Wednesday, August 10, 2011

Fiscal Budget Math

The Obama administration is claiming that S&P made a $2 trillion error when they projected the spending of future years and downgraded the nation's debt rating from AAA to AA+, saying that S&P has "shown a stunning lack of knowledge about basic U.S. fiscal budget math."

Let's take a look at that, and at what the government means by cuts, and why they complain that S&P got it wrong. like most people, talking about trillions of dollars makes things a bit hard to understand, because most of us cannot imagine what a trillion dollars is.

To put things in simpler terms, let's say that we have a household budget of $3,000 per month, but we only make $2,000 per month and we borrow the other $1,000. We are planning on increasing our spending by $300 per month, but our income is projected to remain the same.

We are already $10,000 in debt, so I get in an argument with my wife, and we reach an agreement that we will cut our planned increase six  months from now, and only plan on spending the following:

Plan......Now ..... 1 month out ...... 6 months out ....... 1 year out
Old ...... $3,000... $3,300 ............ $4,800 .............$6,600
New..... $3,000...$3,300 ............ $4,700 ............. $6,000

We congratulate ourselves because we have managed to save $2100 over six months, because we "saved" $100 the sixth month, $200 the seventh, and on until we reach the $600 "savings" of the twelfth month. That is what government budget cuts mean: cutting the rate of increase. Never mind that that we will have to borrow $50,000 on top of the $10,000 we already owe to make ends meet. Never mind that we will argue about the budget next month, and completely rewrite it.

So, the bank that is going to loan me this money looks at my budget and lowers my credit rating. Instead of fixing the problem, I accuse the bank of not understanding how I do my budget. It's the bank's fault. Yeah, that's it- the banks. I don't think that S&P has failed to understand budget math. I think that the US Government has failed to understand basic arithmetic.

Of course, I can always "print" money to pay my debts by tearing all of my dollar bills in half, and thus doubling my money. That will fix it.

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