Should The Economy Scare You?

By Linda McMaken | October 09, 2011 AAA

The economic information that the media provides seems to contradict itself, daily. Over the last few years, since the economic bailout of 2008, we've seen various numbers used by the media and the government that indicate we are growing or slowing, depending on the day and the source. One thing is for sure, if you are one of those laid off, without insurance or struggling with several part-time jobs to make ends meet, these numbers and outlooks are meaningless.(For more on the economy, read The 6 Scariest Possibilities For The U.S. Economy.)

TUTORIAL: Economic Basics

U.S. Debt
The U.S. national debt is climbing by the nano-second. As of this writing, the national debt is soaring at $14,000 billion, that is roughly $47,000 worth of debt for every American citizen. This massive debt load creates a situation where investors are reticent to invest, banks are wary of loaning money, citizens are scared of being taxed to cover the debt, and it is the primary reason the S&P downgraded the United States credit rating, for the first time in its history.

Add this to the credit lowering, by Fitch Ratings, of several members of the European Union, including Greece, Spain and recently Italy, and the world's debt creates a bleak future economic outlook.

The U.S. is the world's largest economy and all other monetary systems are based on it. Most international trade is conducted with U.S. dollars and many countries, such as China and Japan, purchase U.S. government bonds and securities, as a "safe" investment.

With this downgrade, borrowing will be more difficult and more expensive, with invariably higher interest rates. International investors may no longer see the U.S. as a safe investment and take their money elsewhere. This will also mean slower economic growth in the U.S., which will ripple to other world economies. Yet, there is no easy, or foreseeable, solution to reducing the debt. (For more information on debt, check out A Look At Government Bonds And National Debt.)

Class War and the Millionaire Tax
Warren Buffet claims a class war has been brewing for years saying, "There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning." Since the tax cuts of 2001 under the Bush administration, the class war scenario has been played out in the media and by politicians running for office.

Democrats want to increase taxes on the wealthiest 2%, stating that will equalize the tax burden and gain money for the national debt. Republicans contend this would end job creation, by taxing those who have the economic ability to start businesses, and create more tension between workers and corporations. Corporate America does seem to be favored in the tax breaks they are given, and many of the "super-rich" have loopholes that protect much of their money. Yet, not many would argue that the wealthier individuals do create jobs.

Historically, U.S. corporations were taxed at a higher rate than individuals. Just after WWII, for every tax dollar collected from an individual, $1.50 was collected from corporations. Today, those numbers have changed; corporations now pay 25 cents for every dollar an individual pays. Yet, the U.S. has one of the highest corporate tax burdens in the world at 39%, although with corporate loopholes not many are paying this rate. In either case, neither side of the political spectrum can reach an agreement, and again the economy sits stagnant, waiting.

Social Security
The latest legislation that is circulating in Washington, regarding Social Security, is the Republican bill allowing citizens to have their own private savings account for retirement: The SAFE Act (Savings Account for Every American). Currently, 6.2% of your paycheck is deducted and sent to the Social Security fund. This bill would allow you to send that 6.2% to a private account, much like an IRA. Employers would continue to send their portion to the Social Security Fund for the next 15 years, after which they would have the option of putting that money into their employees SAFE Account, or continue paying to Social Security. The distributions of money would be tax-free at retirement age.

Republicans say the fund is broke and in need of fixing, so that those dependent on Social Security will be safeguarded. Democrats contend that the Social Security fund is solvent and has a surplus of money that will last until 2037. Even if it is solvent at the moment, many taxpayers will be retiring in 2037 and beyond, and neither side seems to have a solution.

U.S. Image at Home and Abroad
We may not realize that what the "neighbors" think about us matters, but it does. In a recent column from Prvada, a Russian journal, it was made evident that they see the U.S. as in a depression; a serious financial crisis, with staggering unemployment, currently at 9.1%, and a government with the inability to reach any decisions.

International investors see the U.S. as a risky investment and governments such as China see the U.S. as "uncreditworthy." These images abroad will not lead to improved economics at home.

President Obama may not be fairing well in the polls at home, but internationally he seems to be getting favorable ratings. Polls in France and Germany give him an overall favorable rating of 73 and 63% respectively. In Turkey and Pakistan, however, both the President and the U.S. received negative ratings and only a 17% positive review.

The Bottom Line
Throughout U.S. history, the economy has been a roller-coaster of booms and busts. No one can say with absolute certainty what the coming years will bring. Given all the facts, it would be wise to pay down debt, begin or enhance your savings account and plan for a future where, if there is no social security, you will still have saved enough to provide for yourself. As the old adage goes, "plan for the worst and pray for the best." (For more on the national debt, read What The National Debt Means To You.)

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