Wednesday, August 3, 2011

Knowing Enough About Finance

We are members of a free American society where personal choice rules. Personal choice is optimized when individuals possess the requisite knowledge to make informed choices. Much choice involves money and what to do with it, whether it be borrowing, spending or investing.

Unfortunately far too many of our citizens are unable to make informed financial decisions due to a lack of training and knowledge. That's too bad, since the subject matter isn't all that difficult to understand, assuming the interest is there.

In Financial Literacy must be taught in our schools, the well argued case is made that too few of us are trained to deal with our own money. Virtually no personal-finance training is given to students at the middle school, high school or college level, and then it's pretty much the same story when we enter the workplace as young adults.

With the current financial fiasco we're facing, in many cases as individuals and for all of us in our various cities, states and nation as a whole, we must address in a serious way this individual and national shortfall. Acquiring "enough" knowledge about personal and government finance is imperative to our future well-being as individuals, families and our overall society, too.

We can see this shortfall all too clearly in the current debt ceiling negotiations being conducted in Washington. The math being argued by either side simply doesn't add up in any fundamental or long term sense. To wit, there have been no discussions, at least in public, about how to remedy our financial problems in the long run. Big government and higher taxes for all or smaller government and greater self reliance for all? Large government entitlements and taxation or more personal responsibility and greater individual financial freedoms?

All can and do agree on one thing. We will have a national deficit of ~$1.6 trillion this year. Yet the sticking point in negotiations seems to be the following: The Democrats want to tax the top 2% of earners another $70 billion each year while leaving the tax bills for the other 98% the same as they are. The Republicans want to increase no taxes. What about the ~$400 billion in interest on the national debt? Will we ever bend the upward borrowing trend? If so, how? Not by agreeing to one or two trillion in spending cuts over ten years. That math doesn't work either.

Meanwhile, individual states are concerned as well. They receive an estimated $500 billion annually from the federal government and fear they will lose much of this federal funding in the future. Their fears are justified. That's because the federal funding they've been receiving from the federal government comes from money borrowed by the federal government. That in turn increases the federal debt and deficits, the subject of the current debt ceiling debate.

The biggest piece of the state budget is medicaid, which is ~50% financed by the state and 50% by the federal government. Then the next biggest piece goes to public school districts and colleges. These localities receive funding from the states, which have no money to grant unless they receive funds from the federal government, which has no money to grant, unless it borrows it. And the debts increase.

In fact, medicaid and public school funding represent more than 50% of state budgets, while the state gets 30% of its funds from the feds. To repeat, the feds have no money to grant, since they get 40% of their funds by borrowing.

The Republicans won't discuss additional taxes and the Democrats won't discuss reducing entitlements such as social security and medicare/medicaid. They both appeal to the same "middle class" voter who enjoys eating free lunches. But the food is going to start getting expensive real soon. We have to pay for what we eat, and we have to decide from whence our food will come. That means choice and that means it's essential that we all end up KNOWING ENOUGH ABOUT FINANCE.

Here's a serious question: Why have a debt ceiling if we raise it all the time? We certainly aren't making any progress with respect to keeping a lid on the national debt. And in addition to the ongoing national debt and deficits saga, our various states', cities' and individuals' very real long term financial problems aren't being faced squarely either.

Disruptive change is coming to town. Choices will have to be made soon. So let's each do what we can to ensure we make well informed choices. We'll be able to do that by "knowing enough about finance".

In the coming weeks and months, every effort will be made to do our very small part to help interested people learn more about personal and government finance, as well as the choices associated therewith.

It's really about nothing less than the relationship of free markets to governments, along with the relationship of general prosperity to personal freedom. Knowing enough about finance is essential to our individual and national well-being. It's actually a personal and moral issue for each of us concerning what kind of people we choose to be. That's for sure.

Thanks. Bob.

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