Day: October 6, 2011

Thursday, 6 October 2011

08:32 – It occurred to me that a few of my readers may be unaware of the weasely ways that governments try to make things appear better than they are by using phrases like “primary budget surplus” and “current account deficit”, both of which should be red flags. So let me explain it in personal terms.

Let’s say that you expect your household income to be $50,000 in 2012. Your expected expenses for food, utilities, insurance, car expenses, and so on total $49,000. Congratulations. You’re running a “primary budget surplus” of $1,000. (If your expected expenses had instead been $51,000, you’d be running a “current account deficit” of $1,000.)

But wait. By definition, these figures do not incorporate debt service expenses. You have a mortgage upon which you’re paying interest and principal of $1,500/month, or $18,000 per year. If you take that figure into account–which of course you have to, being a person rather than a government–your expenses now total $49,000 + $18,000 = $67,000 for 2012, but your expected revenue remains $50,000. You’re $17,000 in the hole. There’s no alternative to paying your mortgage, so your only options are to cut spending elsewhere or borrow an additional $17,000 to balance your books. In real life, of course, people cut the other expenses and governments borrow the money.

But it gets worse. Your brother-in-law retires next year, and you’ve signed an unbreakable contract to pay him $5,000 per month and cover his medical insurance costs, which total another $1,500 per month. Starting next January, you’re on the hook for an additional $6,500/month in expenses, or $78,000/year. So, at this point, you expect your actual revenue for 2012 to be $50,000, and your actual expenses to be $145,000. You have to come up with an extra $95,000 in 2012 and, not being a government, you can’t just print the money. Nor can you borrow it, because no one will lend to you. Your personal financial world collapses, but at least you can say you were running a “primary budget surplus”.

It gets worse still. Your sister-in-law retires at the beginning of 2013, and you’ve also agreed to pay her retirement and medical expenses, for an additional $6,500/month. And your company has announced that sales are falling and it will cut all salaries 10% across the board starting in January. So, as of 2013, your expected revenue is $45,000/year and your expected expenses are $223,000. How long can this go on? Well, the obvious answer is “not for long”. And that’s what nations are now finding out: eventually, you have to pay the piper.

Oh, yeah. Did I mention that many of your 50 adult children, such as California and Illinois, are deeply in debt, with no chance ever of paying what they owe? Technically, you’re not responsible for their debts, but you don’t want to see them go to debtors’ prison for life, so you’ll probably end up having to pay off their debts as well.

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