The budget crises: an opportunity for leadership

The budget crises: an opportunity for leadership?

This article deals with the US budget, not Puerto Rico’s. Since we are part of the US and we are, unfortunately, dependent in great measure on the fiscal situation in the States, it is a matter that should concern all of us.

President’s Obama’s 2012 budget proposal offers tax increases and spending cuts but doesn’t touch the big fiscal issues that need to be addressed sooner or later. It still left spending at historically high levels because of escalating health and retirement programs.

Under this new budget, spending as a percent of the US gross domestic product would be 23.6% down from 25.3% this year. This is still very high.

This plan would place the federal government’s deficit next year at $1.1 trillion down from $1.6 trillion this year.

Well, at least we are going in the right direction, aren’t we?

Bringing this down to a reasonable figure in a normal household, it is the equivalent of a family that over spends 1,600 dollars a month and from next month on, they will over spend 1,100 dollars a month.

Who would want to continue lending money to this family under such a plan?

The same applies to us, who would want to continue lending money to the US under such a plan?

As of now, we have been extremely lucky that the Chinese have loaned us money, not because they are disciples of Mother Theresa, but because they need us to purchase their goods. We are their largest customer and if we stop spending, their economy tanks. But, there is a limit to everything.

We have also printed a lot of money to pay for all this stuff, but what will happen to the value of the dollar if we continue to print money? It will tank and probably lose its status as the world’s currency.

I mentioned in a previous article my talk in Geneva, Switzerland to a multinational company where I spoke about the marshmallow principle and how I was followed by Joe Stiglitz, Nobel Prize winner in Economics. He said that out of the three children, the two that ate the marshmallows were Americans and the one that didn’t was Chinese. He then said that the savings rate of Americans was zero and the savings rate of the Chinese is 50% of what they earn.

We continue to eat more marshmallows than we produce and it seems that there is no end in sight. We continue to spend more than we produce and that is no good at all.

To give you an idea, I will reproduce here a chart that didn’t get the media attention that it deserved, for whatever reason, and should have. I admit that I got it from Dick Morris who was a very influential political advisor to President Clinton and now has a newsletter about the economy and is a critic of the present administration.

I warn you that this chart will probably scare you to death but I believe that we must raise awareness everywhere and since this newspaper and my column is read in the US and all over the world via internet; we might help convey the message to our lawmakers that they must stop spending money that we don’t have.

We all condemned the spending habits of the Bush administration. He inherited a government with a surplus and in eight years our debt soared sky high. Yes, we were attacked in 9/11, went into two wars and everything else but whatever the reasons, the debt escalated.

Let’s now look at the situation two years later under the present Democratic administration:

	January 2009	Today	% chg	Source
Avg. retail price/gallon gas in U.S.	$1.83	$3.104	69.6%	1
Crude oil, European Brent (barrel)	$43.48	$99.02	127.7%	2
Crude oil, West TX Inter. (barrel)	$38.74	$91.38	135.9%	2
Gold: London (per troy oz.)	$853.25	$1,369.50	60.5%	2
Corn, No.2 yellow, Central IL	$3.56	$6.33	78.1%	2
Soybeans, No. 1 yellow, IL	$9.66	$13.75	42.3%	2
Sugar, cane, raw, world, lb. fob	$13.37	$35.39	164.7%	2
Unemployment rate, non-farm, overall	7.6%	9.4%	23.7%	3
Unemployment rate, blacks	12.6%	15.8%	25.4%	3
Number of unemployed	11,616,000	14,485,000	24.7%	3
Number of fed. employees, ex. military (curr = 12/10 prelim)	2,779,000	2,840,000	2.2%	3
Real median household income (2008 v 2009)	$50,112	$49,777	-0.7%	4
Number of food stamp recipients (curr = 10/10)	31,983,716	43,200,878	35.1%	5
Number of unemployment benefit recipients (curr = 12/10)	7,526,598	9,193,838	22.2%	6
Number of long-term unemployed	2,600,000	6,400,000	146.2%	3
Poverty rate, individuals (2008 v 2009)	13.2%	14.3%	8.3%	4
People in poverty in U.S. (2008 v 2009)	39,800,000	43,600,000	9.5%	4
U.S. rank in Economic Freedom World Rankings	5	9	n/a	10
Present Situation Index (curr = 12/10)	29.9	23.5	-21.4%	11
Failed banks (curr = 2010 + 2011 to date)	140	164	17.1%	12
U.S. dollar versus Japanese yen exchange rate	89.76	82.03	-8.6%	2
U.S. money supply, M1, in billions (curr = 12/10 prelim)	1,575.1	1,865.7	18.4%	13
U.S. money supply, M2, in billions (curr = 12/10 prelim)	8,310.9	8,852.3	6.5%	13
National debt, in trillions	$10.627	$14.052	32.2%	14

Just take this last item: In the last two years we have accumulated national debt at a rate more than 27 times as fast as during the rest of our entire nation's history. Over 27 times as fast! Metaphorically, speaking, if you are driving in the right lane doing 65 MPH and a car rockets past you in the left lane 27 times faster . . . it would be doing 1,755 MPH!

Sources:
(1) U.S. Energy Information Administration; (2) Wall Street Journal; (3) Bureau of Labor Statistics; (4) Census Bureau; (5) USDA; (6) U.S. Dept. of Labor; (7) FHFA; (8) Standard & Poor's/Case-Shiller; (9) RealtyTrac; (10) Heritage Foundation and WSJ; (11) The Conference Board; (12) FDIC; (13) Federal Reserve; (14) U.S. Treasury

We don’t have to be geniuses to understand that things are not going well.

What to do is a very difficult question, I must admit, and it will be a very painful answer. My field is not economics, thank goodness, but I know arithmetic and I am rather good at adding, subtracting, multiplying and dividing and this scenario doesn’t look good.

If someone is diagnosed with cancer, either you go through chemotherapy or the cancer will kill you. We need to either go through chemotherapy or find another cure but something must be done.

IBM, that magnificent creative company just declared that creativity is the number one leadership competency in today’s world.

They surveyed more than 1,500 CEO’s from 60 countries, in 33 industries worldwide and they believed that more than rigor, management discipline, integrity or even vision, successfully navigating an increasing complex world will require creativity.

And, this is exactly what we need to solve the problem we are facing now.

We must think out of the box, we must try to solve the problem as painlessly as possible but determined to do so no matter the amount of pain we must go through.

I wonder why our lawmakers don’t delegate the budget problem to IBM or other creative companies so that they can creatively solve it. Food for thought!