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Fuzzy Math – What the Government Isn’t Telling You

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It’s that time of year again — budget season for the Federal government.

When I was a kid, budgets were much simpler. You’d sit down and figure out how much money you made, and then you’d cut your expenses to make sure you didn’t spend more than you made. The goal was to stay out of debt, put some money aside and pay off the mortgage.

Today, things aren’t as simple:

  • Savers are losers because interest rates are lower than inflation;
  • debt, when used right, is an important tool for building wealth;
  • the dollar is a fiat currency not backed by anything of intrinsic value (i.e. gold);
  • it’s more important to grow your income than cut your expenses due to inflation;
  • and, most people are losing their homes rather than paying off their mortgages due to a prolonged housing slump.

Dropping deficits?

For the Federal government, things are downright complicated. According to the 2013 proposed budget from the White House, the Federal deficit will drop $901.4 billion in 2013 and then goes on to predict that the deficit will drop sharply by 2014 to $667.8 billion.

Of course, in order for that to happen, the White House, as always, makes a lot of fuzzy financial assumptions. For instance, it relies on “allowing expiration of Bush-era tax cuts for couples earning $250,000 or more a year, limiting the value of itemized deductions to 28 percent for those families, and imposing a minimum tax for individuals with annual incomes of at least $1 million. It would also raise taxes on dividends received by the wealthy to 39.6 percent from the current 15 percent,” according to Bloomberg. None of which is guaranteed, especially in an election year.

Rising taxes and inflation

As I’ve written before, the U.S. government really has three options for reducing our massive debt: major cuts to Social Security and Medicare, more taxes or printing money.

As I’ve also said before, no one has the guts to mess with Social Security and Medicare. Much like the citizens of Greece, who’ve set fire to cities in response to harsh austerity measures such as a 22 percent cut in minimum wage, the population would revolt. As a result, you can expect higher taxes, higher inflation, and the Fed’s continued monetary policy of low interest rates and easy money. In this way, the current White House budget delivers.

Life is going to be more expensive.

The result? The Fed subversively hurts the middle class by devaluing savings through inflation — a hidden tax — and the White House overtly penalizes the rich and investors by raising their taxes significantly. In the end, life is going to get more expensive, and everyone loses, except those who have a financial education.

Of course, even with the increased taxes, there’s no guarantee that the deficit will be reduced. After all, when President Obama submitted his first budget to Congress back in 2009, it predicted that the deficit in 2012 would be $557.4. But based on the budget submitted earlier this month, the 2012 deficit is $1.3269 — a $769.5 billion error, or 138 percent.

But I guess nobody’s perfect.

The time to grow your financial education is now

The point of all this is to remind you, as I did last week, that our government notoriously uses fuzzy math to support rosy conclusions regarding the economy. If you were to believe everything coming out of Washington, you’d think we were a bastion of fiscal conservatism. Rather, housing prices are still tumbling, debt is still growing, money is still being printed, taxes are going higher, unemployment is still at record highs, and most people don’t have much hope.

Now is not the time to let your guard down or relax. I fear harder times are coming. Life is about to get more expensive with higher taxes and inflation. Everyone will feel the effects. Let’s just pray it doesn’t get to be as bad as Greece, who’s debt woes have now opened the door for the Troika — the European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB) — to most likely have permanent government representation in their country. Yes, you read that correctly, banks will be represented in Greece’s government.

This is a time to prepare for tough economic times and to capitalize on the financial opportunities that will come. As I said before, wealth is never lost, it is simply transferred. How are you preparing to be on the receiving end?

For more information about increasing your financial IQ, click here to check out our no-cost, financial education resources.

Original publish date: February 21, 2012

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