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Saturday, 27 September, 2008 1:29 PM
Record Deficits
& Bailouts: Who Is Going to Pay for All this?
The
federal government is buying the largest mortgage and insurance
companies in the world. Now Sec'y Paulson is pushing for a $700
billion "rescue package" for the rest of Wall Street's
whiz kids. Presidential candidates Barack Obama and John McCain
aren't taking a stand. What's this mean for you? What should you
be doing during this crisis? The new book I.O.U.S.A. will put it
all into perspective for you.
Photo
courtesy of www.amazon.com
Hoboken,
NJ — It was hard enough to wrap your mind around
the numbers last week: Our national deficit was growing at a staggering
$1,903 every minute. By January of 2009, the U.S. federal debt was
set to be over $10 trillion, the total federal fiscal hole around
$56 trillion deep. And by 2010, every citizen will "owe"
around $38,000. And yet, this week the federal government is bailing
out the very banks on Wall Street that were complicit in the mortgage
bubble? How does that work?
"These
numbers are overwhelming for most Americans," admits bestselling
author Addison Wiggin, coauthor along with Kate Incontrera of I.O.U.S.A:
One Nation. Under Stress. In Debt. (Wiley, September 2008, ISBN:
978-0-470-22277-5, $19.95). "The simple fact is, we've been
'successful' as a nation for so long the average citizen doesn't
have a clue what's happening on Wall Street or in the economy. Fear
of gigantic numbers, seemingly indiscernible statistics, debates
over theory and partisan bickering only add to the confusion. When
people don't understand something, it is easier to just dismiss
it."
I.O.U.S.A.
is a companion book to the critically acclaimed documentary of the
same name—a national debt documentary that was nominated for
the Grand Jury Prize at the 2008 Sundance Film Festival. The "script"
of the film is a tragicomedy of sorts. It's a primer if you're seeking
a basic understanding of the nation's biggest economic challenge.
The story illuminates today's financial crisis in a unique and easy-to-understand
way by examining four serious "deficits" the nation faces—the
budget deficit, the personal savings deficit, the trade deficit,
and most importantly, the leadership deficit.
The book
also provides complete transcripts of interviews conducted with
financial gurus such as Warren Buffett, Alan Greenspan, Steve Forbes,
Robert Rubin, Arthur Laffer, and more."None of these luminaries
agree 100 percent on what the solutions are for the problems we
face as a nation," admits Wiggin. "But it's obvious to
everyone that we've lived beyond our means for too long. Most Americans
are going to have to rethink what they expect from their government.
And by extension, how they plan for their own future.
"Do
politicians need to be held accountable for the promises they make
during election campaigns? Seems like a natural. But individuals
need to take responsibility for their own lives too. Planning better,
saving, and investing wisely in private life will make it easier
for policy makers to make difficult decisions regarding the finances
of the government."
The book
I.O.U.S.A. provides the language and resources necessary to help
ordinary Americans engage in the national conversation during the
election this year. It helps ordinary folks fortify their own lives
with plans for successful retirement, education, and healthcare.
"When
we started researching the book and the film," says Wiggin,
"we realized most Americans don't know how bad the fiscal situation
of the country is. In that sense, I.O.U.S.A. is their wake-up call.
We have to demand fiscal responsibility from our leaders and from
each other, that much is true. But most Americans would do better
if they simply control their own personal spending, save more, and
invest wisely for their own futures. The national elections, in
our view, provide the perfect opportunity for potential leaders
in the next government to engage the public in this conversation."
About
the Authors:
Addison
Wiggin is the editorial director and publisher of The Daily Reckoning
and executive publisher of Agora Financial, a multi-million-dollar
financial research firm and publishing group based in Baltimore,
Maryland.
The
Daily Reckoning has attracted more than 500,000 readers in
the United States and Great Britain, has been translated into French,
German and Spanish, and has been popularized by such mainstream
publications as Money and Marketwatch.com. Wiggin
has been featured as an expert in such publications as The New
York Times Magazine, Worth, The Washington Times, The Washington
Post, Time, The Pittsburgh Post Gazette, The Baltimore Sun, The
MotleyFool.com, The Street.com and CNN/Money.
He is also
coauthor along with William Bonner of Empire of Debt: The Rise
of an Epic Financial Crisis (Wiley, 2006). He is the author
of newly revised and updated Demise of the Dollar and Why
It's Even Better for Your Investments.
Mr. Wiggin
has been a student, writer, and commentator of financial markets
and governments for more than a decade. With a master's degree in
philosophy from St. John's College and experience working with the
Cato Institute in Washington, D.C., Mr. Wiggin has acquired both
a macroeconomic and contrarian's outlook on domesticand international
markets.
Kate Incontrera
is the managing editor of The Daily Reckoning. Ms. Incontrera
was also an associate producer and writer on the critically acclaimed
documentary film I.O.U.S.A. Before joining Agora Financial in 2004,
Ms. Incontrera studied writing at The University of Cambridge and
at Towson University in Baltimore, Maryland.
An
I.O.U.S.A. Q&A: Financial Experts Weigh in on the Nation's Economic
Crisis
Excerpted
from I.O.U.S.A: One Nation. Under Stress. In Debt. (Wiley, September
2008, ISBN: 978-0-470-22277-5, $19.95) by Addison Wiggin and Kate
Incontrera
WILLIAM BONNER
William
Bonner founded Agora Inc., is the author of free e-letter The Daily
Reckoning, and is also the coauthor along with Addison Wiggin of
Empire of Debt (Wiley, 2006).
Q: What do you think lies ahead, given the lifestyle that
we live today in our country
William
Bonner: We had an expression in the book that basically
said that there are not many people who can afford to live like
Americans today, and too bad Americans can't either. The fact is
that Americans live beyond their means. This is a very, very old
concept, but today people don't even think about it because they
don't know what their means are. You know, when you start down this
path where you're introducing so much credit and monetary inflation,
which just means that there are more and more dollars floating around,
then people don't know what a dollar is worth. For example, when
you get a credit card in the mail with a credit line of $2,500.00,
does that mean that you can spend $2,500.00? As Warren Buffett has
explained many times, you can't live beyond your means forever;
eventually it catches up with you. What's happening in America today
is that people are taking their credit cards, spending money they
don't have, and believing that they'll never have to pay that money.
But they will, somehow, sooner or later. That mathematics has to
catch up to them, and they'll have to spend less money, because
they're right now spending more than they can afford.
PAUL A. VOLCKER
Paul
A. Volcker was the chairman of the Federal Reserve from 1979 to
1987.
Q: Why is it important for Americans or people who are not
involved in the financial industry and/or economics to understand
these issues?
Paul
A. Volcker: It is always difficult to answer that question
because it seems that these issues are small and abstract in comparison
to people's day-to-day problems of making a living and going to
work. Well, they no longer seem abstract when it comes down to people
maintaining fiscal discipline and paying for Social Security and
Medicare. But the greatest challenge for democracy is to be able
to effectively cope with problems that are pretty clearly out in
the future, but require some action, discipline, and restraint today.
That's the test we're going through. And, as people get a better
understanding and education of some basic economic issues, the democracy
will be better able to cope with those future challenges.
DR. ALAN GREENSPAN
Dr.
Alan Greenspan served as the chairman of the United States Federal
Reserve Board from 1987 to 2006.
Q: Why is a lack of savings problematic? How would you explain
that to someone who thinks, "I'm living pretty well and I have
my 401(k) and everything seems fine"? What does a lack of savings
create in the long-term?
Alan
Greenspan: When you think in terms of the economy as a
whole, you have to realize that if the output of an economy—or
in household terms, the amount of income [available]—is all
consumed, [then] we're not accumulating the types of assets which
we find productive over the years. Every advanced economy invests
a significant amount of what it produces. It ploughs it back in
the way of capital assets—meaning factories, equipment, all
forms of capital—which essentially make the standard of living
rise, because as technology and capital increase, an hour's worth
of effort on the part of a person has (over the generations) been
increasing, producing more and more in the way of goods and services.
So that the issue is, for the national economy overall, unless you
plough back or invest a significant part of your production, you
will not have growing standards of living.
The comparable measure with respect to households is that if you
don't save adequately, you are wholly dependent upon the income
you are getting—which, incidentally, indirectly will rise
because other people are saving and investing. But as far as you're
concerned, unless you put money away for nest egg purposes, for
retirement, for a variety of other purposes, you will find that
you are living an extraordinarily precarious existence. Savings
is the buffer, which is the gap between disaster and prosperity.
WARREN BUFFETT
Warren
Buffett is regarded as one of the world's greatest stock market
investors and has been CEO of Berkshire Hathaway since 1970.
Q: At some point in the last few years, for the first time
ever, you bought foreign currencies. Can you explain to me your
own personal faith in the U.S. dollar? Has that faith changed or
altered in the last few years? If so, why?
Warren
Buffett: Both personally and at Berkshire Hathaway, we
have far more assets in dollars than in all other currencies combined.
So it is not like anything drastic is going to happen in the United
States. On the other hand, if you give more and more of your IOUs
to the rest of the world and you denominate them in your own currency,
history shows that countries that do that have an interest over
time in inflating and in having their currencies worth less. If
I could finance all of my own consumption today by handing out something
called Warren Bucks, or Warren IOUs, and I had the power to determine
the value of those IOUs over time, believe me, I would make sure
that when I repaid them 10 or 20 years from now that they were worth
less, per unit, than they are today. So any country that piles up
external debt will have a great temptation to inflate over time,
and that means that our currency, relative to other major currencies,
is likely to depreciate over time.
STEVE FORBES
Steve
Forbes is the editor-in-chief of Forbes magazine and president and
CEO of Forbes Inc.
Q:
We grew up in a culture where we heard phrases like "A penny
saved is a penny earned" or "Put it away for a rainy day."
Where did this culture change in the United States? When did the
shame of owing money, indebtedness, or bankruptcy evaporate and
the idea of accepting massive personal or governmental debt become
accepted? Also, do you believe this culture change is positive or
negative?
Steve
Forbes: Well, the key is that people must learn how to
handle finances in a responsible way. Too often, the kind of consumer
culture we have focuses only on the here and now, not on the future.
What we should learn to build on in terms of recasting our culture
is home ownership. There you're taking on debt, but you have an
asset behind it, you're paying it off, it's your property.
In terms
of indebtedness, people have to look at the balance sheet and make
sure they have assets there. This is where having your own personal
accounts for Social Security would be such a benefit because from
a young age, your money's going into that account. You want to know,
"How am I going to grow that account? How am I going to protect
that account? How do I make sure the politicians don't wreck it
for me?" Suddenly, people are going to develop a Ben Franklin-like
mentality because they are talking about their own money. And, don't
you think that's going to start to spill over into other areas?
People are going to want to talk about assets and actions that will
help or jeopardize their earnings. At an early age, people will
develop a mentality that they can accumulate and grow their assets.
They will become excited to see that they worked and have something
to show for it, other than just a paycheck or a trip to the movies.
After a person earns their money at McDonald's, they will have something
that lasts longer. Now, the words "A penny saved is a penny
earned is a penny saved" will have meaning. Kids especially
will be able to build this mentality at an early age.
ROBERT RUBIN
Robert
Rubin, the 70th secretary of the U.S. Treasury (1995-1999), was
one of the key players in the Clinton administration's balanced
budget. He is currently a director and chairman of the Executive
Committee at Citigroup.
Q: Speaking of deficits, do you think deficits matter?
Robert
Rubin: Well, I don't think there's any question that deficits
matter, and I think there is probably virtually no mainstream economist
who doesn't believe that deficits matter. Deficits over time—and
we're talking about deficits over a period of time, not just for
a little while—lead to higher interest rates, they can create
the risks of market disruption, and they undermine the ability of
government to engage in public investment, which is so critical
economically and socially. They reduce our leverage abroad when
we try to negotiate on international economic policy issues that
are important to our country.
What we
found in the early 1990s, when President Clinton put in place a
powerful deficit reduction program, is that deficits also undermine
business and consumer confidence more generally. So I don't think
there's any question that deficits matter. And I think it's a broadly
accepted view that sustained deficits over time can have significant
adverse impact on jobs, on standards of living, and on our economy
more generally.
Source:
DeHart & Company
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