Scariest movie of the Halloween season -- IOUSA

[Windup]

We went to see IOUSA, a movie about what the producers call “the four deficits” – federal budget, personal savings, trade and leadership. 

My wife says it’s “way scarier than Saw V” mainly because you can’t sit there and say to yourself, “It’s only a movie!!” – the problem is out there waiting for you when you step out of the theater.  For me, this hung some numbers on a problem that I knew was bad, but hadn’t fully appreciated just how bad.  It’s resolutely non-partisan, taking no position whatsoever in the big-government vs. small government debate – but insisting that we have to pay for whatever government we have. Not to mention the retirement we expect and the stuff we buy from the rest of the world.

The movie also went out of its way to explode some of the facile solutions that get tossed around.  Rescinding the Bush tax cuts, eliminating “pork barrel spending” and “waste, fraud and abuse” and pulling out of Iraq gets you less than one-quarter of the way to covering the debt and funding the unfunded liabilities in Social Security and Medicare.  A “tax only” solution involved doubling the federal tax take, while a “cut spending only” solution involves halving everything in the government that isn’t Medicare, Social Security or Defense. (Disclaimer: I'm working from memory, here, and may be a bit off on exact numbers, but not the general scale of the problem.)

The movie is at only one theater here, in Jordan Creek mall, our local Temple of Upscale Shopping.  Since the Personal Savings section consists mostly of saying, “Don’t buy stuff you can’t afford” this struck us as a bit like the American Manufacturer’s Association sponsoring a public reading of The Communist Manifesto, but we were glad somebody picked it up. 

More details on the movie, including where you can see it your state, here: http://www.iousathemovie.com/

[Zathras]

Want to really get sick?  Watch Maxed Out. 

www.maxedoutmovie.com

Just wrong.

[JoeFitz]

An interesting set of comparatives, but the movie relies on a fallacy - that it is preferable that the US federal government to be debt-free.

I can't imagine buying a highway or a bridge on a pay-as-you go basis; these projects take time to complete and are long-term assets.

I don't know whether the US government should have $10 trillion or $5 trillion in debt. But I do know that I'd rather the US government buy a lot less military hardware (US spends about half of the world's annual military budget) and put aside a little more for the entitlements (social security, medicare and medicaid) that form a good chunk of the projected US deficit (and therefore debt).

[Zathras]

An interesting set of comparatives, but the movie relies on a fallacy - that it is preferable that the US federal government to be debt-free.

I can't imagine buying a highway or a bridge on a pay-as-you go basis; these projects take time to complete and are long-term assets.

I don't know whether the US government should have $10 trillion or $5 trillion in debt. But I do know that I'd rather the US government buy a lot less military hardware (US spends about half of the world's annual military budget) and put aside a little more for the entitlements (social security, medicare and medicaid) that form a good chunk of the projected US deficit (and therefore debt).

I disagree.  Debt is bad.  Not trying to start an argument, just stating my side.

[Windup]

An interesting set of comparatives, but the movie relies on a fallacy - that it is preferable that the US federal government to be debt-free.

The movie acknowledges that you can't be debt-free -- it's happened exactly once in US history.  Any organization of any size has debt as part of its capital structure. 

However, when you're in the situation we are in where debt and unfunded liabilities are growing faster than total income and total assets, you are headed for a world of hurt.  That was the problem that the movie made clear for me -- the relationship between debt and GDP and most important, how that relationship is changing. 

I agree with you in terms of cutting defense, but the problem with the most problematic entitlement -- Medicare -- is that its teathered to health care costs, which are rising faster than the GDP is growing.  Money has been set aside for Social Security, but as the trust fund begins to spend more money for benefits than it takes in in taxes -- a situation it will face farely soon -- the bonds held by the fund must either be paid off with taxes, or with funds borrowed from another creditor.

[Windup]

I disagree.  Debt is bad.  Not trying to start an argument, just stating my side.

Well, I agree with the point Joe is trying to make -- there's a big difference between debt taken on to acquire assets and debt taken on to fund consumption.  Financially, the former can work out quite well at the right combination of improved earnings and interest rates; the latter always foreshadows lower living standards in the future. 

Our problem, as a nation and most especially as households, is that we're doing way too much of the latter.

[Zathras]

I disagree.  Debt is bad.  Not trying to start an argument, just stating my side.

Well, I agree with the point Joe is trying to make -- there's a big difference between debt taken on to acquire assets and debt taken on to fund consumption.  Financially, the former can work out quite well at the right combination of improved earnings and interest rates; the latter always foreshadows lower living standards in the future. 

Our problem, as a nation and most especially as households, is that we're doing way too much of the latter.

I find it oddly satisfying to hear people who were investing with OPM (Other People's Money) moaning about the current economic crisis.  They thought I was simple and naive because I thought borrowing money at 5% on a home to invest in the market was a Bad Idea.  They would show me all sorts of numbers proving their side of the argument.  The one sophisticated part of the equation they always left out?  Risk. 

You play with snakes, you're gonna get bit!

[Windup]

I find it oddly satisfying to hear people who were investing with OPM (Other People's Money) moaning about the current economic crisis.  They thought I was simple and naive because I thought borrowing money at 5% on a home to invest in the market was a Bad Idea.  They would show me all sorts of numbers proving their side of the argument.  The one sophisticated part of the equation they always left out?  Risk. 

You play with snakes, you're gonna get bit!

They had a lot of company in underestimating risks.  It appears to be an inherent feature of markets that during long periods of stability, market participants will ratchet up risk by increasing leverage, demanding smaller margins, etc.  And the longer a given market remains stable, the more pronounced the tendency becomes. 

So, yes, paying attention to risk is a Very Big Deal.  However, this doesn't invalidate the basic idea that taking on debt to acquire assets can be a good thing.  If it wasn't, nobody would ever start or buy a business, borrow for college, etc.

[Zathras]

I started, run and grow my business with cash.  I am more risk averse.

[Russell Nash]

Just to add a point hear.  On average (this means I don't have he current stats) Treasury bonds have paid around 4%.  The nation debt at this moment is 10.5 TRILLION dollars (almost exactly double what it was eight years ago).  That means interest on the debt is around 420 BILLION dollars a year. 

[Zathras]

An admission.

I started my current business with cash.  Paying off business debt after it is closed is no fun.  So, yes, I have borrowed to start businesses, but am more comfortable using straight cash.  I do have some 30 day accounts, but that's only for billing purposes, I can pay when I receive the services or materials.  It's one of the things that is going to get me through the current slow down.  I am even thinking about expanding.

To each their own.

[Windup]

I started, run and grow my business with cash.  I am more risk averse.

A great deal obviously depends on the business.  If startup costs and other barriers to entry are low enough, and the income stream is volatile enough (door-to-door sales like Mary Kay/Avon, most small consulting shops) cash may easily be the only rational basis on which to finance the business.  OTOH, for a capital-intensive enterprise like a farm, some degree of debt may be inevitable.

Good luck, by the way.  And I share your risk aversion.

[Zathras]

I started, run and grow my business with cash.  I am more risk averse.

A great deal obviously depends on the business.  If startup costs and other barriers to entry are low enough, and the income stream is volatile enough (door-to-door sales like Mary Kay/Avon, most small consulting shops) cash may easily be the only rational basis on which to finance the business.  OTOH, for a capital-intensive enterprise like a farm, some degree of debt may be inevitable.

Good luck, by the way.  And I share your risk aversion.

I under funded previous ventures.  I got started with this one for about 15k.  I own my truck and trailer (18 wheeler).  Now, I had to bust my but and look around to get a good deal, but it was worth it.  If I had a loan on my truck, like most owner operators do, the recent fuel spike may have put me under.  Many truck owners and trucking companies folded this year.

My main point is that I don't want to borrow money for anything.  Of course, I'm not in Congress, so I actually have to balance a budget.   

[JoeFitz]

Just to add a point hear.  On average (this means I don't have he current stats) Treasury bonds have paid around 4%.  The nation debt at this moment is 10.5 TRILLION dollars (almost exactly double what it was eight years ago).  That means interest on the debt is around 420 BILLION dollars a year. 

Just for the sake of argument, though, the single largest type of creditor is the federal and state governments, so about 210 BILLION dollars is guaranteed, stable income to other levels/departments of government. It's the type of investment where a lot of state and federal pension funds and trust funds are kept, for example.

Where would these huge asset pools be invested without the US debt? Necessarily in lower-paying, higher risk investments.

[Windup]

Where would these huge asset pools be invested without the US debt? Necessarily in lower-paying, higher risk investments.

I think you mean higher-paying, higher-risk investments.  Because the default risk is considered (at least for now) to be practially zero, the Federal Treasury can borrow more cheaply than just about any entity on the planet.  But, fear not. Even if we balanced the budget tomorrow, the debt will be with us for a good, long time.  Just paying off the bonds held by the Social Security Trust fund will absorb any efforts we're likely to muster in the repayment department for several decades, with no affect whatsover on the "float."