How to Explain the Current Economic Situation to Friends & Family

Resilient Life Public Resilient Life
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Given its simple elegance in addressing a question frequently asked on this site, this post has been elevated from the forums section. It has been updated by site members rhare and travlin since its first appearance (the original post can be read here).

I've been working on a way to get across to friends and family how bad the economic situation has become. I find one of the biggest problems is that when numbers are in the billions and trillions they are very hard to imagine, and people get this glazed/deer in the headlights look. So I decided to try to scale the numbers in a way that can be more easily visualized. 

Below is an updated version, with many thanks to members of PeakProsperity.com community who suggested changes/corrections, and particularly to Travlin for rewording much of the message to make it a better story. Hopefully this version will help convince others of the serious nature of the US fiscal outlook. 

My Troubled Relative 

I need your advice. I have a relativewho is in financial trouble. He makes $50,000 a year, but he spent $74,591 last year, and his prospects of making $50,000 this year look kind of bad. There's a good chance he will get a pay cut.

Unfortunately, he’s been overspending for quite a while and has charged $295,632 on credit cards. He’s been lucky enough to get low teaser rates, and when those have expired, he’s been able to transfer the balances to other low-rate cards. So he keeps charging $24,591 per year beyond his income. If he can’t keep rolling over his debt at super low rates, the interest will quickly eat him up.

But, that's not his worst problem. He convinced his family he was a great investor. His parents gave him a portion of their income for many years, and he promised he would make regular payments to them and cover their medical care when they got too old to work. The problem is, he spent all the money. He also has dependents who are poor, and he promised to help them out, too. To cover those promises, he should have $2,372,953 sitting in a bank account earning an interest rate that keeps up with inflation. But the money is all gone.

So what should he do? Well, his Republican friends, who say they are responsible with money, have decided he must really cut spending to get things under control. There are lots of things he can live without, so they say he should reduce spending by $1,292 per year. His Democrat friends say that’s too much. They feel it would be a great hardship for him to cut spending that drastically, so reducing it by $137 should be about right.

So here’s the picture:

  • $50,000: Income
  • $74,591: Expenses
  • $24,591: Deficit
  • $295,632: Short-term revovling debt at artificially low rates
  • $2,372,632: Unfunded promises
  • $1,292: Republican friends budget cuts
  • $137: Democrat friends budget cuts

So, what does the future look like for my Uncle Sam? Do you think he can keep going like this much longer? What about his family who are counting on the promises he made to them? Do you see any possible solution other than bankruptcy? 

Multiply the above numbers by 47,620,000, and you get the fiscal picture for the United States Government in 2010:

  • $2.381 Trillion: Revenue
  • $3.552 Trillion: Budget
  • $1.171 Trillion: Deficit
  • $14.078 Trillion: Debt
  • $113 Trillion: Unfunded Liabilities (Social Security, Medicare, Medicaid)
  • $0.0615 Trillion ($61.5 Billion): Republican proposed budget cuts
  • $0.0065 Trillion ($6.5 Billion): Democrat  proposed budget cuts

 

  

Sources

Wikipedia: http://en.wikipedia.org/wiki/2010_United_States_federal_budget

US National Debt Clock: http://www.usdebtclock.org/

CNN: http://www.cnn.com/2011/POLITICS/03/09/photos.proposed.cuts/index.html?hpt=Sbin

 

Calculations

3.552T Budget / 2.381T Revenue * 50,000 Income = 74,591 Expenses

74,591 Expenses - 50,000 Income = 24,591 Deficit

1.171T Deficit / 2.381T Revenue * 50,000 Income = 24,591 Deficit

14.078T Debt / 2.381T Revenue * 50,000 Income = 295,632 Short Term Debt

113T UFL / 2.381T Revenue * 50,000 Income = 2,372,953 Unfunded Liabilities

61.5B Republican cuts / 2.381T Revenue * 50,000 Income = 1,292 Republican cuts

6.5B Democrat cuts / 2.381T Revenue * 50,000 Income = 137 Democrat cuts

  

  

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This is a companion discussion topic for the original entry at https://peakprosperity.com/how-to-explain-the-current-economic-situation-to-friends-family-2/

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Rhare

This is a simply brilliant way to illustrate our problem.  I have one suggestion to add to Poet’s idea of presenting this as a description of my friend Sam.  (Post 1 in the thread.) https://peakprosperity.com/forum/how-explain-friends-current-economic-situation/54377#new  I believe you calculated one ratio to apply to all the numbers to bring them down to a comprehensible scale.   To end the story of Sam dramatically we can say, “Now multiply these numbers by X, and this accurately describes the financial condition of the United States Government.”  So what number is X?

Very nice work Rhare.

Travlin 

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[quote=Travlin]To end the story of Sam dramatically we can say, “Now multiply these numbers by X, and this accurately describes the financial condition of the United States Government.”  So what number is X?[/quote]I used the revenue as the base number so:
X = 23,810,000  (2,381,000,000,000 ÷ 100,000)
I also added the following in the letter I sent to the editor of our local paper:
If the US completely dropped all Social Security, Medicare, and Medicaid promises and decided to balance the budget and pay off the debt already incurred in 30 years at 3% interest the current budget would still need to be cut by more than 1/2 (55%).
 
 

4

Not sure if y’all have read Mr. Krugmans NY Times op-ed from Mar 10, 2011 where he says there’s no reason to get so worked up about the budget:

First, the nation is not, in fact, “broke.” The federal government is having no trouble raising money, and the price of that money — the interest rate on federal borrowing — is very low by historical standards. So there’s no need to scramble to slash spending now now now; we can and should be willing to spend now if it will produce savings in the long run.
Of course he doesn't mention that we're borrowing the money from ourselves and debasing our currency and exporting inflation as a result.
5

I’ll recap what I said before…
Really great analogy! This is really a great way to talk about the situation with people!

Obviously customizing the approach to suit the audience and to make it really hit home, that’s what your post is about.

As you know, I would ask people I know if they could help with advice for a friend I have, whom I’ll call “Sam”. Maybe at the end, after receiving financial advice from them, I would reveal that it’s actually a relative. It’s “Uncle Sam”. Their jaw should drop about then…

For those who may want to emphasize a different aspect of the “mob”, rather than say “mob” they could try changing that to “parents”. Many years ago, “Sam” started collecting money from his parents and promised invest it for them for their retirement. He sent them statements every year showing how much they had contributed and what they could expect to get. But now they’re REALLY heading into retirement and have medical issues and bills looming.

But “Sam” actually squandered all the money as soon s he got it. Now what is he going to have to do? Do you think he will either have to borrow more, or reduce what he promised he would give them? Sam has “kids” (food stamps, welfare, defense, etc.), too.

Poet

6

Is the US really paying 30% interest on its debt?  That’s astounding.

7

The comment about 30% was comparing to a consumer with a low interest card that suddenly finds the interest rate at something like 29.99% (as has been discussed on other forums).  Currently the US is paying around 3% on debt (more info here as well).  How much longer that can continue is anyones guess…

8

This is an excellent article.  Thanks!
The next piece of info that I would throw at people is a basic overview of exponential equations.  Like Albert Bartlett said “The greatest shortcoming of the human race is our inability to understand the exponential function.”  When people start seeing the huge difference between an interest rate of 4% to 8% to 12%, etc. on the national debt they start to grasp the very precarious situation we are in.

9

You beat me to it.  I have been using a similar (but not nearly as good) analogy for the past few months when trying to get people to realize the ridiculous predicament we are in.  Well done!
I have found in my discussions that people are just clueless as to the difference between a billion and a trillion!  One guy asked me “but don’t other people owe us a bunch of money too?”  Good Grief. . .

Rector

10

This is fascinating and very interesting!  This seems like an excellent way to explain IT to someone.  However, I’m very pessimistic anyone will actually listen and be transformed by this.  Have any of you gotten through to somebody who was previously clueless, disinterested, distracted?  What’s been your percentage of success/failure.  I’ve gotten through to one person completely, and that happened the same way it happened to me: The Crash Course.  But he’s one of only 3 people I’ve spoken to who’ve watched the whole course, everyone else is “too busy.”  However, there have been a few who took me at my word (without understanding what’s going on for themselves) and asked me what they should do (good grief!).  I don’t want to tell someone what to do if they don’t know why and could make the decisions themselves. 
We deserve the business and political leaders we have because they are just like us, just more so.  We live beyond our personal means.  They live beyond their corporate means and national resources/tax base.  We put off important and painful choices, which just makes things worse.  So do they, on a much larger scale. We lie and deceive to cover up our mistakes and moral failings.  So do they, on a much bigger stage.  If WE would pay attention and wield the power WE have, this could have been prevented and even at this late stage we could still choose the least of the bad paths available to us.   However, WE are no wiser or better than the fools running the ship.  Sorry, I’m very pessimistic, but still trying, like you.  This approach might reach a few, and that would be worth it.

Sound collision. Brace for impact.

11

great comparison.
only you have a small mistake - the link to the 144T unfunded liabilities isn’t for today’s situation, only a projection to 2015.

Today it stands at approximately 113T.

http://usdebtclock.org

12

Nice work rhare, think the analogy achieves much of the goal of distilling the numbers to friends and family.  Billions are hard enough to fathom, Trillions a whole other realm of comprehension.
My question is, where are the spending cuts in defense?  That’s what completes the argument.  Defense is roughly the same number as Social Security.

Given the 55% spending cuts required as described, we’re only talking about $6B and $60B in proposed cuts for either party.  Once the real concept of trillions are understood, it’s obvious how unserious both parties are about solving the budget.  Including defense spending makes the argument both serious and apolitical.

With that, I think the statement describing the republican side as “extremely fiscally responsible” is quite misleading.  A better description of those cuts would be something like “more than democrats, but insignificant nonetheless.”

But as far as a frame of reference to help friends and family with the numbers, good job and thanks.

The most concerning line in the link you provided is 

The 2010 Budget proposed by President Barack Obama projects significant debt increases.[13][14] The debt is projected to nearly double to $20 trillion by 2015, but is expected to increase to nearly 100% of GDP by 2020 and remain at that level thereafter.
How is it projected to increase to nearly 100% of GDP within 1 decade, yet that is not the headline?  Strange.  Consider those increasing debt payments in a decade of rising yields and the story goes from strange to scary.
13

 I had no idea this would resonate with so many people when I put it on the forum.   For those that have asked how well this analogy works, I have no idea, as I sent it to a few friends at the same time I posted it on the forum.  I’m hoping it will help show people the sheer magnitude of the financial problem we face.
I generally have people respond in several ways when you try to talk to them about the US fiscal situation:
We will just raise the retirement age and reduce benefits a little and everything will be okay.
We just need to tax the rich some more and that would close the budget.
We need to stop spending on the wars and military and that would solve the problem.
We will just be like Japan and struggle through our own lost decade.
We need to cut the waste in government and that will close the budget gap.
It’s funny because I have learned that I can predict which answers I will get based on someone’s political leanings. None of the answers even remotely show a understanding of the size of the problem and they show no awareness of any impact from the other 2 E’s.
One nice thing about the smaller numbers is you can use tools like mortgage calculators that won’t handle billions or trillions.  Any calculations done using the smaller values are proportional to the larger values.  That is how I came up with the following:
If we completely default on Social Security, Medicare, and Medicaid - that is end the programs completely tomorrow and decide we want to pay off the debt in 30 years at 3% (assuming we could somehow finance it for 30 years - who carries the note?), we would have to cut spending by 56% to 1.67T.  If we wanted to keep current spending the same and still pay off the debt we would need to raise taxes by 80%.  And both of those scenarios assume we ditch the entitlement programs.
If we want to keep current spending levels and finance the entitlement programs over a 30 year time frame at 3% we would need to immediately raise taxes by 385% (so almost 4x the tax payments).  I don’t know about anyone else, but I certainly could not afford to pay 4x in taxes.
If that doesn’t show how completely screwed we are, I don’t know what will.  It’s numbers like this that lead me to the conclusion that none of the current debates matter at least as far as resolving our current fiscal crisis.   Since I don’t think there is any way citizens are ready to accept the type of cuts necessary I’m resolved that we will have a catastrophic collapse at some point.  I’m just hoping I can get my friends and family to wake up in time to prepare for what’s ahead.  The situation in Wisconsin is really scary because it shows how upset people get over what are truly insignificant cuts compared to what’s going to occur.

[quote=thc0655]
Sorry, I’m very pessimistic, but still trying, like you.  This approach might reach a few, and that would be worth it.
Sound collision. Brace for impact.[/quote]
We are in complete agreement.

Perhaps my sarcasm was too subtle.

Actually only current spending is about the same.  Social Security unlike defense has promised payments in the future with a NPV (net present value) of 14T.  My point was not really to indicate what we need to cut, just that we need to make really really big cuts, and the entitlement programs are such a large part of the problem that they will have to be cut significantly.  I completely agree with you that the growth in the debt not making the headlines is very very scary, but it just shows how most citizens are unaware of the situation. 

[quote=ronyissar]
only you have a small mistake - the link to the 144T unfunded liabilities isn’t for today’s situation, only a projection to 2015.
Today it stands at approximately 113T.[/quote]
What’s a few trillion among friends. I have seen quite a few different values for the NPV of the entitlements.  I suspect the value shown at us debt clock is probably more accurate, and I was sloppy just quickly looking for a value when I wrote the original post.
 

14

First Rhare, I love the analogy wish I’d thought of it (too).
It seems more real when you can compare it to your actual family finances. Many of us get so upset because we try to explain to someone that, “Hey, if you were broke and your bills were already more than your income, would you sit around discussing where to stay on your planned trip to Hawaii, or what color your new SUV should be, etc.” That is the insanity we seem to face almost daily. 

Finally, now that you have put the numbers down and shown that even with complete cuts of virtually all the big liabilities we still won’t be free of this burden, I feel like we should take the lead that Thelma and Louise has shown us and just put the pedal to the metal and get it over with. Let’s crash this thing and if anything is left, start from scratch.

SS

 

15

Well,
I suspect, the scale can be decreased to fit the income level of the person being addressed. Sort-of.

Why do I say that? Because the above scenario is EXACTLY how Americans have been living for almost a generation. When I graduated from college, I thought if I could make $12,000/yr I would not know what to do with all of the extra money. I would say, that within 3-5 years that amount became $35-50K/yr. Meaning, the life style, (House, 2 cars, annual vacation, retirement fund) went from $12K/yr to maintain to $35K/yr within 3-5 years… now, did my salary increase that much? NOPE. I lived with my parents in the beginning and then moved to a modest apartment. Luckily,  I had a company car at the time and my $12K salary afforded me relative comfort. My cohort of friends however, lived the life. Running credit card debt up and home mortgage as well. They had big weddings and even bigger houses. Their children, now adults, have learned how to live the same way.

My point is, even a $100K/yr scenario may bee too high for some to comprehend. Lots of folks I know have to live on less than that and most likely know all too well and have to use the credit shuffle to stay alive.

So then, why do their eyes glaze over when you speak to them about such things? I think part of it is because they already know, deep down, how bad it is because they already live it from one paycheck to the next.They are already in survival mode. They have conceded that there is nothing that can be done. All that is left is hope and prayer.

C.

16

+1 on that statement.  300+ million strong, all unwilling to accept shared sacrifice.

Maybe that, but I’m also a terrible judge of written sarcasm.  Whether a sports or economics forum, I’ve mis-interpreted sarcasm before.

17

[quote=RNcarl]Well,
I suspect, the scale can be decreased to fit the income level of the person being addressed. Sort-of.
My point is, even a $100K/yr scenario may bee too high for some to comprehend. Lots of folks I know have to live on less than that and most likely know all too well and have to use the credit shuffle to stay alive.
[/quote]
Good point Carl.  It might be more effective to calculate this based on the median household income, which I think is about $45,000 per year.  $50,000 is close and a nice round number, so just cutting Rhare’s numbers in half might be more effective.
Travlin 

18

19

…rhare – another arrow in the ol’ Quiver o’Reality.  One can never have too many, since most people tend to keep on ignoring reality no matter how full of arrows their hind end is.

20

I think the $100K income figure is just right actually.  It’s higher than the average household income, but maybe that’s appropriate considering many people think of the US as a successful, wealthy nation and $100K/year is to many a goal post of ‘success’.  The idea of your outwardly successful uncle Sam earning $100K per year yet loaded down with debt seems perfect for the situation, and yet $100K/year is still within the realm of comprehension for most.
All in all a great article.

  • Nickbert