Warren Buffet had these pearls of wisdom to share with Kids:
- Never spend more than you have.
- Save for the unexpected
- Never borrow without a payback plan
I like it. Short. Sweet. Accurate. Simple... Sustainable even.
So simple even a caveman could understand it.
I'm thinking that we need to transmit this repeatedly up to our friends in the Federal Government (and maybe even to the States).
Never spend more than you have. Boy do we break this rule. And we have broken it so long that it somehow seems normal. Over decades, there has only been a couple years during the Clinton era that we haven't run an annual deficit. Of course, debt builds over time (unless you go bankrupt).
Make no doubt about it, there are any number of things that will make our current level of borrowing infinitely worse than it is right now. Slower, lower or negative economic growth. Interest and inflation could sink us based on the percentage of government revenues that goes to interest on the debt (debt-servicing). On average we are probably paying about 1% interest on government debt, and that represents about 9-10% of the government revenues. (I hate to use the word revenues for the intake of taxes, let's call it government inflows.)
Sooo, if interest rates go up to 10% that would mean that almost all of the gov inflows would immediately become outflows to service the debt.
That brings us to #2, save for the unexpected. Ops. Didn't do that, did we!
That brings us to #3, never borrow without a payback plan. Ops. Didn't do that, did we!
Now we are in a sequester situation. That is a lot like your parents cutting off your credit cards. . . Painful. Not very sophisticated. Only partially effective. Lot's of side effects.
And that is our after-the-fact payback plan? It's not even a plan; it was the trap door contingency that legislators came up with for the unlikely event that they couldn't come up with a plan.
Keywords: Sustainable and non-sustainable (gov) spending, deficit, interest, payback, funding, budgeting.