Fall 2013 US Economic Prediction

I am beginning to convince myself that the US economy is headed for a 3-5 year window of high sustained growth. Here are a few reasons why:

Recall that 2008 was the last year that people with terrible credit could obtain easy housing credit. 2008 + 5 is 2013, which means that this is the last year that banks have to deal with uncertainty about large numbers of borrowers with cheaper 5-year Adjustable Rate mortgages going through foreclosure. The orderly winding down of these toxic assets will enable local and national banks to open up their reserves for legitimate business lending more freely.

Also, competition for high-tech workers is really heating up in the job market. I'm getting the kinds of unsolicited phone calls and emails I got back in 1998 and 2005. Yes, this portends a future bubble-burst, but one that is several years out, with the actual, you know, bubble, in the meantime.

Finally, the stock market has shown uncanny resilience in the face of multiple fiscal crises from Washington over the past 10 months. The right kind of stocks are heading in the right direction: temporary worker companies like Manpower and for-profit education companies like DeVry.

(disclaimer: I don't have any financial interest in either of the stocks mentioned except perhaps accidentally via my employer's 401(k) benefit)

Wrapping Your Head Around the National Debt, Deficits, Surpluses, and the Debt Ceiling

The following is not a perfect explanation of the concepts of our national debt, deficits, surpluses, and the debt ceiling. But hopefully my readers will find it helpful in understanding what these terms mean and how they differ from one another.

Lets say we start a country and we have zero debt. In the first year, we collect $10,000 in taxes and spend $10,000. So we had no deficit, because all the bills were covered. We had nothing left over, so no surplus either. And we did not borrow any money, so no debt.

Year 2, we still collect $10,000 in taxes on $10,000 in expenses but we also decide to light a new national Christmas tree. This will cost $300 extra for tree, lights and electricity. We print 10 pieces of paper with the words "IOU $30.00" printed on them and tell people we will pay back $30 plus some interest on them in 5 years. 10 people buy our bonds, so we now have the $300 to cover the Christmas tree. Result: no deficit, no surplus, but now we have a $330 debt (including a flat 10% interest rate on the $300).

In year 3, we will need to set aside a little more than $10,000 (around $66 more) to make sure we will have the $330 ready to pay back the people who bought our bonds when they come due. However, if we still only bring in $10,000 in taxes, we will incur a $66 deficit for the year. The way we cover that is to print more IOUs and sell them so the money is set aside and our creditors believe we are taking our responsibilities seriously. So we see that the deficit incurred this year causes the debt to grow.

Skip ahead 230 years... We now have a military, a department of social services, tons of federal employees in each, etc, etc. All of these programs were approved over time by the people's representatives -- including the financing schemes to pay for them over time with future tax receipts. The amount of all the bonds we've permitted ourselves to print and sell (to cover our past and future spending commitments above the taxes that have come in) is our "debt ceiling".

Let's say the total amount we've agreed to pay above all of the combined tax income so far is now $17 Trillion. That's the debt. If, in this year, we incur more expenses (including payments on the debt) than we bring in from taxes, we have a deficit for the year. If we had a deficit last year and we have a deficit this year, but the amount we went "over" this year is half of what we went over last year, we have cut our deficit in half. If we bring in more tax revenues this year than this year's expenses, it is a surplus - but that doesn't help us pay down the debt unless we agree to apply some or all of this year's surplus toward paying off the total debt.

Meeting Princess And Her Family

I recently had a mind-expanding experience. A boy invited me into his father's gem shop in nearby Bastrop, Texas. There was a cabinet with an aquarium by the door that had a piece of notebook paper on the front with the word "Princess" written on it in magic marker.

The boy explained that princess was their pet tarantula and that she guarded the shop. While the father told me about his business, the boy took the screen off the top of the aquarium and took Princess out, holding her in his hands. I had never before been that near such a large spider. I turned to the boy and acknowledged the creature. She reared back, waving her two front legs in warning. The boy asked if I wanted to hold her. I said, "sure".

I held my hands open together near his and Princess hesitatingly approached. Then she decided to walk over onto my hands. When she did, I could feel the most unusual, marvelous adhesive sensation as the tips of each of her legs moved about on my palms. The father explained that a tarantula has its sense of smell in its feet and that if you raise one from infancy, it will bond to you through that sense like any other pet.

When my visit was over, I thanked the boy for letting me hold Princess. He thanked me for holding her. I had just made friends with a new family in a very old-fashioned way - by socializing with them about their pet.