kine that came up after them are seven years; and the seven empty ears blasted with the east wind shall be seven years of famine. This is the thing which I have spoken unto Pharaoh: What God is about to do he sheweth unto Pharaoh. Behold, there come seven years of great plenty throughout all the land of Egypt: And there shall arise after them seven years of famine; and all the plenty shall be forgotten in the land of Egypt; and the famine shall consume the land; And the plenty shall not be known in the land by reason of that famine following; for it shall be very grievous. And for that the dream was doubled unto Pharaoh twice; it is because the thing is established by God, and God will shortly bring it to pass. Now therefore let Pharaoh look out a man discreet and wise, and set him over the land of Egypt. Let Pharaoh do this, and let him appoint officers over the land, and take up the fifth part of the land of Egypt in the seven plenteous years. And let them gather all the food of those good years that come, and lay up corn under the hand of Pharaoh, and let them keep food in the cities. And that food shall be for store to the land against the seven years of famine, which shall be in the land of Egypt; that the land perish not through the famine.
photo by canadacow
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