Bruce’s Wealth Blog

I was shocked last night to hear a comment about our economy and what is really going on.  You see, the federal government has their own special way of doing accounting.  While we often joke about how “creative” the federal government can be, we have a sense that something just is not right but we cannot put our finger on it.  The truth is that instead of using accrual accounting, which is the method required by the government to be used by businesses when reporting income to the IRS, our government uses cash accounting when reporting back to us.

 

Let me give you an example of the difference:  Let’s say you obtain an unsecured personal loan for $100,000.00.  And you have 5 years to pay it back with 5% interest.  Your monthly mortgage payment would be $1,887.12.  In a cash system, you were billed $22,645.48, and you paid $22,645.48.  If your income was $22,645.48, then you would show a balanced budget because your income was $22,645.48 and your expenses were $22,645.48.  If your income was $30,000.00 then you would actually show a $7,354.52 surplus.

 

However, if you conform to GAAP (Generally Accepted Accounting Principles), then you would use the accrual method required by our corporations.  In this case, you would show $30,000.00 in income, a new liability of $100,000.00 – $18,055.53 in principle reduction leaving a balance for that liability of $81,944.47, and interest expense of $4,589.96.  The cash at the end of the year is $7,354.52.  Balancing the cash against the liability, we end up with a negative net worth of $74,589.96.

 

We have the same year and the same transactions but two different methods of accounting in play.  One method shows more than a $7,000.00 surplus.  The other method shows we are in the hole for nearly $75,000.00.  Which sounds better to you?  If you were a politician, what would you rather tell your constituents?

 

This is what is going on today.  It is not about republican or democrat.  All of our politicians are spending us into bankruptcy and wondering why we are having problems with our economy.  Without this last “economic stimulus” bill, the government would have to disclose a national debt of $65,500,000,000,000.00.  This is more than 4 times our gross domestic product, and for the first time in history exceeds the gross domestic product for the entire world.  In short, as a nation we are bankrupt.  If we were to pay this debt off today, each household would have to pay$589,228.76.  If we were to pay it over time (which is the way we like to do things) it would cost more.  Based on the 30 year bond rate of 3.5%, if we were to drag this out over 40 years, we would be paying a total of $121,795,718,063,508.00 of which $56,295,718,063,508.10 is nothing but interest.  This equates to about $1,095,657.10 per household or $2,282.62 per household per month.  That seems to be a little much to put on the backs of the taxpayers, so lets drag this out over 75 years.  Again, at an interest rate of 3.5% the total would be $185,420,751,313,928.00 of which $119,920,751,313,928.00 is nothing but interest.  This works out to about $1,668,018.92 per household or $1,853.35 per household per month.   Basically, what we are talking about is another house payment per month for every household in the United States for the next 75 years or 900 months.  If our politicians were doing this in a publicly traded corporation, they would be prosecuted and thrown in jail.

 

To fix this, our government can print more money.  If we do this, and we likely are going to do this, it will have an even worse effect on our economy.  Printing more money will devalue the dollar against every other currency in the world.  Our imports will cost more, and we will get less for our exports.  In other words, as we interact with other countries, we will increase our expenses while decreasing our income.  Ultimately this will put more pressure on our economy creating at best stagflation or at worst a depression the likes of which we have never seen.  If you have never heard of stagflation, it is where we have uncontrolled inflation coupled with a stagnant economy.

 

In the short term, we have HR-1 (2009).  The American Reinvestment and Recovery Act, otherwise known as the Economic Stimulus bill.  This is a bill we have been told will cost American Taxpayers $816,000,000,000.  Once all is said and done it is expected to cost more than three times that amount.  In addition, the law makers had no time to read the bill.  They simply voted on it based on what their leaders told them was in the bill.  Looking at the bill we find $600,000,000.00 will be spent buying new cars for government workers; $10,000,000.00 for bike and walking trails; $200,000,000.00 for plug in car stations; $400,000,000.00 to NASA to collect climate change data; $800,000,000.00 to clean up superfund sites; $600,000,000.00 in grants for desil emission reduction; $650,000,000.00 for alternative energy technologies, energy efficiency enhancements, and deferred maintenance at federal facilities; $1,000,000,000.00 to the unions for their community oriented policing services cops hiring program; $246,000,000.00 to Hollywood; and $4,190,000,000.00 to ACORN, the group under investigation for illegal voter registration.  These are just some of the expenditures in the  bill.  Clearly, this is not an economic stimulus package.  It is a pork package.  It is simply a spending bill that has been rushed through.

 

So what does this mean to you?  Spending got us into this trouble.  More spending will not get us out.  As an investor it is critical that you minimize your debt and maximize your assets and income.  Real estate is still a great investment, but you don’t want to owe money on it.  You want to own it free and clear.  As the dollar is devalued, your cash will also be devalued.  But, assets such as real estate and gold will increase in value.  I hope I am wrong, but it looks like we are in for long harsh economic times.  Non-monetary assets are your best bet.  I will be discussing this in more detail at the next Inner Circle conference call.  Make sure you don’t miss it.  If you are not yet an Inner Circle member, visit http://member.drpreforeclosure.com and click on Inner Circle to join.

 

Bruce..