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We all know the economy is not the booming environment that it used to be. Foreclosures, lay-offs, inflation, tight credit and poor investment returns have hit millions of people hard.

At the same time, most of us are optimistic that this is not going to be an excessive downturn. It should not take decades for things to unwind and reach bottom before resuming growth. Still, the next 2-3 years are likely to be rough with belt-tightening required far and wide.

While there is a lot of disagreement about what needs to be done to fix the economy (from letting everything fail and starting things over after to nationalizing our financial institutions and perhaps even more), it is not the economy in aggregate that drives most of us.

If you have a story – good or bad – about how the current economy has impacted you, please add it below. Lets together put a real face on the massive numbers being reported in the news.

The best of the comments will be highlighted and may be spun into independent posts for more conversation.

As some of us remember, Ross Perot loves charts.  They do a good job of conveying limited bits of information.

Well, despite not running for President this year, he has updated his charts.  Take a look at his Challenges presentation.

I think it is logically put together, and does a better job of pointing out the long term risks we are playing with regarding the entitlements programs that have been created and expanded.  There is a lot of other information out there too.

After looking at the preentation, let me know what you think.

What does an ideally minimal government look like?  We can look to European governments for an opposing view where the state enforces controls on individuals and businesses alike while owning in some cases certain services.

We can look to many developing and mostly developed countries ranging from India to Mexico and including several sub-Saharan African countries.  These countries fail to permit all of their citizens equal rights and in some of them outright government corruption worsens the situation.

Even the American state is a poor example as over the years the importance of individual responsibility has been subsumed by the steady approach of a nanny state and the rising political value of businesses and coalitions and the decreasing effectiveness of the individual in the political process.

It is time to rebuild our government into something that is small while protecting our country and ensuring individual freedoms.  Yes, it will be a significant shake-up of the status quo.  But as Ben Cohen (yes of Ben&Jerry’s) shows, it is doeable.  He isn’t the only one, so rest assured this is not an empty exercise.

I am not a Libertarian, although I agree with a number of their ideals.  As of now though, it is their extremists who garner the most coverage.  Being an extremist is not the way to make change happen, although they do play a role in starting efforts for change.  Think back to various protest groups whose viewpoints have become mainstream – women’s suffrage, anti-segregation, even the American Revolution.  By themselves, the individual acts that brought notice to the protesters and movement were not enough to make the change happen.  It was when the majority took heed and accepted the cause that change occurred.

The extreme Libertarians are in that position right now.  They are getting notice and more followers.  Yet the most extreme views still go many time further than a plurality of this country is willing to accept.  Things like the complete legalization of drugs (all drugs), abolition of the income tax, and the elimination of the Federal Reserve is beyond reasonable expectations.

The principles, especially as they can be backed by the writings of such notable historical figures as Banjamin Franklin, George Washington, and Thomas Jefferson, are sound.  Their contributions to the founding of our country and their visions for its progression are among the best examples that we have available to us.

Thomas Jefferson put it well with:

A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor and bread it has earned – this is the sum of good government.

George Washington:

Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.

Benjamin Franklin

The Constitution only guarantees the American people the right to pursue happiness. You have to catch it yourself.

Note, that while there is a lot of concern over a small government, there are no serious suggestions of eliminating the government.  Especially in today’s global environment, the elimination of the Federal government would be a mistake and a tragedy.  Even mostly emasculating it would prove more harmful than helpful.

Instead, what needs to be done is to make changes to reduce the size of the Federal Government in meaningful ways.  This means migrating as many reponsibilities as possible (education, many health and welfare operations) completely too the states – including setting standards and choosing how to fund them.

There are areas where a national entity will be more effective and efficient than one that is run by the individual states.  That does not mean that it should be run by the Federal Government.  Instead, the States themselves should be empowered to develop cooperative institutions – funded and governed by the states individually – to take advantage of that economy of scale.

Those areas that are legitimately the Federal Government’s reponsibility – without the massive overuse of the instate commerce clause – ought to be streamlined and minimized.

Making these change is not without winners and losers.

Individual responsibility will play a much bigger role.  Those who are looking for somebody else to make decisions for them will face a real chance of falling through the cracks.    Let me rephrase.  Those who do not take responsibility for themselves will fall behind and will never catch up.

There is another major category of losers from this change.  Those who benefit most from a large, powerful central government: lobbyist and their employers.  No longer would it be possible to get the same huge contracts and broad legislative action done by working with a handful of people.  Instead, 51 or more legislative bodies will need to be approached and convinced.  The opposition will be able to have more of an impact, with legislators living closer to the affected citizens and much easier to be reached.

Winners will be those individuals that plan ahead, are willing to stand up and be heard, and who will take advantage of their rights.  By recognizing that the right to the pursuit of happiness does not guarantee reaching, these individuals will continue to put in the effort required to work for their goals.  Many of these citizens will reach those goals.

Their success will be more than individual accomplishment,  Like the Fords, Rockefellers, Boeings, Waltons, Trumps and other imperfect leaders of America they will pull others along.  Our country has been built by hands like thiers guiding millions of hands like ours.  One man’s vision can consume tens, hundred, even thousands of others to achieve.

These will be the winners of such a change.  The individuals with the vision and will to keep our country moving forward.  Their success will outweigh the decreased ability of multination corporations to push their own agenda forward.

Is the tradeoff worth it? It has to be.  As things are progressing now, we are flirting with national disaster in slow motion.  An expanded central government that spends beyond its means, encourages inflation and favors large corporations over individuals threatens to end the Pax Americana just as the Pax Romana eventually ended in the decline and fall of that great government.

It is difficult to argue that America needs to change to avoid disaster.  How it needs to change is the more difficult question.  A return to a weak federal government and strong state governments offers the most hope for long term stability and continued success of our nation.

As always, anybody who wishes to agree or disagree (respectfully!!) is invited to post a comment and join the discussion.  How do you think the US needs to change?  Do you agree thatthe move to greater individual responsibility is the best way to go?

Dave Ransey is a great personal finance guru for millions of individuals out there.  His Christian viewpoint, practical advice, and emphasis on personal responsibility and shunning of debt is a breath of fresh air in an environment where debt is king.

A voice in the financial desert is a good way to describe Dave.  He has been there before us.  He has made money, gone bankrupt and made money again.  Now, he earns his living by teaching people a way to get out of debt, stay there, and reach their financial goals.

What is the most refreshing about Dave Ramsey is also where he is wrong.  He is stubbornly against loans with very few exceptions.  Even though used right, there are loans that can benefit the consumer in the end.  Why is he against them?  He is against them because even with the good loans, most people will come out behind.

Let me repeat that. Even using good loans, most people come out behind.

When borrowing money, it only takes a minor mistake or two to lose money.  In most cases (car loans, payday loans, unsecured loans, etc.) the mistake is in taking out the loan in the first place.  For others, it is in getting the wrong terms, financing the wrong amount, or making a late payment (or several), or simply not being able to meet the obligations because of life changes.

Each one of us strives to be better than average.  Each one of us belives that we are better than most.  Anytime there is an exception to a rule, we want to believe we are the exception.  This is why people gamble, play games of chance, and take risks with their lives and money.  Ultimately, few of us will manage to always stay above that line.  Depending on the risks we take, when we fall below, it can be a minor irritation, very painful, or fatal.

Dave Ramsey may be wrong on saying to avoid all loans.  Some people can prove him wrong.  For 99% of us, avoiding debt completely is going to be the right way to go.

Dave Ramsey is wrong, but we will all be better often listening to him anyways.  Listen to Dave.

As I talked about recently, my wallet disappeared and reappeared recently.  When it disappeared, I did the immediate right thing and canceled all my cards and asked for replacements.

The more interesting part was how the process compared from place to place.

All of the companies have an automated answering service that is supposed to ensure that you get to the correct department for help.

One had an option right on the first menu to report a lost/stolen card and it rang through to a person immediately.

One would not let me proceed without my card number and it was not until I stopped pressing buttons trying to get to a person that it finally decided that the automated system could not help me.  I actually got frustrated enough with this one to scream at the phone.

One took a couple of menus, but got me to the right person.  The big plus was that person was not only solved that problem, but did a good job handing me off to somebody else for another issue on the same call.

All of them promised the replacement cards in 10 business days except one – which promised it in 3 days.  All of the cards but one arrived in 5 days.  The missing one has still not arrived, but it has not been 10 business days yet.

I found it most interesting that 60% underpromised and overdelivered on the arrival date for the replacements.  20% overpromised but matched the rest.   The other 20% is on pace to match what they promised.

While I will argue that the specifics of financial independence will vary from individual to individual, there are some commonalities.  Using these,it is possible to create a common definition.

Financial Independence is having sufficient mix of assets to both meet current financial needs and a comfortable probability of meeting future needs.

I suspect that you have noticed the qualifier in that definition.  It is an important one, because we are talking about the future.  In many cases, it is a future that could be 40, 50, 60, maybe even 70 years long.  During that time frame, a lot can happen that would not be predicted now.

Lets break that statement apart.

…meet current financial needs…

Current Financial needs is the defined part of financial independence.  It is what takes into consideration your current standard of living.  A 30-something individual with a $2500/month mortgage and 3 kids at home will have a hugely different set of current financial needs than a 70 year old widow with a paid off mortgage and good health.

Most commonly, ‘current’ for accounting or financial planning means the next 12 months.  That time frame works well for this definition too.  The idea is to have assets that will provide the funds needed for the next year without having to disrupt your current financial setup.

This can mean CDs that are maturing in the next 12 months, cash set aside for living expenses, or a planned sale of other assets that will provide sufficient funds.  It should not mean dipping into existing credit or taking on new debt.  Needing to do either indicates that current needs are not being met.

That situation can arise even for wealthy individuals.  The example would be somebody who has restricted stock that is worth millions, but cannot be sold, or someone whose wealth is all in real estate without cash reserves.  Essentially, the concern is that assets are not producing cash or cannot be easily turned into cash as needed.

… probability of meeting future needs.

This is the guesstimate portion.  Since nobody has yet demonstrated an ability to accurately predict financial markets decades in advance, there will always be an unknown element to long term planning.  The further out planning is being done, the more uncertainty there will be.

This is where a mix of long term assets becomes helpful.  It is possible that something could happen that will destroy the global economy.  Unlikely, but possible (generally it would have to kill hundreds of millions and shut down global trade).  There is also the chance that the US economy could eventually go the way of Zimbabwe or South America with hyperinflation that would destroy the value of the US Dollar.

Short of that, we have the capability to plan for success.  Looking at individual assets (stocks, bonds, real estate, precious metal, artwork, antiques, etc.) they will go up and down in value over time.  Fortunately, they generally do not all move in the same direction at the same time.  This allows us to build portfolios that will help reach our goals.

By choosing the right mix of investments, it becomes highly probable that a portfolio of assets can produce income and maintain (or grow) value for years and decades to come.  With a low enough draw down on that portfolio (4% or less a year is suggested by financial planners) the chance of success rises even more.

There are really 4 factors that influence the probability of success:

  • Initial size of portfolio
  • Rate of draw down
  • Asset mix in portfolio
  • Length of time assets need to last

Thus, a large, diverse portfolio, with a low draw down rate (2% or less) for 20 years has a much better chance of lasting than a smaller, concentrated portfolio with a high draw down rate (5%) for 30 years.

…a comfortable…

The last thing to discuss is comfort.  This is where the independence gets to be intensely personal.

Comfort is how you feel about the assets and likelihood of success with the plan.  Some people are comfortable with a large stock portion in their portfolio.  The historic returns offset the volatility enough that they are not afraid to see swings in the value of the portfolio.  Others are not and prefer to have a lot of bonds, precious metals, and real estate.

The idea of an 80% chance of success is enough for some people.  They are willing to risk a 1 in 5 chance that they will have to reduce their standard of living or return to earning more money.  Others will not be comfortable at less than a 99% chance of success.  Those are willing to work longer to improve the likelihood that they will not need to change their plans later.

This is the root post for the discussion about the Federal Debt and Deficit and its impact on us.

As I work through my exploration and education about the Federal Debt and Deficit, each of those posts will be linked back to this one.  That will allow this post to act as a central hub for comments and suggestions on additional facets to be explored.