Wednesday, November 12, 2008

My friend's family is on the verge of bankruptcy...

My friend’s family is in financial trouble. They find themselves in a situation where they have a huge amount of debt, decent revenue, but more expenses than the revenue can cover. And unfortunately, in these tough economic times, their prospects for growing their revenue any time soon is not looking so good, yet their expenses are scheduled to continue to rise for the foreseeable future.

They have hope, but also seem to be in a great deal of denial.

Here is the breakdown:
Total Salary after taxes – $120,000 (not expected to increase any time soon)

Total Yearly Expenses – $145,000 (expected to increase for many years to come)
Total Debt – $550,000 (likely to grow to over $1,000,000 in 10 years)

Here is their budget:
$33,000 in legal fees defending their business, expected to stay this high for years to come

$29,000 to support their parents, expected to increase for years to come
$20,000 to cover their parents medical bills, expected to increase for years to come
$15,000 to supporting a sister who is out of work and not in a great position to get a job
$12,000 interest expense on their debt
$5,000 on their kids education
$4,000 on gas, auto expenses, transportation
$4,000 helping their uncle who lost his legs in Vietnam
$4,000 in charity donations globally and locally
$19,000 on general expenses

What should my friends do when they only see expenses increase in the years to come and know that they will never be able to pay down their debt?

Bankruptcy seems to be one of the only options on the table for them. And unfortunately, this is a common and truly sad situation for everyone in this situation.

Do you know someone in this situation? What, if anything, can we do to help them? What do you say to them to give them hope?

But…I haven’t been 100% honest with you.

This isn’t my friend’s family situation.

It is the United States Federal Government! And it is our actual 2007 Tax Base, 2007 Budget and our Current National Debt. I simply divided the
actual numbers by 20,000.

The idea being that as long as we keep speaking in Billions and Trillions, no one would be able to relate to these figures and understand the severe state we are in. If we reduce it down to what a family would have to deal with at a personal level and it becomes something we can actually understand and digest.

So here are the 2007 figures:
US Tax Revenues – $2,400,000,000,000 (2.4 Trillion)
US Expenses - $2,900,000,000,000 (2.9 Trillion)
US Debt – $11,000,000,000,000 (11 Trillion)

Tax revenues will likely be flat for a while as we work through a deep recession
Spending will likely grow as the boomers retire and start asking for their benefits, not to mention a government that refuses to cut spending in good times or bad.

When all is said and done, some say the US Debt will exceed $50 TRILLION when you account for social security and medicare benefits for the boomers. In this analogy, it would equate to $2.5 Million debt for this fictitious family currently making about 120,000 in after tax salary.

And we are financing this debt at the low “teaser rates” right now of 2 or 3%. What if interest rates go back up to 5 or 10% in the future? What if 100% of your salary can't even cover the interest payment on your debt? Makes it hard to live, doesn’t it?

Did the concept of the United States declaring bankruptcy in the future seem impossible? I think it is an absolute possibility.

Welcome to the Boomer's Wake


hippoface said...

Love you baby boomer brother! We will ride it out together. You have the brains in the family!!! Cheryl

Anonymous said...

Greg - great to see you blogging. :)

But I must take issue with your analogy for a variety of reasons. Sovereign government != individual family. For starters, you might look at national debt as a percentage of GDP over the past 20 years or so.

Even if we accept the analogy for the sake of discussion, though, the solution as far as the federales are concerned is simple:

1. Increase income

Simply by reducing the marginal tax rate, the Fed govt can spur so much additional economic activity that actual tax revenues go higher. That has been our experience during JFK, Reagan, and even Bush tax cuts. Of course, now we have Obama... but still... that's what we need to do.

2. Cut out entitlements

That $29K to support parents, and $20K to cover parent medical bills can absolutely be cut. At a minimum, they can be reformed significantly so that it is not the drain it is today (private accounts, anyone?).

Politically our elected reps lack the spine to do the right thing, but that is not the same thing as a family unable to make changes.

3. If things should ever get so bad that the U.S. ever defaults on its sovereign debt, believe me, the last thing we'll be worrying about is our tax burden. The social chaos, the pillaging, the murders, rapes, and breakdown of society will be so severe that we won't be worrying too much about things like that. Instead, we'll be holed up with our guns in our laps, defending what we have against looters and bandits.

Greg Ausley said...

Hey Rob!

Great discussion points.

I would offer that in this analogy, income is going to remain fixed for the next 5-10 years. Income is defined here as the tax revenues. We are in a deep recession at best. Tax revenues shouldn't grow (at least significantly) for a while. Of course I am not an economist and hope I am wrong here.

In terms of entitlements, I am all for cutting them down to reasonable levels. However, it seems that it ain't gonna happen! The is a government by the boomers, for the boomers. Cutting retirement benefits is political suicide and I don't think Obama will have the courage to do so.

So I agree with everything you say in a fundamental way, but am sorry to say that it just isn't practical to expect any of these things out of the government any time soon.

Sorry, my friend, but you and I are going to be stuck paying this bill for years to come.

Please keep reading and commenting. I love the discussion!


Anonymous said...

Income over the next 5-10 years will not grow only if the government does stupid shit. Which... it is highly likely to do. But cut taxes, cut the corporate tax rates, cut regulations, stop bailing out failed companies, drop trade barriers, and watch the engine of American growth just rev up.

Cutting entitlements is political suicide only because we post-boomers are lame-asses. Half of us are brainwashed by liberal ideology and thinks big government is always the best, while the other half of us are politically powerless. That can change. There is a very strong streak of libertarian, pro-capitalist views in the Gen-X and Gen-Y generations. As they start to overcome the brainwashing by their college profs and the media, they may find that actually, they really DON'T want to vote for the guy who proposes to take their money and keep giving it to the Boomers.

We are likely to be stuck paying the bill, sure. But those of us with children have a lot of motivation to make sure THEY don't end up paying for grandma and grandpa's excesses.

The pendulum will swing back. :) Have faith in the American people.