The US is apparently going to have a deficit of over 1 TRILLION dollars this year. That is a deficit, not the debt which is much, much greater than the deficit for a single year. This will bring the national debt to something like 11.5 TRILLION dollars. Eleven and half TRILLION dollars is $11,500,000,000,000. The population of the US is about 303,824,640 (that’s about 304 MILLION people). If every person in the US had to chip in an equal amount of money today to pay off the US national debt tomorrow, that would be $37,850.78 for each and every person in the United States. You’ve got an extra $38,000 laying around right?
By any measure, that is a staggering amount of money and the amount is growing daily. At an annual interest rate of 5%, we are racking up $575,000,000,000 in interest alone. That is 575 BILLION dollars per year in interest. For each person in the US that is about $2,000 per year in interest we will eventually have to pay back.
You’ve probably heard about all the bailouts given to the banks, the automakers and everyone else who was irresponsible and gambled like someone smashed out of their minds at the roulette wheel in Vegas. The banks are broke, the government is broke, some of the states, most notably California is broke and a big chunk of US citizens are broke. Many gambled and got caught up in the housing frenzy and frankly deserve to lose while many other who behaved responsibly have been snared by job loss, personal bankruptcy due to health care costs or other unfortunate situations in life.
The stock market peaked on Monday, October 1, 2007 at 14,087.55. By March 6th, 2009, the DOW bottomed at 6,443.27, a drop of about 54.3%. Since then it has bounced back to 8,816 on July 15, 2009 after a nice pop following record earnings anounce by Goldman Sachs (GS). Not long ago, Goldman was going hat in hand to the US government for a bailout to stave off financial collapse. It seems rather ironic that all of a sudden, Goldman was able to
turn a profit of 3.22 BILLION in the previous quarter. Where did that proft come from?
The markets didn’t really seem to care. “Good news” from Intel added a little fuel to the rally and the DOW ended up 257 points or 3.07%. While the markets are still way down from the October 1, 2007 highs, they are up significantly from the March 6th, 2009 lows.
There doesn’t seem to be any logic to the recent jump in stock prices. The US economy continues to fall apart and lose jobs at an alarming rate. The housing crisis is still not finished by a long shot as liar loans (Option ARMs) and pick your payment (Alt-A) loans continue to reset en masse through early 2012. We’ve go 2 more years of home mortgage resets to go. So we’ll have at least 3 more years of steady or increasing foreclosures. The commercial real estate market will be another troublesome area as well. Maybe sometime in 2013 or 2014 this mess will have worked its way through the economy.
While the media continues to put a positive spin on the economy and various government people claim all is good and the stimulus is starting to take hold, the bottom line is that this country, the financial institutions, the states and many of the peopel are simply broke. If anything was still made in this country, the stimulus package might have a positive effect. Unfortunately not much is made in this country and borring money at the federal level to give people to spend may delay housing losses and bankruptcies, it is only a temporary and (probably empty) fix. We’re simply getting money to spend on products that come from overseas.
So what is a person to do?
Stop wasting money. This could be on toys, clothes, eating out, cable television, iPhone cell plans and other luxuries.
Don’t put any money in the stock market you will need in the next 3-4 years. There is nothing supporting the stock market and the economy is going to get worse, possibly much. Now that the markets are off their lows, the temptation is to chase them up. Bad move! We’ll retest the 2007 lows at some point in the next couple years. If you have a 401K and you may have to draw on that if you lose your job, you may want to watch the markets. If we get back to a 10,000 DOW, you might want to move your 401K funds into a money market or very conservative bond fund to preserve capital in case you will need to make a withdrawl.
Cut your fixed expenses. Cars and houses/apartments are generally the two biggest expenses you have. Can you refinance them or sell them now if you need to before the value drops further?
Start shopping smart! Look for bargains online. Ditch the department stores and find discounters. Go to the warehouse shopping clubs to save money and stock up on necessities. Try grocery stores like ALDI.
Know what government benefits are available to you in different situations.
If you get laid off and have employer health insurance, apply for COBRA. You’ll get it for 65% off for up to 9 months and can maintain the same health insurance plan for 18 months.
If you decide to buy a house and you are a first time homebuyer, take advantage of the 2009 $8,000 homebuyer credit. You’ll need to make less than $75,000 (single) to qualify for it and may get a partial tax credit if you make more than that but it phases out rather quickly.
Keep a positive attitude but anticipate that the economy is going to get worse and develop a plan if you lose your job. Can you get your expenses down to the point where you could live on unemployment? It’s generally around $2,000 per month give or take a little bit. That’s not much to live on but if you cut back to basics and have low car and housing payments, it can be done especially if you are single.
If you think you might get laid off and you’ve been at the job for a while, you might want to stick it out till you do get laid off unless you get a really good offer from another company you think will offer stable long term employment. A severance package from an employer you’ve been at for a long time will be better than somewhere you only spend a few months.
If you are considering a new job, do the math on the real costs (or cost savings) of the new job. Will you have to move? Will your housing costs go up? Will you have to sell a house? Will your commuting costs and time go up or down? Will you have to pay more in local taxes?
Be content with the low rates of return on savings for now. If you want to take a little risk then consider municipal bond funds in with any taxable accounts. You may be able to pull in a 4% tax free yield. It’s not much but its better than most savings of money market accounts.
Stockpile some cash. Six months would be great, but anything you can save will help!
The economy is going to get worse (maybe much) before it gets better so get smart now and get prepared to make it through the current turbulent times. Don’t forget to go out and get some exercise too. It’s a great way to burn off stress and hopefully sleep better at night!