Category: Layman’s Terms

Now that the elections are over, everyone in Washington is talking about The Fiscal Cliff. But what is this thing anyway? Where did it come from? How worried about it should we be? And what are our politicians going to do about it? Well, I will try to tell you, with helpful illustrations inspired by #StarWarsFiscalCliff (with a couple of Lord of the Rings quotes smuggled in).

A long time ago, in a budget far, far away, choices were made that brought us where we are today… Shall we begin?

Let’s start with our politicians in Washington. We ask for nice things without wanting to pay for them, and they give them to us because they want to re-elected. It’s a nice cycle.  Until the unpaid bills start to pile up and the “budget hawks” (a.k.a. party poopers) start to get concerned about the future. So they set dates for the parties to end. But whenever the date arrives, nobody wants to end the party just yet, so they all agree to continue the party for just one more year. After all, it will just cost a little bit more. Until the next date arrives, and they do it again.

For example. The “doc fix” is supposed to cut Medicare costs by knocking 30% off what the government pays Medicare doctors. But do we really have to cut that spending now? Those doctors won’t like that. How about next year? Meanwhile, the “Alternative Minimum Tax” is supposed to increase revenue by overriding the credits and deductions of rich taxpayers, but it’s not indexed to inflation, and every year it threatens to catch millions of “middle-class” families. Oops, better tweak that for next year, too.

Congress has been playing this game for years with relatively minor things like the doc fix and the AMT. But last decade, President Bush raised the stakes on this can-kicking game…

Continue reading Layman’s Terms: The Fiscal Cliff

Gather round, folks, it’s time for a little story.

As long as I’ve been alive, the federal government has taken 6.2% out of workers’ paychecks to fund Social Security for the people who aren’t working anymore. Then at the end of the year 2010 Congress was looking for ways to spend money to make people happy, but they couldn’t just give people any more stimulus paychecks because that was too obvious. So somebody had the bright idea to reduce everyody’s payroll tax from 6.2% to 4.2% for the year 2011. This would put more money in people’s pockets and stimulate the economy and bring a magical paradise to all.

Continue reading Layman’s Terms: The Two-Month Payroll Tax Cut Extension

(NOTE: This is intended to be a living document. If you spot an error or just want to quibble about something I said or left out, let me know in the comments.)

One of my friends asked me for “an intelligent rundown” on the Republican candidates for the 2012 presidential election. Here is my attempt with a blog post for the public, including the candidates’ experience, links to their wiki and campaign sites, the age they would be as President, their fact-checked score on campaign statements by the [mostly] non-partisan Politifact, and my opinions of their pros and cons and a summary of their campaign thus far.

Here are the 2012 GOP Presidential candidates, in roughly reverse order of their current poll standings. This guide isn’t perfect, but neither are any of these candidates… (UPDATED 1/21/12) (Bias disclaimer: This guide may be too mean to Gingrich, not nice enough to Santorum, and too nice to Paul and Roemer)

Continue reading Guide to the 2012 GOP Presidential Candidates: A Reasonable Attempt At An Intelligent Summary

What is the Supercommittee?
The Supercommittee was created by Congress to try to find a way to cut $1.2 trillion from the federal budget over the next 10 years. Congress could not agree on a way to do this, so they appointed 12 of their members – 6 Democrat and 6 Republican – to try to come up with such a way, and if seven of them agreed on a plan, that plan would go straight to the House and the Senate to be voted on. However, these 12 members could not agree on a plan any more than the rest of Congress could earlier.

What was the Supercommittee’s deadline?
The official deadline for coming up with a plan was Wednesday, November 23, but the Congressional Budget Office needed 48 hours to analyze the plan and verify that it would produce $1.2 trillion in savings, so the failure of the committee to come up with a plan by Monday night means that they have failed completely.

Continue reading Layman’s Terms: What does The Debt Supercommittee Failure Mean?

Well, I was going to rattle off my thoughts on the S&P downgrade like everybody else but first I thought I’d make a post explaining what that even means to help give some context for anyone who doesn’t follow world financial news or even national financial news all the time.

So, basically, there are three organizations known as the Big 3 credit ratings agencies – Standard & Poor’s (S&P), Moody’s, and Fitch. There are investors all over the world, from rich billionaires to folks managing the retirement portfolios of middle-class Americans, and they like to make more money by loaning the money they have to various groups of people, from governments to homebuyers, who pay it back with interest. Except sometimes, of course, people can’t pay the money back when it’s due – maybe a country got into too much debt and is about to collapse, or maybe a million people bought homes they couldn’t afford and then lost their jobs and then stopped making house payments and now the group that originally loaned the money to the homebuyers from the investors can’t pay the investors back. That’s oversimplified, of course, but the main point is that when you loan money there’s a good chance you’ll get more money back but always a small chance you won’t get any of it back. In general, the more investors are wary of a certain borrower, the higher the interest rate they will require to loan them money. If the interest rate for, say, bonds issued by a certain country is low enough that there aren’t enough investors willing to get in on it, then the rate goes up until enough investors get attracted by it so the country can borrow as much money as they need for that time period, and that’s partly why interest rates all over the world go up and down all the time.

This is all well and good, but it gets rather complicated. for your average portfolio manager (let’s name him Max). If Jane Smith has $25 coming out of her check every two weeks to save for her retirement, Max tries to decide where best to invest the money. But there are thousands of places where he could put that money, from stock markets to government bonds all over the world, and he doesn’t have time to keep up with the ever-changing details of every country’s financial situation – right now the 5% interest rate on Italy bonds is a way better return than every stock market in the world, but the reason it’s so high is there are increasing fears that the government there might default – so Max probably doesn’t want to put Jane’s money there. But that’s just one example, and Max doesn’t have time to keep up with the ever-changing risks associated with the thousands of available options. So how does he decide where to put Jane’s money?

Continue reading Layman’s Terms: What Is the S&P Downgrade?