r u l y

Since, lately I have been reviewing the organizational design of online events from the Super Bowl to fashion shows, I thought I would analyze last week’s big online event, the President’s annual State of the Union address!

It was hard for us to work up the motivation to want to watch the State of the Union address. (And apparently other people as well.) These speeches, no matter who makes them, usually aren’t all that interesting and don’t really tell you that much in terms of information you can use. Often, they are just rah-rah moments for whichever political party is in power to cheer on their pet projects. But, since there are big issues facing the country at the moment and we all should do our best to become more involved with government, we dutifully logged on at 9 p.m. to watch the President’s speech.

In general, I have been very impressed with the IT organization of President Obama’s staff. They generally do a great job incorporating the latest online and social media tools to convey his campaign messages. This year, they promised an “enhanced” version of his State of the Union address to those who watched it online.

Interestingly, as with the fashion shows, the State of the Union does not start exactly on time. There was a delay of about 19 minutes or so between when the broadcast began and when the President started speaking. We people-watched during this time, wishing the enhanced online version would answer questions like, “Why are members of Congress wearing green ribbons?” (to pay tribute to victims of gun violence, apparently)

It was an interesting contrast people-watching this crowd versus the fashion show crowd. I didn’t spot one person looking at a smart phone at any time during the SOTU broadcast. My husband commented that this could be an age thing more than an issue of manners. In general, politicians are excellent networkers and have incredible people skills. It was refreshing to see them all chatting and smiling with each other.

Once the President enters the room, it takes him at least 5 minutes to get up to the podium to speak.

This entrance was a little confusing to me. For some reason, the news makes me believe that Congress and the White House are bumping into each other all the time working on various legislative matters. So, even though it is the State of the Union, it should not be that big of a deal for them to shake hands or say hello to the President because they would see him the next day at work. Apparently, this is where I am completely wrong. The way members of Congress were greeting the President (and each other) it appeared like they almost never see each other in person, except for at big events like the State of the Union.

The President began his address.

The issue we are most concerned with at the moment is the sequester, i.e. the automatic spending cuts to the military and many government agencies that is supposed to take effect March 1st or about 8 days from now. Military is big business here in Virginia. Virginia is home to the Pentagon as well as Quantico Marine Base and large shipbuilding and aviation activities in the Newport News area. Many people make their living here directly or indirectly through military spending. So, any cut to military spending is a threat to a lot of jobs and will deal a body blow to the Virginia economy.

As I have written about before, Virginia is a battleground state that has very near equal numbers of Democratic and Republican voters. Every year, the elections are tight and to be a representative from Virginia you can’t be too much of an extremist. Virginia is also in the spotlight right now for having some pretty impressive representation in the House and Senate. Eric Cantor is the House Majority Leader and is the Representative for our Congressional District. In the Senate, Virginia recently elected Senators Mark Warner and Tim Kaine, both former governors of the state. Mark Warner was part of the “Gang of Six,” a bipartisan group of Senators coming up with alternative, bipartisan budget solutions. So, Virginia in many respects has sent its A-team to handle these extremely difficult fiscal problems. I often wish they would just lock all the Virginia Congressional members in a room and ask them to hammer out a deal for the nation.

Senator Mark Warner recently sent an email to his constituents that said “The sequester was intentionally designed to be an unacceptable financial tool–an option that no reasonable policymaker would ever willingly choose to use. But by continually pushing off the day of reckoning, we essentially have further amplified its potentially destructive impact: Even deeper cuts may be required over an even shorter budget period.” Last week, Senator Kaine visited areas of Virginia that are likely to be targeted by the cuts.

The President started off his speech indicating that America’s economy is strong and growing. I can certainly understand why he did this. After all, there is no use scaring everyone that danger is looming in less than two weeks. He mentioned the sequester and said that he wanted some reasonable compromises but there wasn’t a lot of specifics. We got a hint about what counter-proposals are being circulated in Congress.

“Now, some in Congress have proposed preventing only the defense cuts by making even bigger cuts to things like education and job training, Medicare and Social Security benefits. That idea is even worse.”

–President Obama, State of the Union address, February 13, 2013.

Now that I have re-read the text of the speech online, I see that most of the first half or so of the speech was about the sequester but when I was watching it live for some reason, the focus on the sequester didn’t seem to come through.

The President said he wanted to “ask more of the wealthiest seniors,” which could mean either cutting them off from Social Security or Medicare or giving them fewer benefits from these programs. Personally, I don’t think this is a bad idea. Of all the budget sacrifices that have to be made, this seems like a pretty small one. From reading I have done on this issue, however, some people really resist this idea out of principle. They construe Social Security and Medicare benefits as something they have paid for in full and are now owed rather than what it truly is, a form of insurance that guarantees you a minimum standard of living if you haven’t managed to do better on your own.

He also mentioned closing tax loopholes. While the speech didn’t mention too much in terms of specifics, the “enhanced” version of the speech gave some guidance here, suggesting that corporate aircraft exemptions would be on the list.

The “enhanced” version was a little disappointing. There were notices that you could live Tweet your reactions to the speech by using #sotu but unlike the Superbowl broadcast, they didn’t incorporate those tweets (or a curated selection of them) into the enhanced version. So, I suppose you should either be watching the online version with your smart phone in hand or have two windows on your computer open so that you can both watch the speech and Tweet. I personally wanted to see the discussion centralized in one place. The SOTU could also take a page from the SuperBowl broadcast and choose in advance several Twitter commentators (perhaps distinguished members of their party, journalists or celebrities like Stephen Colbert and John Stewart) to put in comments during the clapping breaks to liven things up a bit.

The graphics used to enhance the speech were sometimes helpful but sometimes seemed too simplistic. For example, in a portion of the speech discussing the military, rather than providing some sort of data, it was just pictures of troops hugging their families at welcome home events.

My main complaint about the State of the Union speech is that it was just too vague. There were a lot of great ideas mentioned but almost nothing about how you could follow up on various initiatives. For example, when the President mentioned raising minimum wage or expanding access to preschool, it would have been great to have a link saying, “Click here to read the draft legislation on this subject from Representative ____.” After the speech, we were left wondering whether these were just ideas or actual pending legislative actions.

Getting to the meat of the speech, however, what were the ideas the President proposed?

1. Avoid the sequester by restoring defense spending but cutting tax loopholes and decreasing benefits to wealthy seniors.
2. Set up 15 3-D printing hubs to help reinvigorate areas impacted by job losses.
3. Invest in energy research to shift cars off of oil and gas and reduce emissions.
4. Fix-It-First program to repair 70,000 structurally unsound bridges
5. Improve access to mortgage refinancing for Americans with sound credit.
6. Expand preschool education offerings.
7. Immigration reform
8. Paycheck Fairness Act to help ensure women are not discriminated against in wages and salaries
9. Increase minimum wage to $9.00 per hour, tie minimum wage to the cost of living
10. Cyber-security legislation to better secure U.S. computer systems
11. TransAtlantic Trade and Investment Partnership with the EU
12. Improve the voting experience in America
13. Gun control

On this last issue, gun control, it does seem that the moment for this legislation has lost its window. One suggestion I would make is to move the talking point about mental health to the top of the legislation and get that done.

After last week’s terrifying rogue cop incident, perhaps having some form of screening and monitoring system for those who have received specialized job-related training in killing tactics would be a good idea too. Also, last night’s Frontline documentary on Adam Lanza demonstrated that probably the best source of research and information on how to prevent gun violence in children may be tied up in the families of the killers. Understandably, these families are probably afraid to speak for fear of being sued or targeted. I would like to see Congress authorize a special commission of health care professionals that would allow these families to be interviewed fully, without fear of prosecution. The results of this commission would not be made public but any findings to prevent gun violence could then be shared with institutions and health care professionals who could use that information.

The day after the speech, the White House hosted another online event for mostly younger people to comment on the ideas in the State of the Union and ask the President questions. This event was very well done. The President performs very well in unscripted Q&A formats. I was impressed that the questions they chose from young people demonstrated a great deal of sophistication and wanted specifics. People were asking questions like, “If you raise the minimum wage, won’t that raise the prices for everything from groceries to gasoline?” Also, “What are your plans to limit software patent protection from patent trolls?” The President had thoughtful responses to each of these questions.

If there is one thing I think would move this country forward in helping to solve the very difficult problems before us, it would be to deemphasize the role of political parties and focus instead on our individual representatives and senators. When you just listen to President Obama’s words and you don’t put them in the context that he is part of the larger Democratic party goals, the words are thoughtful, intelligent and compassionate. Right now, as I receive updates from the largely Republican members of our Virginia House of Delegates, I find the same thing. These are good-hearted people who want to do the very best for this country. We have somehow forgotten to think of them as people and construe them as cogs in a big machine. Our overemphasis on political party affiliation is not helping us move forward. We need to let our Congressional representatives know that we are paying attention to them as individuals and that we want them to vote their conscience, not their party. They need to be free to make whatever compromises they have to. News media have a large role in making this happen. We need to be careful about painting all members of one political party with a broad brush and instead focus on the votes and actions of individual party members or subgroups within each party.

“[W]e were never sent here to be perfect. We were sent here to make what difference we can, to secure this nation, expand opportunity, uphold our ideals through the hard, often frustrating, but absolutely necessary work of self-government.”

–Barack Obama, State of the Union, February 13, 2013

What was your reaction to the State of the Union address? What political issues are you thinking about lately? Please share in the comments.

“Mesa Verde” by red, white and black eyes forever. (August 3, 2010). From the Flickr Creative Commons.

The “fiscal cliff” has come and gone and visits us again as we negotiate the “debt ceiling.” Sadly, I don’t think most people have any idea how to even begin to understand these issues. To really participate in the discussion, you need to understand tax law and for most people that is about as interesting as watching paint dry.

To drum up interest in the issue, all the news was telling us was horror stories about increased taxes. But our tax system is so complicated that there is no way to know without hours of calculations what any particular tax change REALLY means for any individual person or family. The Democratic party began circulating the figure of a $2,000 tax increase for the typical family. There was no real explanation of where that number came from and even if there was an explanation, who would understand it?

And so, at the last-minute, we had the fiscal cliff deal but what was it?

For a lawyer, all of this vagueness is maddening. You can’t mention increased taxes without getting really specific. And so, I present to you, my attempt to summarize what I think happened with tax rates both before and after the fiscal cliff. (Note: the tax code is so complex that I am not 100% sure I have this right. If you have a correction, please email me or post a comment.)

As you can see, the fiscal cliff deal increased taxes on only a very tiny fraction of all taxpayers (roughly only the top 3% of all taxpayers). But if you happen to be in this “lucky” group, thank you for “agreeing” to pay roughly a 5% increase in your overall taxes.

But what I find the most interesting is that the fiscal cliff really didn’t have much of an effect at all on the bulk of all taxpayers. Approximately 77% of all taxpayers earn less than $75,000 per year. Approximately 38% fall somewhere in the $17,400 to $70,700 income band (highlighted in yellow). These taxpayers didn’t really benefit from the Bush tax cuts since their taxes and dividend taxes have been the same. These taxpayers likewise didn’t face any threat from the fiscal cliff. So, if you want an explanation for voter apathy on this issue, you might have it there. I also find it interesting that no one was up in arms about the 5% tax increase on those earning less than $17,400. If there was one fiscal cliff tax rate increase that seemed bizarre and wrong, that one was a standout.

So, if there wasn’t much change on tax rates for most people, how else did people “save” money during the recent fiscal cliff deal?

For a lot of families, a cut of 50% to the child tax credit would be a big impact on their taxes. Yet, you heard nothing about this particular issue in the news. Likewise, the marriage penalty was not mentioned. I find it also strange to know that the estate tax exemption is now even higher than it was before the fiscal cliff, an odd result to be sure.

If you have received your first paycheck of 2013, you may have noticed that despite the avoidance of income tax rate increases, your pay may be up to $189/month lower than expected. This is, of course due to the resumption of “normal” Social Security taxes.

I personally don’t mind this increase as I think anyone who ever hopes to claim Social Security one day needs to pay in. We know this program is underfunded so it only makes sense to me to resume the old tax rates. We also see that higher income earners are going to start chipping in more to Social Security and Medicare.

If you take the perspective as I do that we need to start making meaningful progress in rectifying the nation’s finances, the fiscal cliff deal is hardly inspiring. Yes, we need to be careful not to kill the economy but honestly, we can all afford to take a few more hits for the sake of the country. I am shocked at the lack of creativity in creating these deals. For example, it is not as though the only choices were keeping the Bush tax cuts or raising them back to Clinton-era rates. We could have raised taxes 1% on everyone or even 0.5% and most people would not have noticed. The child tax credit could have been cut by $100 or $50 as a token of solidarity. As we head toward the debt ceiling negotiation, I hope we see a little more bravery and creativity.

What do you make of the fiscal cliff deal? Please share in the comments.

"Taft finds tearing the budget a difficult task. Washington, D.C., Jan. 2. Senator Robert A. Taft, Republican of Ohio, found tearing the budget a difficult task as he told reporters at a press conference today that it would take at least two years to balance the budget" (1940). Photo by Harris & Ewing. From the Library of Congress Prints and Photographs Division

In the last post, we talked about the investing mindset of relating complex investments into simpler, more understandable ideas. We took the example of the federal government’s budget and scaled it down into the budget for a typical middle class family. I left you with the cliff-hanger of what would have to be done to get the federal government in a position to dig itself out of debt.

There is not one answer to this question. The number of possible remedies is really only limited by how you want to do the math. Anyone in a difficult situation like this could benefit from another investing mindset rule:

A good investor makes decisions first by numbers
and secondly by emotions.

So, where do we start with this problem?

Well, the first place we could start is to ask the family/government how it is spending its money. The latest government financial report provides this answer:

For simplicity, we will assume all of these expenses total $154,000. Scaling everything down we see the following breakdown.

2011 U.S. Government Scaled-Down Budget

Medicare/Medicaid: $37,000
Other: $35,420
Social Security: $32,000
Defense: $31,000
Interest on the Debt: $10,780
Military pensions:$7,700

When I play around with these numbers myself, treating the government like a family with a spending problem, I notice a couple of interesting things. First, if you try to start paying down our national debt at even a modest pace over 30-40 years, you necessarily have to start making cuts of about 50% to all existing government programs. Secondly, even if you increase taxes substantially just to cover paying down the debt and supporting all existing programs, there gets to be an effective limit at which you can no longer tax enough to support the existing programs. From my point of view, I don’t see how anyone can fix the U.S. government budget without both raising taxes and decreasing benefits.

Next, we can see what the experts in each of the political parties are proposing.

• Click to see a quick summary of proposals from three different viewpoints: the Tea Party, the latest Republican proposal and President Obama’s draft budget.

There are a million different ideas about how to get the country’s finances on a sustainable path. The one thing all parties seem to agree on is that things can’t keep going on the way they are. Something has to change. There are three key things I think we all need to remember about this budgeting process.

1) Regardless of the budget decisions ultimately made, the government has to get its currently dysfunctional financial and accounting systems organized.

The U.S. has made some terrible financial decisions over numerous years and has yet to fully account for all of these mistakes. Take for example, these shocking quotes from Comptroller Dodaro in the government’s latest financial report:

“Three major impediments continued to prevent us from rendering an opinion on the accrual-based consolidated financial statements: (1) serious financial management problems at the Department of Defense (DOD) that have prevented DOD’s financial statements from being auditable, (2) the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal entities, and (3) the federal government’s ineffective process for preparing the consolidated financial statements.”

“Based on our review of completed Material Differences Reports for fiscal year 2011, we continue to note that amounts reported by federal entity trading partners for certain intragovernmental accounts were not in agreement by significant amounts. We noted that a significant number of CFOs continue to cite differing accounting methodologies, accounting errors, and timing differences for material differences with their trading partners. Some CFOs indicated that they did not know the reason for the differences. In addition, some CFOs confirmed the balance or activity, however, differences continued to exist. Further, there continue to be hundreds of billions of dollars of unreconciled differences between the General Fund of the U.S. Government and federal entity trading partners related to appropriation and other intragovernmental transactions.” (emphasis added)

“As in previous years, Treasury did not have adequate systems and personnel to address the magnitude of the fiscal year 2011 financial reporting challenges it faced, such as control deficiencies in its process for preparing the consolidated financial statements noted above. We found that personnel at Treasury’s Financial Management Service had excessive workloads that required an extraordinary amount of effort and dedication to compile the consolidated financial statements. Further, there were not enough personnel with specialized financial reporting experience to help ensure reliable financial reporting by the reporting date. In addition, the federal government does not perform interim compilations at the governmentwide level, which leads to almost all of the compilation effort being performed during a condensed time period at the end of the year.”

If you are familiar with financial statements, you would know that these seemingly boring, technical quotes have massive implications. They are really shocking! CFOs typically sweat bullets over any notes to the financial statements that even hint that a company is mismanaging its money. These notes outright state that the government has “serious financial management problems,” “control deficiencies,” “hundreds of billions of dollars of unreconciled differences” and is “ineffective.” Also, the words “As in previous years” is put in front of a terrible statement about the Treasury Department’s lack of financial capability as though the Treasury Department thinks it is acceptable to continue not to address these problems. If a corporation issued financial statements anything like this, the company would probably be automatically delisted from the stock market and likely sued perhaps even with criminal charges. It really is that bad.

So, no matter which budget path we choose, we should at least have the integrity to admit to our bad choices and the intelligence to execute our complex choices and properly and fully account for whatever it is that we have done. This has to be a top priority for any political party.

When you look at the three proposals above, the Tea Party seems to say that they are going to address this problem by eliminating any complicated financial transactions by cutting the government down severely. Both the Republican and Democratic parties would do well to add a line item to their budgets for additional accounting and financial management personnel.

2) We have to make a decision about what to do with our debt.

The budget proposals from the three political parties make radically different choices when it comes to the national debt. If you are trying to relate the government’s finances to your own, this is where the biggest disconnect occurs. If you fail to pay your mortgage, credit card, etc. there are big consequences for you. If the government fails to pay, it doesn’t seem to matter at all. There is seemingly endless credit for the government.

The Tea Party’s proposal is kind of like declaring liquidation bankruptcy with regard to the debt and quickly strikes to erase the debt in 5 years while political will remains intact. While you can disagree with these tactics, it probably is true that if you really wanted to erase the debt, you would have to do it quickly. The Republicans take a less aggressive approach and start cutting spending slowly, starting to pay down the debt almost 30 years into the future and who knows when, if ever, it would be paid off in full. All you would need is one intervening war, economic crisis or other problem to throw that spending plan off. The Democrats also cut spending slowly but sadly don’t seem to ever start paying down the debt, even with large tax increases.

3) The government is most likely on a slow path toward relinquishing its role as guarantor, forcing us all to
live with more financial uncertainty.

It is almost certainly true that the government can only get its finances in shape when it can adequately predict and control costs. It is probably only a matter of time before the government follows the trend in private industry to convert open-ended obligations to fixed price, limited time commitments.

Almost no private company makes these kinds of commitments any more. For example, companies found that promising employees pensions was too difficult to manage and required too much to be set aside in savings to guarantee payments so pension plans were converted to 401(k)’s. Likewise, we now have private health insurance programs that cap lifetime spending at a certain dollar amount. The government is really the only entity that operates without these constraints.

This is probably the biggest philosophical difference between the competing proposals. The Tea Party and the Republican Party force the government to operate like a private company. Open-ended programs like Medicaid would be converted to block grants to the states of limited dollar value. Once the money runs out each year, it is gone and people would have to do without unless private charity steps in. Likewise, converting Social Security to private accounts would do the same thing. Instead of your “Social Security pension” you would get the 401(k), which could be better or could be worse depending on how your investments perform. Converting people from Medicare to private health insurance will almost certainly result in dollar caps on care. The Democratic party maintains existing, unlimited systems but sadly, does not seem to have a sustainable way to afford them, even with significant, larger tax increases.

Worldwide, we are seeing many countries come to terms with the end of guaranteed programs. It requires us all to accept that the buffer on life’s uncertainty is gone. We could starve. We might have to make life-altering consequences about our health. We certainly have to take more responsibility to save, to make connections with other people who could help us, to maintain our diet and exercise and to do all sorts of other difficult things.

We can at least take comfort knowing that the future might not be dim, just different. After all, is there that much difference between having a Social Security 401(k) where the value goes up and down with the stock market or a guaranteed Social Security pension that gets cut 25% (or perhaps more) when the government runs out of money?

It is a good exercise in focused, logical investing discipline to look at each of these budget proposals and create your own game plan assuming any one of these strategies is enacted. How would they impact you?

When it comes to your own money, the same rational, numbers first, approach is essential. Money is complicated. It invites emotion. Money is the access key to all sorts of wonderful and essential things. Money is also the reminder of bad decisions or painful decisions we keep putting off.

The government’s budget struggle really has so many parallels to our individual lives. How do we plan for the future? How do we strike the balance between getting exciting things we want and covering the cost of boring, basic essentials like food, clothing and shelter. How do we do the day to day accounting necessary to make good decisions?

Do you struggle with maintaining rational thought when it comes to issues of money? What do you think of the pending budget proposals? Please share in the comments.

Simplified diagram of the federal budgeting process from "A Citizen's Guide to the Federal Budget" 1999

Probably one of the biggest deterrents to learning about investing is that the learning curve is extremely steep for the beginning investor. There are so many different types of investments, so many different industries, so many types of analyses and calculations. Many people take one look at this situation, feel so completely helpless and overwhelmed and just give up. They don’t open their 401(k) statement or read a prospectus or even borrow a book from the library. They just hope for the best, do a little here and there, and take comfort knowing that safety nets like Social Security are out there to help.

Unfortunately, the reality for most of us is that we can’t rely on this ostrich-like strategy any more. We have to know what we are doing, even if that means confronting a lot of bad news or having to change.

If we want an example of this, Americans can look to our own federal government. We all know that for many, many, many years, the government’s finances have been a mess. But how many of us have any idea how bad they are or exactly what it will take to fix the situation?

I didn’t feel like I really understood any of this discussion—except in the broadest of terms. So, I recalled another investing mindset rule that has served me well:
 

Restate a complex investing scenario into something you do understand.

 
In the next couple of posts, we will organize information on the U.S. government’s finances in a couple of different ways. It is my hope that this information will help us all to become better investors of our own money and also better stewards of the nation’s finances as well.

Gene Dodaro, Comptroller General of the United States. Photo from the GAO website.

First of all, how do we even begin looking at the government’s finances? Fortunately, for us, this is already someone else’s job. Whose job? Gene L. Dodaro, Comptroller General of the United States. Mr. Dodaro’s biography indicates he has a bachelor’s degree in accounting as well as 30 years of experience at the Government Accounting Office.  Mr. Dodaro is accompanied in this work by Robert F. Dacey, Chief Accountant, who is an accountant and lawyer and a recognized authority in accounting circles.

Last year, Mr. Dodaro and Mr. Dacey were involved in producing a document called Fiscal Year 2011 Financial Report of the United States Government, which is in many ways similar to a 10-K issued by a publicly traded corporation.

Auditing the finances of the federal government is a completely daunting task because of the sheer size of the government. Where to begin? First, they narrow down “the government” to a list of 35 of the most important agencies.

The 35 Government Agencies Included in the U.S. Government’s Fiscal Year Report

While this is a huge list, I am sure there are probably other agencies not listed here. For whatever reason, those other agencies are not included in the fiscal year report.

After they go through the books of all these agencies, they produce the fiscal year report letting us know how the government spent its money. For the past several years, these financial results have been terrible, reflecting huge deficits.

The U.S. government’s finances are in the trillions of dollars. The concept of a trillion is just too much for most of us to grasp. For example, I could tell you this true but brief summary of the government’s 2011 financial picture:

2011 U.S. Government Financial Summary

Income: $2.4 trillion
Expenses: $3.7 trillion
Deficit: $1.3 trillion

Since my own finances do not involve trillions of dollars, I don’t really know how to process this information. But when I took these same numbers and scaled them down proportionately to reflect a middle class family’s income, they looked like this:

2011 U.S. Government Financial Summary Scaled Down to a Middle Class Family’s Income

Income: $100,000
Expenses: $154,000
Deficit: $54,000

Now, the situation still looks bad but it is finally relatable. Imagine for a moment that our hypothetical family had a year where they had to replace the roof on their home, had some sort of medical catastrophe and had to buy a new car. The family could easily overspend their income doing these things, and probably paid for them by taking out a home equity line of credit, car loan and credit card debt. It was a tough year for our country last year and you could say that the complex transactions conducted by the government were similar to these family challenges.

If this were an isolated incident, the government, like the family, might heave a sigh of relief that it made it through the year and then start constricting expenses to be able to afford all of our newfound debt. Unfortunately, the government has been doing this type of spending every year for a long period of time. There is always some emergency we haven’t budgeted for, some exciting new thing we want to build or buy, some expense that we wouldn’t dream of letting go. So, the government, like some families, just keeps charging and charging, tiding things over for one more year.

What does the government’s net worth look like now? Below is a chart from the most recent financial report for the government:

Again, these numbers are so astoundingly large that they defy comprehension.  A net “worth” of -$15 trillion dollars?  If we relate them down to something we can understand, like a house and mortgage, we get something like this:

 2011 Government Assets and Liabilities Related to the Average Middle-Class Family

Assets (House):  $113,000

Debt Securities and Pensions (Mortgage): $665,000

Other (Credit Card Debt/Car Loans, etc.): $63,600

Net Worth: -$615,600

As you can see, the government is incredibly leveraged.  The typical family in this situation would most likely declare bankruptcy and start over.   Just the $63,600 in credit card debt would be enough to push most families to the brink.

We know (hope) that bankruptcy isn’t an option for our government, so what can be done about this terrible situation?  In my next post, I will talk about that in context of another investing mindset rule.

In the meantime, I ask you to think about an investment you don’t understand and try to relate it to something that you do.  In my case, the investments that confuse me the most are the mutual funds in our 401(k) plans.  Over the past year, I have been trying to track the investments on a quarterly basis and equate them as closely as I can to traditional stocks.  I also try to simplify all the complex data into simple questions like “If I add up the beginning balance plus all contributions in this investment, is the current value of the investment more, less or the same compared to what I started with?”  “Which investment made the most money?  Which made the least?” “What asset category is this investment in?”  I still can’t make the accounting numbers work out exactly for these mutual funds (for reasons I still don’t understand) but I feel a little more empowered to deal with these funds and at least have a framework to get started.

Have you used a relational mindset to help you make more sense of your money?  Please share in the comments.