Living within our means; control of our destiny

America is poorer. US economic growth has slowed. The rate of growth for the American economy has been reduced to 2%. Americans are cash poor. We can not outgrow our problems. We can no longer sustain the lifestyle to which we have become accustomed. 47% of Americans said their household could not come up with $2,000 in 30 days without selling some possessions(source: National Bureau of Economic Research- Time Magazine-June 2011). Manufacturing, the engine of our explosive growth , has been outsourced. The US is no longer competitive with emerging economies (China, Southeast Asia) because of our labor costs. Even China's wages have increased to the extent that they are losing business to less developed countries like Vietnam. The American economy has been driven by consumer spending. Consumer spending has been driven by consumer debt. In times of growth, this failing equation was obscured. Not now. Our willingness to take on debt and mortgages outpaces our income and income prospects. The employment scenario no longer supports continuous employment. Corporations are reluctant to hire. Corporations and other private employers have shed pension plans and healthcare coverage. That means we as individuals, families must pay more and more of our shrinking incomes to pay for spiking gas prices, taxes and healthcare costs. Many people are exhausting their savings, investments an unemployment benefits. The stress is oppressive. Higher education costs are spiraling out of reach. As a result, we are not preparing the next generation to manage this rapidly changing economic environment. Public education is no longer (if ever) connected to higher education standards. Our youth are not being prepared to participate in an increasingly competitive world. If the standard is to deliver a manageable lifestyle to the next generation; we have failed.

A major actor:

The American auto industry has delivered a poor product, for generations, from to support the US lifestyle. In fact, they did not provide designs to address the increasing cost of oil and other economic factors. Instead, they built oversize SUVs (and Hummers !). They exploited their francise. The American auto industry traded short term profits for long term competitiveness. Their failure is a major actor in the soaring unemployment and the fading of our manufacturing platform. Now, the number one car maker in the world is Toyota. How did that happen ?GM was one of the largest corporations in the world. Just recently, GM has worked to eliminate government ownership and reorganization. A far cry from the auto gian that dominated world auto production to being rescued by the government and reorganization. The Italian automaker, Fiat, purchased 52% of Chrysler, third largest automaker in the US. The US automakers have failed the American people. They are not the only ones, Wallstreet, banking and the housing industry, in their pursuit of fees and profits, distorted the American dream and plunged us deeper into debt.

State Level:

We are losing our financial equilibrium because of debt. We are maintaing our current lifestyle through debt. This pattern can not be sustained. The federal stimulus package targeted infrastructure projects that take years befor they are at their peak and hiring. Our states are bankrupt. Cities are suffering from overwhelming deficits as well. High unemployment has significantly reduced the tax base we to provide services. The cadre of public employees can longer be maintained. Their pensions are longer being funded adequately and there is solution to the lack of funding for pension obligations. The state of Illinois has a 13 billion deficit for pension funding. Private employment used to be the more rewarding than government employment. No longer. Private companies have slashed their payrolls and benefits. The private sector is more efficient than government though their motives were secular (profits). The shortsightedness of profits can be a downfall.There must be a balance. A strategy. Municipalities are going to be forced to manage on the same basis (surplus). Their slow response is due to the fact politicians (as opposed to professional financial managers)are in charge of our municipal budgets. This aspect of our governance is a major flaw in our system. The massive deficits are unsustainable. Municipal credit ratings are crashing and cities and states can not implement maintenance and/or building plans for infrastructure.

An article in the NY Times ("Indiana economy stronger than most, but at a cost", Michael Powell, Monica Davey, 6/23/11). cited the impact of the stringent cost cutting measures in the state of Indiana. From a balance sheet perspective the results have been impressive. Their budget is balanced and their pension system is funded. The impact of such measures has been high unemployment. In this article, Illinois is cas as the polar opposite. The deficits are massive. Bill Gross the co-chairman of PIMCO says that "Illinois is the worst state (CNBC interview). Moody's , the rating agency, cited the widening gap between revenue and expenses. Illinois spends $3 for every $2 of revenue. Illinois has responded by increasing the tax rate from 3% to 5%, hardly a complete solution. Illinois and Indiana are examples of avoiding issues and making decisions. An example of keeping the same lifestyle at all cost versus balancing the budget. Illinois is a study of policitics driving the budget. Indiana is a study in economics driving the budget. They are also a study in contrasts; not facing the facts versus dealing with reality. It is a tradeoff that we must face.Indiana may not be the answer but they are definitely prepared for what comes ahead. As a study in value judgements; life will be more difficult but living within your means allows you to have some control of your destiny.

Local level:

The city of Chicago has used desparate and stopgap measures to stem the tide of deficits. The tax base has steadily eroded but we do not expect to live any differently. An example of the stopgap measures are the sale of Chicago's parking rights for 75 years for $1.5 billion. Unfortunately, Chicago has spent all but several hundred million dollars in the first couple of years. 73 years to go. Additionally, the parking rights were woefully underpriced. The Chicago Skyway (highway in Chicago that connects to Indiana). Chicago tried to sell Midway Airport, failed to close the deal. And, I understand they are still trying to find ways to sell the airport. Now, the most recent issue to come to the surface; one alderman has 6 bodyguards for 24 hour protection. For 25 years. There are 50 alderman in Chicago yet one has 6 bodyguards (Chicago Policemen). It may have been justified in 1986 (Council Wars) but now it is just extravagance. Nevertheless, when the alderman was queried about such measures he said it was ordered by the court. After 25 years he is still trying to hold on to such extravagance. It is really ironic that this particular alderman is chairman of the finance committee of the city council. In other words, he is supposed to have some sense of fiduciary responsibility. Politicians in charge of our municipal budgets.

National level:

On a national level wars have drained our economy for a decade. The long term estimate for the cost of wars will be 2 to 3 trillion dollars (reference: Professor Stiglitz- Columbia University) considering the long term healthcare costs. The current deficit for all states is estimated to be between 140 and 160 billion dollars (Center on Budget and Policy Priorities). The housing crisis is an example that we refuse to come to terms with our circumstance. The profileration of sub-prime mortgages is akin to a gold rush, Fool's gold. Taking on unaffordable mortgages will bail you out. Well, the real estate market nose-dived. And so did family's finances. The participation in this debacle is legendary; in exchange for fees they suspended underwriting principles. They bet that by spreading the risk (credit derivatives) would compensate for poor lending practices. They underestimated the greed of their colleagues. This cancer spread throughout the financial industry. Lehman Brothers, Bears and Stearns, AIG and others made this bet. These institutions (and others) are part of the American Financial Infrastructure. Without their ability to process capital, business can not operate. To an extent, government can not operate. They failed , egregiously, and as a result plunged the American economy into a tailspin. They failed to maintain any financial prudence and lost the public trust. The value of the franchise of the American financial infrastructure has plummeted. The banking industry's performance has made the case for more regulation. The conduct and analysis of Larry Summers, Alan Greenspan, Robert Reuben and Timothy Geithner in opposing regulation of credit derivatives is a major actor in our financial malaise. Business had it's partners in government for the failure of the financial system (see the documentary- "Inside Job - Charles Ferguson).

We are here:

No matter how we got here, we are here. America is at the cusp of financial failure. We must face the facts; our quality of life is no longer sustainable. We simply spent unwisely. We have been slow to come to this realization on a national, local and individual level (we vote therefore we are responsible).This is to our detriment. It is somewhat understandable; our quality of life has been phenomenal. Our standard of living and stability has given us a sense of entitlement which has distorted our perception of the bleak facts. It is hard to let go of the good life and the expectations of comfort and ease. The slower the realization, the harder the crash . But the principles of business, economics and finance are relentless. Either we make the hard decisions or the decisions will be made for us. China, our largest creditor has publicly admonished us for our irresponsible management. Any hesitation from China in the financial markets and we shudder. We have to reduce spending and we have to lower our expectations. We are losing control of our destiny. It is time act.