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Sunday, April 5, 2009

Ed Norton

While recently watching an old episode of the honeymooners I witnessed the following insight from Ed Norton. To set up the scenario, Ed and Ralph were at a Raccoon lodge meeting and Ralph as secretary gave a financial report that showed the lodge had a deficit of $439. As the dicussion went forward on how to reduce the deficit Norton came up with this gem: "Seeing our members are not paying their $2 monthly fees, I recommend that we reduce the fees to $1 and now if the members don't pay we have cut the deficit in Half!

I now realize where the present administration gets their budget ideas. Tim Geithner is a modern day Ed Norton. He believes that we should bail out all the banks and by spending trillions of dollars more we can in essence cut the deficit in half. In fact the Obama budget actually suggests that by increasing spending to over 3.5 trillion we can cut the present deficit in half over the next ten years. Please forgive me as surely I am not brilliant enough to understand how spending can reduce deficits.

Over the history of the US the highest the debt to GDP ratio has been in the 40% arena. Now Congress and the President are telling us that we can increase that ratio to the 80% area and by doing so the deficit will be halved. Just like Norton this represents upside down thinking. Understand that this ratio is in reality a debt to income ration. Years ago you couldn't qualify for a mortgage with a debt to income ratio of more than 25%, that was increased to approx 35% and then when the mortgage bubble was blowing up just prior to the burst you could see mortgages approved to people with debt to income ratios of nearly 65%! Any wonder why the bubble burst. Now this type of debt to income ratio basically bankrupted a vast majority of banks and it totally took out Fanny Mae and Freddy Mac. Can you imagine what a debt to income ratio of 80% and perhaps even higher for the country would do to us?

Printing trillions of dollars and increasing the debt ratio well beyond what can potentially be earned is a simple formula for bankruptcy, it is also the pathway to hyper-inflation and all types of other unintended consequences. The Bush administration was far to willing to placate the left side of the isle with their spending excesses, of course some were necessary yet there was still too much spending expecially from a so-called fiscally conservative administration. So, now the present administration is trying to sell us a Norton plan. Of course the rhetoric is that "we inherited this deficit" and thusly the only way to reduce it is to go on an unprecedented spending spree. It is comparable to you deciding that it is now time to max all all your debt options and then try to pay that off with 50% less income then you now have. Would you run your own personal finances this way? Of course you wouldn't. So why would you sit back and simply allow the government to do this for you? If you do, then you have a lot in common with Ed Norton.