The U.S. Government Wants You in Debt
I’m going to out on a limb and make the bold statement: the United States government wants you in debt, rather than you saving money. Politics aside, I am going to discuss why I believe this statement to be true. If you accept my premise, I will then discuss ways you can use it to your advantage.
Current Examples
Government taxes serve more than the purpose to fund federal obligations. Taxes (either increases or decreases) have been a method in which a government can modify personal behavior. If the government wants people to stop smoking, it creates a “sin” tax to make it more costly to smoke. When a government offers tax incentives for acquiring debt, they are basically stating they want you to purchase things with debt. The government then rewards you when you comply. Why else would the government have implemented these policies to stimulate the economy?
- Federal Reserve policies have forced the average one-year CD interest rates to currently below 1.5% APR. In addition, the FDIC recently ruled banks that are not “well capitalized” will not be allowed to sell fixed investment products for more than 75 basis points (or 0.75%) above the national average. This effectively punishes savers and fixed income retirees, while rewarding people who have debt with lower loan rates.
- Offering the Cash-for-Clunkers program rewarded people to buy new cars (mostly likely with an auto loan), while trading in existing working cars (more than likely these cars were debt free).
- A tax credit of $8,000 to buy a home, originally just for first time homebuyers, now is for anyone. Congress liked the plan so much, they have extended it into 2010. How many people bought a house with cash only?
- Why is it people who did not take on too much debt are indirectly punished, while others who over extended themselves are excused of their loans? Can you say moral hazard?
It’s been said many times over 70% of the U.S. economy is consumer based. If the consumer disappears what happens to the economy? This might be the core reason why the United States policy might be trying to continue spending any way possible.
Older Examples
You might be thinking, “Investor Junkie, you must be a Republican, since you are mentioning policies of the current administration.” You'd be wrong. Examples have existed for many years regardless of which party controls government — some as long as the Federal Reserve has been in existence.
- George W. Bush stated after 9/11 that we must go out and keep spending.
- The Federal Reserve’s economic policy has always favored inflation, while deflation is considered “evil.” Deflation by itself is assumed to be bad, but that’s not always the case. Deflation helps savers as the value of your money saved increases. Deflation when you have massive leverage (as our government and many people on a personal level do) makes debt cost more. This causes the government to be in a bad situation; so the goal of the Federal Reserve is to re-inflate what was deflated. I personally believe the Federal Reserve is doing this at no cost spared, and will cause future ramifications.
- Since the Federal Reserve has been created in 1913 the dollar has lost 95% of its value. Don’t believe me? Visit The Inflation Calculator, and plug in one dollar, enter 1913 as the start year, and 2008 as the end year. What cost $0.05 in 1913 now costs $1.00. Because of inflation the value of your money, if you don’t do anything with it, decreases. Would you rather save it, or immediately buy something with it? Better yet, if you buy with debt that debt will be worth less in the future. Inflation causes you to make this decision.
- Your home’s mortgage interest is tax deductible. Netherlands, Sweden, and Switzerland are the only other countries to offer a tax deduction, effectively saying you should not only buy a home, but also buy a home with debt.
- Businesses can take on loans to purchase equipment and it’s considered capital improvements. When purchasing via a loan, you can take a tax deduction from the interest.
- Freddie Mac, Fannie Mae, and banks were mandated by the federal government to make subprime loans.
- Inflation, on average for the past 97 years, has been around 3.43%. This means any debt that’s held for one year is worth 3.43% less than it was the previous year.
- The government taxes interest earned from most savings and investments.
Yet again you might be thinking, “But Investor Junkie, the U.S. government offers tax deductions for retirement accounts.” Yes this is very true! There are examples of tax deductions for savings, but it usually only delays taxes, and does not eliminate them. Currently Roth IRAs are an exception to this rule.
Let’s not forget about estate taxes. If you have saved over the years and have a sizeable nest egg, a good portion of that nest egg could die with you. By default, your heirs are taxed considerably on your inherited savings after a specific dollar amount. Taxes are delayed, but usually never eliminated.
Use the U.S. government policy to your advantage!
From the many examples I have shown, the United States government wants you to acquire debt. I’m not sure this is a done on purpose or by accident. Don’t fret — not all is bad. If you understand what’s occurring, you can seize the opportunity.
How to take advantage of this situation:
- Acquire fixed rate debt on assets that increase in value with inflation. A perfect example is to own a home and real estate investments. Use Bankrate.com web site to calculate your real interest rate after taxes. Mortgage rates are at historic lows and probably will be higher in the future.
- Where the government does offer incentives to save, use them. This can include any of the following investments: 401K, 403b, IRA, Roth IRA, 529.
- If you believe we are going to have higher inflation in the next 10-30 years than the previous 30 years, you are best to purchase hard assets. Commodities and real estate do very well in high inflation environments.
- Plan methods to minimize or delay your taxes every step of the way, including at death.
- For the more adventurous type, owning a business is another method to acquire debts that are tax deductible and earn income in the process.
In the end, it’s been said the only sure things in life are death and taxes. Having debt is also almost another sure thing, and best to use government policies to your advantage.
What are your thoughts on the topic? Do you think the government wants you in debt? Do you believe it’s on purpose or by accident?
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The moral hazard created by recent government policies in the U.S. and elsewhere has indeed punished the prudent and rewarded the profligate. But the question arises as to how long this can continue, especially considering the increasing amount of debt that exists, not just at the consumer level, but at the sovereign level as well. This feels like a giant debt bubble ready to pop.
In Canada, our mortgage interest is not deductible, and our banks did not lower lending criteria to the levels of the U.S. banks. We have not (yet) experienced the housing crash that our American neighbours have endured. But housing prices have recently begun to rise a lot here and I can't help but wonder how many people will be caught without a chair when the low interest rate music stops.
P.S. - It's great to read a thoughtful article from a fellow "junkie"!
I really liked this article until I read to the section on taking advantage of the government policies. How I interpret this is that the government wants us to be in debt so we should just continue to follow along (but leverage it to our minimal advantage in the process). What would it take to advise people to not even mess with the government by paying cash instead of acquiring debt. I see the government as a great parallel to credit cards companies. If you don't mess with them they can't mess with you. Why don't we take on the mentality that cash is king instead of debt is bad BUT we should still use it. When you play with snakes (Left, Right, or indifferent) you get bit. Simple enough? Or is it...
I agree the best way is our government not go down this path. As you know the government is a like a massive oil tanker, how quickly can it change course? My point is just accept the fact, understand it, and at least use it to your advantage. While doing this you also should do everything you can to reverse our government trend (maybe I should have stated this). Economic policies I don't think will change though, as this trend has been around longer than most of us have been alive.
Related to credit cards I'm firm believer you should also use credit cards to your advantage. By raking up points, and paying them off monthly.
I also disagreed with the author at this point in his article. Being aware of the slavery means putting bullets in the slavers heads. Thats it.
Everywhere you go we are penalized for paying cash. Many companies check credit reports to determine the percentage or rate they will charge. Debt free is now used to work against a consumer. Our world is FICO induced. The thought of not submitting to the almighty FICO is laughed upon. So each person has to decide whether they will pay a little higher rate to be debt free or pay a lower rate and have it taken out the back door with other debt induced interest rates. Thanks for the post. It was thought provoking.
http://www.storyofstuff.com/
This video explains the cycle of consumerism and talks about a lot of the same topics in your well written blog post.
Thanks for the reminder that we need to think for ourselves and take control of our finances.
I appreciate this site so much.
Do you know of any government that doesn't reward debt? I ask out of curiosity, not sarcasm. So if I wanted to be rewarded for my working hard and saving a lot, where would I ideally want to live?
JAPAN! I'm here now and it's a rarity that you can use a credit card anywhere except major hotels, chains, etc. CASH RULES HERE!! It's taken me a year to get used to carrying a large wad of cash with me everywhere, but the truth is that you HAVE to (and everyone does)...you can't rely on debit or credit cards here as backups!
They tried to get the nation to spend more money last year to boost the economy by handing out a stimulus check to everyone, but it backfired because the people just put it into their savings! One of my co-workers confided in me that he was stressed out because of his credit card debt, which was about $400. Totally different world here concerning money!
The above post was in response to Molly, who asked if there was any country that didn't really reward debt...
Oh, and I went to UR! (But not on debt, wooohoo for scholarships!)
You would go to the top 1% of the US population. Read The Millionaire Mind by Thomas Stanley. More millionaires work hard, save money and pay cash as opposed to using credit cards and using points to get airline vouchers. The proof is in the pudding (sorry for the lame reference).
When you have an economic system based on "free market capitalism" of course the government will encourage purchasing things with credit and acquiring debt, otherwise the whole system as we know it will collapse.
I understand the frustration of people who "play by the rules" but get seemingly burned. However, if we continue living in the free market capitalist dreamworld, people who do not spend money are always going to get screwed. However, folks who acquire debt are also getting screwed by paying compounded fees and interest. Only those with loads of money to begin with or those who are fortunate enough to continually raise their earnings will succeed.
I think the whole thing needs a revolution and a drastic change. It is best to start and change what you can.
I think frugal living blogs such as this are a great jumping off point for the middle-class to realize a new way to live. Buy locally, reuse, recycle and consider the quality of a product, not just the price. It all starts at home and hopefully, in these small ways, will start to change the world dynamic.
http://en.wikipedia.org/wiki/Federal_Reserve_System
A great book (though somewhat long winded and controversial) on the subject is "The Creature from Jekyll Island" by Edward Griffin.
You are correct the govt does not directly control (or even supposed to influence) the Federal Reserve. Keep in mind about good old Ben today getting re-pointed to his position by who? Plus the fact, the Fed is a govt creation. Until just recently you haven't seen anyone in Congress complaining about the Federal Reserve (cept for Ron Paul since the 80's)
While my 401K may delay being taxed, there is an assumption that the tax is deferred to a time when I will be in a lower tax bracket.
I fully expect that to keep the economy going, especially now wiht China as a competing consumer market, the government will eventually have to raise taxes astronomically to pay our debts.
Therefore, I do not sassume it will be a good deal to delay my taxes, as I expect by time I retire- in 25 years- my taxes will be the same, or even higher than, my tax rate now!
But yet, I am squeamish. So half my savings is liquid, half is 401k/403b. Hedging my bets.
Absolutely they do. People who are deeply in debt have to go to work, a lot. This takes up a lot of your time, thus discouraging pursuing ideas, starting companies, trying new things in general.
When they make it favorable to go into debt, they know exactly where you will be for the next 10-30yrs, at work, making payments.
nice.....I like that one
My thoughts on housing exactly. Especially interesting is that there are all these tax reasons promoting buying a home yet homes (at least free standing) are a greater drain on government resources than people living in high rise apartments or in condos. For each new developement you increase bus stops, the area covered by police and fire, infrastructure costs...houses are a drain on the tax base yet we keep telling these people that they get to pay less in taxes.
As for the person who mentioned that not only savers are screwed but so are those in debt by fees, compounding etc...they did not have to go into debt. The vast majority of people in this country and much of the free world are in debt by choice. Sure it can be pointed out that there are extreme examples where peole are in debt due to no fault of their own but these are by far the minority.
Interesting premise, but then when I reached "A tax credit of $8,000 to buy a home, originally just for first time homebuyers, now is for anyone," you lost me. You're wrong two ways here -- the credit that was extended for move-up buyers (I'm assuming that's what you meant by anyone) is only $6500, and it only applies if you have been in your home for 5 years. It's not like that information is hard to find, so it makes me wonder what other sweeping generalizations/misinformations you've got lumped in here.
I do not agree theres a government agenda to keep you in debt.
The government certainly does have policies to encourage home ownership. Thats more about 'the American dream' than favoring indebtedness.
Other than that theres nothing sinister going on and all the policies are about stimulating the economy not putting us in debt. Inflation is a natural consequence of a growing economy so with a growing economy there will be some inflation. At least a $1 million of your estate is exempt from estate taxes.
The government wants us to spend, spend, spend. They tell us the way out of the economic downturn is spending. Debt is just the way for us to spend more. Some people lead by example, look at the Government's deficit. I don' think the Government makes the best role model http://evolutionofwealth.com/2009/06/who-is-your-role-model/
Great points. Since we exist in a debt-driven economy, there are many elements in the economy, including government, that try to convince people to get into debt so we can have economic growth. But is over-consumption and addiction to debt the best possible long term solution to economic growth? How does all these "pro-consumerism" policies affect the environment or the less fortunate?
As for me and my house, we will stay away from debt. I will not give up my freedom for the good of the economy.
http://blog.beatingdebt.org/2009/02/24/giving-up-our-freedom-for-the-goo...
They don't want you in debt, they just want you to spend. They don't care if you save a dime.
This is the comment I was looking for. Our system requires people to continue spending, continuing buying. They don't want you in debt. They just want you to use other people's money (banks), and grow that money. That therefore makes the whole system increase.
See the movie maxed out. And read 'outrage' by dick morris. Congress was paid off by the credit card companies in 2005, that is why the bankruptcy laws changed in favor of Credit card companies... makes it nearly impossible for consumers to get forgiveness on their debt and get a fresh start. Our fine government looking out for themselves as usual. You can get a chapt 13 if you're lucky, but most people default on that and are trapped in it forever.
the government and big business wants us in debt for sure.
@FinancialBondage: Very good point!
The government is trying to rebuild the economy, although it probably hasn't picked the best way possible to do this they are foolish. Personally I think people need to learn how to spend money responsibly. Not just horde the money they have but buy stuff that they can. Most people say "we can't afford it". so cut back on what is purchased instead of just not spending anything. The economy requires people to spend money, without them buying stuff the curve begins shifting and makes it difficult to put back into equilibrium
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Use a combination of cash and credit with this philosophy...
Open high limit credit cards, but use them as debit cards. If you have $80,000 in the bank and you want to buy something that costs $90,000, don't buy it unless you are willing to empty your bank account and owe $10,000.
Think of your credit cards as "More convenient than carrying Cash".
Same example...$80,000 in the bank, you want to buy something for $3500. If you are comfortable spending $3500 from your $80,000 then buy it on credit and pay most of it as soon as your statement arrives leaving about 20% about $700. This will keep you semi-debt free as you can eliminate it all together if you wanted to, but will give you an EXCELLENT FICO score to use as LEVERAGE when you desire to purchase investment property.