My Economic Plan

One doesn’t have to go far to see all the bad economic news. Personally, I think it will get much worse, but we’ll save that debate for another time. Many now want Washington politicians to “do something.” We wait anxiously to see what Obama will say or what Helicopter Ben is whispering. So many people now expect Washington to fix this mess. Well I have news for you, Washington can’t fix this entire mess.

This isn’t just a problem in Washington or on Wall Street. This problem exists on Main Street as well. We save no money, we spend every dime we earn - we spend money we haven’t earned! We allocate far too much of our capital to buy consumer items that are gone far too quickly instead of spending that money in developing new technologies and funding startup ventures to fix problems that exist in the world. We spend too much money on homes to live in. (An aside: Politicians for years have implemented programs for “affordable housing” by increasing capital available to people so they could buy homes, but they never made it affordable. Now that home prices are falling, they are worried sick - even though it will finally give them the affordable housing they have yearned for).

Instead of expecting politicians and bankers to come up with a solution to a problem they helped create with our complacency, how about we all develop our own plan? Too many people act like they are victims and have no personal role in the mess we now find ourselves in. Too many are waiting for government to solve or fix the economy. Well, I have news for you - you do matter, your actions matter, and what you do with your money each and every day matters. Collectively we are the economy.

Too many of us went along with the bankers' idea of a strong economy and borrowed heavily and spent beyond our means. We bought into the notion of sending our retirement money to Wall Street to buy companies at 30x P/E, as if it was the normal thing to do, the right thing to do. The “experts” told us to make sure we were diversified and that would limit the risk. We bought into the notion that home prices would forever climb skyward and that it was the “best” investment (is a home an investment?). We took on too much debt and borrowed against our future earnings despite the fact that the majority of our population got closer to the age of retirement. We are part of the problem, and we can be part of the solution.

We know the bankers' answer to the current economic woes - get us to borrow more money. We know the politicians answer - print more and spend more money (our money). The word bailout is flying around far too much. Does any of this actually fix our fundamental problems? I don’t think so, though you’re entitled to your opinion.

So let’s come up with our own solutions on an individual level. Ask yourself, what can YOU do? You might not have much say in Washington on an individual basis, but you do have some say over your own finances and actions. First, come up with a way to get your own financial house in order. Then we can worry about coming up with a plan that would help get the rest of the country in order. I’d love to see each of you post your own ideas. Your ideas are probably much different than mine - that’s fine. I want to hear them, many of you will have better ideas than me. Discussion is good, and it’s time we start taking responsibility for our own actions and also get more involved in finding real solutions to the problems at the individual level.

My Personal Plan of what I can do:

1. Go through personal household budget line by line and figure out what can be reduced. The goal is to live within my means and decrease costs as much as possible while still living a comfortable life.
2. With 100% of my savings I am going to pay off all outstanding debts. My goal is to be debt free, for the rest of my life and buy the things I want or need with SAVINGS.
3. After budget is in good shape, I need to decide what to do with any savings I have. I’ve decided a quarter of all my savings I want to put toward retirement, though this figure may change. The other three quarters of my savings I want to put toward large future goals like building an emergency fund, buying a small acreage with a nice little house, starting a small business, investing in other local businesses, etc, etc, etc. It will vary for each person.

After you have created a REAL plan for how you will get YOUR financial house in order, you can begin to worry about the greater economy and the country in general. Think of some potential solutions that you can suggest to our politicians. Here’s my idea. Please note: It won’t be quick, easy or without pain and it has flaws. I’d love to hear your ideas!

1. We need to let the banks fail that can’t stand on their own two feet. Who cares about their derivative positions - just let them fail. Period. It was all fake wealth created anyways.
2. We need to let the healthy banks thrive as a result of the bigger banks falling - this will happen naturally.
3. We need to abolish the Federal Reserve. If you want a Central Bank - then make one that is owned and controlled by government and fully audited, not a private corporation that has NEVER been audited like the current system. I’m tired of Federal Reserve bankers getting all the bailouts and having the power to print money and affect interest rates and being promoted into high government posts after having made such a mess.
4. Government needs to get out of all special interest programs and slash expenditures. There are trillions of dollars being wasted on programs that aren’t necessary and are outside the spectrum of what government should do.
5. Issue a new currency that is NOT debt. Right now every dollar is debt. Dollar = Debt.
6. Abolish fractional reserve banking. Every dollar should be a real dollar. Period. No printing “fake” money on a fractional basis.
7. Tax reform is needed badly. Get rid of death taxes, property taxes, income taxes, and corporate taxes. If we didn’t have such a large government, we wouldn’t need these taxes. A sales tax based on consumption would be more fair and would reward savers and wealth building within the nation. We could also use service fees and tariffs to help balance the budget. We didn’t have income taxes until just recently! Remember, we must get rid of MOST government departments that aren’t vital and so we can afford to reform the taxes.
8. Companies like GM, Ford (F) and Chrysler need to get a bank to loan them money or file Chapter 11 and reorganize until they are healthy and once again competitive and financially sustainable.

Would the plan above be painful? Of course! Once we fix the underlying problems it will be much better for our society in the long run. Our fiat dollar controlled by the Federal Reserve DOES NOT award savers but encourages debt. The current tax system DOES NOT AWARD savers.

Comments

[youngolf:]

Yep.

2008 Dec 15 08:32 AM

[User 173545:]

Great ideas that most smart and un-connected people support. The problem is that your ideas would take people currently in power out of power which is why, unfortunately, nothing will change short of a revolution.

2008 Dec 15 09:35 AM

[flow5:]

Number 1 & 2 = yes, too damn many banks that even with real-time immediate update software systems, the Fed can't track settlements or reserves except with a lag
Number 3 = no - The Fed is not the problem, the economists are
Number 4 = yes - the "federal" government is too bloated but that problem is very challenging and change will be a long time in coming (too many special interest groups) abolish the lobbyists
Number 5 = no, not yet
Number 6 = no, only in a frictionless world is savings = investment
Number 7 = yes, what do the tax experts advocate?
Number 8 = yes, seems too obvious

2008 Dec 15 09:41 AM

[RickRussellTX:]

Yeah, I cannot see how eliminating fractional reserve banking fixes any problems. If anything, it dramatically worsens liquidity problems -- look at the national bank system before the Federal Reserve existed. If depositors took out money, the bank had to demand immediate payment on loans. It makes sense in theory, until you find out that the letter of credit you sent to the lumber mill just got pulled. Do we really want to go back to the days of couriers carrying gold and paper currency to pay for business transactions? Without the ability to rely on short-term lines of credit, that is what will happen.

2008 Dec 15 10:22 AM

[RickRussellTX:]

Yeah, I cannot see how eliminating fractional reserve banking fixes any problems. If anything, it dramatically worsens liquidity problems -- look at the national bank system before the Federal Reserve existed. If depositors took out money, the bank had to demand immediate payment on loans. It makes sense in theory, until you find out that the letter of credit you sent to the lumber mill just got pulled. Do we really want to go back to the days of couriers carrying gold and paper currency to pay for business transactions? Without the ability to rely on short-term lines of credit, that is what will happen.

2008 Dec 15 10:22 AM

[Robert Nabloid:]

Like I said, my plan isn't perfect. I would assume that most banks would have money that they can lend out from their own assets they have developed over the years. I would also assume those that take longer term bonds from the bank would offer more stable money to be lent out. TO be truthful, I don't want my money in my checking account to be lent out by the bank - my savings account yes, as I want a little interest, but my checking account I want to be using right away and would prefer it not to be lent out.

Like I said, my plan isn't perfect. I'm open to suggestions and I'd love to hear your plans - both what you plan to personally do and what you wish government would do. I know we don't have much say over government, and that is why nothing will change - sad, as they say its a democracy for and by the people. Oh well, at least we are personally free to do choose most of our own actions (as long as you don't owe too many people money anyways :-) ).


On Dec 15 10:22 AM RickRussellTX wrote:

> Yeah, I cannot see how eliminating fractional reserve banking fixes
> any problems. If anything, it dramatically worsens liquidity problems
> -- look at the national bank system before the Federal Reserve existed.
> If depositors took out money, the bank had to demand immediate payment
> on loans. It makes sense in theory, until you find out that the letter
> of credit you sent to the lumber mill just got pulled. Do we really
> want to go back to the days of couriers carrying gold and paper currency
> to pay for business transactions? Without the ability to rely on
> short-term lines of credit, that is what will happen.
>

2008 Dec 15 01:14 PM

[John Lounsbury:]

Robert Nabloid - - -

Good article to stimulate discussion. I have some comments.

a. Your comment on diversification is apropros. Diversified crap is still crap.

b. Printing more money and instituting bailouts does not fix the problem. It is an attempt to apply a bandage to prevent infection until the cause of the lesion can be addressed. The problem is that removing the bandage (later) can be problematic.

c. I agree with flow5 and RickRussellTX: The Federal Reserve is not a problem, but is a valuable stabilizing factor. The Fed is the glue of our financial system.

d. Fractional reserve banking is not the problem. This is not a system for creating more money, but to increase the velocity of money. It is how fractional reserve debt has been used that has gotten us in trouble. In a stable system, fractional reserve debt is used to invest in assets to produce tangible and/or consumable things. The debt is repaid through proceeds from sale of things produced and the money disappears from circulation until another loan is made. In the past couple of decades loans have been used to finance derivatives of financial instruments. These derivatives have been used as "reserves" to create more layers of financial leverage (psuedo-fractional reserve banking), without regulation by auditors. This has been referred to as a house of cards. It has also been called a Ponzi scheme. It is both. This complex financial structure (now collapsing) was not constructed to enable production of things that could be used or consumed. It was constructed to produce more financial paper. The payback of the "loans" was not in U.S. currency, but in the new financial paper. In other words, the payment to the original investors depended on the ensnarement of new investors. This is the classical definition of a Ponzi scheme. An effective audit system could have prevented this.

e. Sales taxes (consumption taxes) are a good idea but fraught with a number of implementation issues. This type of tax is extremely regressive: Someone earning $40,000 a year will spend most of his income, say $38,000, and pay tax on this amount. Someone earning $80,000 a year will spend a lot (but a smaller percentage) on consumption, say $68,000. At $400,000, the amount spent on consumption might be only 50%, $200,000. The advantage of this is that it does encourage saving over consumption. The disadvantage is that the bulk of the tax burden is born by those with the fewest resources. Such a system can fuel vast social unrest. If the consumption tax was 25% (in the ballpark I have seen proposed), the $40,000 earner pays $9,500 a year in taxes (24% of income); the $80,000 pays $17,000 a year (21%); the $400,000 pays $50,000 (12.5%).

A solution to this problem is to make refunds of consumption tax paid by those with lower incomes. One proposal (as best I remember it) was to have full refund of consumption taxes paid for incomes up to $40,000 (married filing jointly, $20,000 single filers). The rebate would scale down with increasing income, say to 60% at $100,000, to 20% at $200,000 and 0% at $250,000. This would require annual filing of income reports by individuals, just as the current income tax process does. In order to verify incomes reported, employers would have to continue to file reports for all employees, sub-contractors, etc. By the time the consumption tax system is defined in a workable way, it is not much different than an income tax system.

f. Tax reform is needed. My position is that simplification is a desirable objective. Problems arise in the area of unintended consequences. Can you remove mortage interest deductions in the middle of a housing crisis without creating Armageddon? Remove charitable deduction when charities' capacities are stressed beyond normal. Other questions arise regarding investment credits, municipal bonds, capital gains, dividends, etc. Remove all current tax code and start over? Millions would scream breach of contarct. Complex. long-term financial commitments have been made based on an assumed contract of taxation, which can be modified in moderation but not voided.

g. Definitely agree with improved government efficiency. The President-elect has said he will get rid of what is not working and improve what is working. I am skeptical about the implementation, but this is what needs to be done.

h. Get rid of lobbyists? I don't know that Congress can work without lobbyists. Those legislators that have expertise in issues of government are generally very narrowly informed. Many operate at the level of ideology rather than idea-ology. I would rather restrict how lobbyists interact with congresspeople. How about having all information provided by a lobby to a legislator first be posted for public review? In my opinion, the problem is not with the existence of lobbyists but in the system that allows one-sided input to Congress. If all positions could be in action, legislators and their staffs would be more likely to be properly educated on issues they address.

Robert, you have attempted to start a discussion on a wide variety of issues. Even though they are interrelated, these should probably be worked on individually before the entire analysis is attempted.

2008 Dec 15 01:22 PM

[Larry House:]

Thanks, Robert, for a thought-provoking article. I have been taking some steps in response to this mess we are in, but I haven't put them down as a specific plan. I am retired but working full time. I am selling "things" as I can to increase liquidity and to pay off debt. I received a letter from Citi that my card from them would go from 6.7% interest to 14.99%. I opted out of that and will pay the balance in full next month and will close the account. It had a high credit limit, but I don't need or want it. I am going to increase my savings balance, even at the expense of less money to invest. Ready cash is more comforting right now than stocks and bonds. We have two paid-for vehicles, and I don't forsee buying a car for several years. I may never buy another new one. We are eating out less, and we are, in general, just lowering our spending and not thinking about "things. "My IRA funds are 80% in short-term bonds, A-rated and higher, and 20% in high-yielding stocks. I also hold gold and silver bullion. Before I made these changes to my investments, I was down about 30% this year, but it would only have been down 15% if my Lehman bonds hadn't defaulted. I have been investing for 30 years, and I have never see conditions like we have today. I think the greatest mistake an investor can make today is to think that "things will soon get back to normal." We will have a new "normal" at some point in the future, but it won't be soon.

2008 Dec 15 02:53 PM

[silverslut:]

Anyone who thinks that the Fed is not a problem, has no idea how the world works. Furthermore, such extremely ignorant people are themselves part of the problem. My advice to them, is to immediately suspect everything they think they know, since it is obvious that they are gullible. At the very least, they should read "THE CREATURE FROM JEKYL ISLAND, before they say another word on a subject on which they know nothing. It is unfortunate that they are gullible and ignorant. I hope that I don't need to add stupid to the list.

2008 Dec 15 03:37 PM

[henarl:]

Probably the best article I have read in a long time. If everyone (or even a significant majority) would act with fiscal responsibility as individuals, it would solve the collective problems we are now experiencing. The schemes of the greedy only work with the acquiescence (and greed) of their victims.

2008 Dec 15 04:09 PM

[Blackeyebart:]

It's not fair to attack the attack the Government because Wall Street mucked up. Who is trying to solve the problems? - it sure isn't Wall Street.

Taxes aren't the problem most people make them out to be. Everyone could shift to a country with lower taxes but don't because it doesn't make economic sense. People are wealthier is countries with higher taxes. That's just a fact. Don't take my word for it. It's not my problem if political/economic theory doest match reality.

2008 Dec 16 02:11 AM

[Robert Nabloid:]

@jlounsbury59: Thank you for the comments. I agree with most of what you wrote! I also agree that the topic is huge, too big for one short article. I was just raising the issue to start with. I'll see where my own interest and the interest or readers takes us in terms of future research and any potential future articles. I'm not the best writer. I'm just trying to raise a few issues and get people to ACT - We can't stand idle and play victim forever and we each have a personal role - what we do with our own money counts.

I do not agree with C, though. It has never been a stabilizing factor, IMHO. I realize this is debatable. Perhaps in another article we can have a friendly debate? :-)

@LarryH: It's good to see some people out there trying to pay off debts instead of taking on more debt! For too long they have coerced us to take on debt and borrow against our future. We can't borrow forever - we must eventually pay it off!

I buy used vehicles. I've been able to get some ABSOLUTE bargains in the last five years on vehicles (even during the boom times!). I bought a 2003 Chev Venture in top shape with just 60k miles for under $4,000 within the last two years. I've bought a few other vehicles in the last five years, in top shape with low mileage for under $5,000, each of them looks brand new and works perfectly. I don't feel I've compromised on ANYTHING! I'm pretty much driving new vehicles at a fraction of the price. Compared to my friend that bought a brand new Dodge Ram for $40,000, I could buy 8 newish vehicles, practically a fleet, for the same money! Just some food for thought in case you were dreading the notion of never buying a new vehicle again...

Stay the course of fiscal prudence. A little bit if your money stored in silver/gold is always a good hedge. In the future you may spot some excellent opportunities in businesses or industries you have vast knowledge of, and hopefully when the time comes, you will have some capital to deploy - and I hope your investments reward your patience, research and knowledge.

@silverslut: I agree with you, the Federal Reserve is responsible for more than some people realize. For those that want a Federal Reserve, at least make it Federal. Anytime a private corporation has power over your money, which is the world currency, there are some conflicts of interest. I've done some research on the Federal Reserve - perhaps I'll write an article later on? Maybe I won't. I do think it has a major role to play in where we are at today.

@henarl: Thanks. I don't think fiscal responsibility takes a genius to figure out but it does take some common sense. If more people around the world would act fiscally responsible we might not be in this mess.

2008 Dec 16 02:11 AM

[Robert Nabloid:]

It's not fair to attack the government? I'm being critical and trying to get people to raise suggestions! That is what we are supposed to do if this is really government OF and BY the people.

Was it really ONLY Wall Street that mucked up? And how is government going to solve the problem of debt, which I think is one of the central problems we are faced with today? I'm open to see any plans they have. So far all I've seen is plans to spend their way out of the mess by printing money, taking on debt and lowering interest rates to entice others to take on more debt. Is that the solution? We just need to spend our way to prosperity? If that's the case then why bother saving a dime for retirement?

A country with low taxes alone doesn't ensure prosperity - just like a country with high tax rates doesn't ensure prosperity. There are some other major factors like education, capital, work ethic, natural resources, etc, etc, etc. That said, I'd prefer a government to have low taxes over high as it allows more money to stay in the hands of producers and commoners such as ourselves. Government has a funny history with the use of tax money and it usually proves wasteful. You don't want to know how many scandals I've seen with government use of funds...

BTW, I'm from a country with higher taxes than you. Do you think I'm wealthier simply because I'm from a country with higher taxes? In my country, I live in the one area that has the lowest taxes in the country and it has prospered because of its lower taxes. My area of the country is the only one WITHOUT DEBT. We did not pay it off with high taxes. We paid it off with fiscal prudence and cutting budgetary spending in government. Then, our natural resources became very highly sought after - so we are lucky in that regard - but we were already well on our way to prosperity. Corporate Head offices flourish here, small businesses flourish here and the wealth is spread around quite well due to lower taxes here than the other areas of my country. In my area of the country, we have higher per capita GDP than any state in the US (with the exception of DC, which isn't a state but a district). Taxes alone aren't the sole problem for any economy, but they are a problem when they are too high.

On Dec 16 02:11 AM Blackeybart wrote:

> It's not fair to attack the attack the Government because Wall Street
> mucked up. Who is trying to solve the problems? - it sure isn't Wall
> Street.
>
> Taxes aren't the problem most people make them out to be. Everyone
> could shift to a country with lower taxes but don't because it doesn't
> make economic sense. People are wealthier is countries with higher
> taxes. That's just a fact. Don't take my word for it. It's not my
> problem if political/economic theory doest match reality.

2008 Dec 16 02:34 AM

[chal:]

If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, (i.e., the "business cycle") the banks and corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."

Thomas Jefferson, President of the United States 1801-1809"

2008 Dec 16 11:20 AM

[Blackeyebart:]

The point I am making is that much of the criticism of government and taxation is pure prejudice without a shred of logic or reason. People just sound off. Countries with higher taxation usually have "higher" levels of civil infrastructure, better educated and healthier people, less public and private corruption, and are more democratic. I don't think these points are seriously in dispute.
Of course in every country drains burst, some people are illiterate or ill (or both), there is their Blagojevich, or Madoff; and Democracy is relative (especially in Florida!)
The overall point however is, I think, valid. If you don't agree say so.

I think the constant drumbeat against Government and Taxation makes it very difficult to rationally discuss any improvements to either. Why can't we talk about value for money?

"It's not fair to attack the government? I'm being critical and trying to get people to raise suggestions! That is what we are supposed to do if this is really government OF and BY the people.

2008 Dec 16 05:18 PM

[Robert Nabloid:]

Our taxes have been increased over the last century, dramatically. That is why people complain about it - it has been going up and up and up - WHY CAN"T IT STAY AT ONE STABLE RATE??? We don't mind paying taxes for basic infrastructure and the necessities to make our country great, but it's a big slippery slope we have been on with Politicians spending an increasing amount of OUR money year in and year out to buy votes and become popular. We didn't have personal income taxes at one time and we did just fine as a country! I'm not just talking about corporate tax and personal income tax. There are now taxes on everything! And they are adding more taxes. They tax money that has already been taxed. How about tax it once? And one of the real travesties is the government has spent so much money on Keynesian economic policies that many of the taxes only go to service the interest on the national debt, not any actual infrastructure or social programs! A very slippery slope. But all this talk of taxes isn't what I was focusing on - it was but one element - tax reform could be healthy - tax reform alone doesn't mean lowering taxes, but perhaps making it much simpler and only taxing the money once? There are bigger fish to fry, such as looking at what our money system is, how money is created, and how money is continually devalued. Tax reform doesn't = lower taxes. It means tax reform.

I wish we did talk about the value of money more often. The problem is, there isn't any value to fiat currencies except what others are willing to pay at the time. I attempted to talk about the value of money when I was discussing fractional reserve lending, the Fed, and the rampant money creation that almost always occurs and must occur to keep the system afloat. All of this hurts 'savers' and has created a dollar that will continually be devalued until it collapses (all fiat currencies eventually collapse - how long will the dollar last? Another 5 years? 100 years? 500? Who knows?).

I still remember stories of my grandpa buying a coca cola for a nickel. I can't buy it for less than $2. All the hard work my grandpa did and all the money he saved in cash/bank accounts wouldn't even equal what the average man earns in one year today. That is sad - a man's entire earnings equate to nothing, so can one really get ahead? You are forced to put your money into items to hedge against the inflation, but many of these items (farmland, gold, stocks, etc) aren't without problems and some are very expensive for the average person to buy (try buying some farmland in my area!). It seems to me the country is further in debt than ever before - both the actual country, the states, and personal families... all in debt. Are we a "rich" nation? Obviously there are some real problems in our economy, our tax system and our currency. All need to be addressed. The scope of the topic is too big for just one short article, that is very clear. I really just wanted to know what your suggestions were...

And tell me why the population and economy have to continually grow year in and out or we face a recession. Why can't growth be zero after a big blockbuster year, and stay that way? If we were all employed and booming two years ago, why do we NEED the economy to keep growing? Answer those questions and look into what money is, how it's created, who creates it. It's an eye opening experience to see how the system really operates and discover that it is based on infinite growth with is impossible.

On Dec 16 05:18 PM Blackeyebart wrote:

> The point I am making is that much of the criticism of government
> and taxation is pure prejudice without a shred of logic or reason.
> People just sound off. Countries with higher taxation usually have
> "higher" levels of civil infrastructure, better educated and healthier
> people, less public and private corruption, and are more democratic.
> I don't think these points are seriously in dispute.
> Of course in every country drains burst, some people are illiterate
> or ill (or both), there is their Blagojevich, or Madoff; and Democracy
> is relative (especially in Florida!)
> The overall point however is, I think, valid. If you don't agree
> say so.
>
> I think the constant drumbeat against Government and Taxation makes
> it very difficult to rationally discuss any improvements to either.
> Why can't we talk about value for money?
>
> "It's not fair to attack the government? I'm being critical and trying
> to get people to raise suggestions! That is what we are supposed
> to do if this is really government OF and BY the people.

2008 Dec 17 03:08 AM

[roger maxims:]

Dear old Robert,

If just 10% of Americans implement your Personal Plan and start saving, clear their credit card bills month in month out, then soon enough you won't feel much difference between your country, Japan or Russia anymore.

The reason why novelty companies like Apple can survive is because there are so many card-swipers who hit the limits like they're on a Vegas winning streak. Once domestic consumption slows, US is done for the remainder of the century.

The rest of the world simply postpone their wine and fridge purchases and continue eating their humble sushi, pasta and chow mein as before.

2008 Dec 23 10:26 AM