How did we get into this mess? Well, if by “mess” we are talking about the slump which is cratering economies, stock markets and real-estate values on a global scale, the answer is relatively simple… we over-spent. The unfortunate thing about this situation though, is that the quickest solution to the problem is not the one being pursued by our government.

To explain this contradiction, let’s take stock of where we are. It shouldn’t surprise anyone that the United States has developed into the most prosperous, wealthy and influential country in history. The basic freedoms we have as Americans have allowed for this, and it is most evident in the quality of life we enjoy. Our average family income outstrips the incomes of every developing country by a staggering margin, and most developed nations as well, which is very evident to anyone who has had the opportunity to travel abroad.

But as is the case with all wealthy nations throughout history, our focus has ever-grown toward spending our wealth and consuming goods and services. Certainly this philosophy can benefit everyone to an extent – after all, if the United States and our European counterparts choose to spend our wealth, businesses here and abroad can generate an income and can also grow. This is the heart of capitalism – as we earn income, we can spend, which generates revenues for businesses, which can then pay their employees, and the cycle continues.

Problems arise, however, when markets and economies are massaged into performance, which is precisely what our government has done and is continuing to do. At Washington’s request, quasi-governmental agencies like Fannie Mae and Freddie Mac made credit easy to get, and then guaranteed that debt with taxpayer money, so that everyone who wanted a home could have one. Stated another way, our elected officials encouraged a system where people could borrow beyond their means, and then guaranteed those loans by abusing their ability to dip into the pockets of responsible, hard-working Americans for more tax dollars.

If that makes you angry, it should, but before we get indignant and point fingers, we must acknowledge that our government isn’t entirely to blame in this. After all, the government and the banking system only made the money available to us; we had to spend it, which is precisely what happened. As a group, Americans have lost sight of what it means to save and live within our means. For over fifty years we have increasingly looked to our incomes of the future to pay for the things we want today. “No interest for 12 months” and “No money down” have become hallmarks of the American way of life in the past decade as we have borrowed against our individual futures to provide greater levels of comfort for us today. In that sense, we have become like a nation of three-year-olds throwing temper tantrums, except we’re crying for flat-screen televisions, Nintendo Wiis and new cars instead of for Barbies and GI Joes. What’s worse, our elected officials have borrowed and are continuing to borrow from our children’s futures to shore up the problems we are dealing with today, all in the name of “economic stimulus.”

If that also makes you sad, it should, but before you get on your soapbox about whether Democrats or Republicans are more to blame, don’t. Collectively, they have led by example and have done an exceedingly poor job of demonstrating the virtues of prudence and public service. It has been said, and rightfully so, that Democrats like to tax and spend, and Republicans like to borrow and spend, but the problem with both of these stances is that the emphasis is always on spending. Given that our government doesn’t produce any goods or services, they spend by borrowing or taking money from the people who do. So that is where we are today, with the government’s solution to our problems resting in their ability to spend even more money they don’t have, and to encourage you to do the same.

This sounds kind of stupid, because it is. The rescue efforts of our federal government are largely focused on getting us to borrow and consume more, even at a point where the average, suffering American is praying for ways to pay down their mortgages, second mortgages and credit card balances, not looking for ways to add more debt. What makes even less sense though, is that Washington wants us to turn a blind eye to their rampant spending on earmarks and entitlement programs, and to ignore the fact that our mortgages, second mortgages and credit card balances are going to be even harder to pay down when the they inevitably raise our taxes in the future to pay for all this.

As you may have guessed, it is difficult to spend your way out of a predicament that was caused by over-spending in the first place. And while this is the essence of what the feds are attempting to do, there seems to be a slight silver lining glinting at us on the horizon – Americans don’t seem to be buying into it. Remember, in order for their plan to work, we have to borrow, borrow, borrow and then spend, spend, spend. But after years of borrowing against their homes and tapping their credit cards, the average American consumer seems to have recognized the dangerous reef below the surface in continuing to surf that ever-growing wave of stupidity tied to the borrow and spend cycle.

So what does this mean for a true economic recovery and for that much anticipated stock market rebound? One of two paths is likely at this point. The first path posits that the feds, whose appetite for spending is almost never thwarted, will find it within themselves to spend enough money to make up for the consumer’s unwillingness to do so, and in doing so, will also leverage our beloved country’s future, devalue our dollar and will cause inflation to rise to double-digit levels. What’s worse is that the artificial stimulus may cause Americans to return to their old spendy ways, with no lessons learned, doomed to repeat the same cycle until the next economic bubble bursts with possibly graver consequences.

The second path, which is healthier in the long-run though possibly more painful in the short-run, suggests that Americans will continue to reject the cheese in the government’s borrow and spend mousetrap in favor of shoring up their personal finances by paying down debt and living simpler. Slower consumer spending will certainly hamper a speedy turnaround. However, breaking the debt cycle now means we will be a financially healthier country when we inevitably come through this recession.

Given a choice between the two scenarios, we hope Americans continue to choose the healthier path even though it may take longer, because it naturally places us on a better, stronger foundation in the years ahead. After all, a couple of years of a sluggish economy and dampened stock returns seem a small price to pay for the security of our children’s futures.

Incidentally, the better solution to our problems which we alluded to in our opening paragraph, is for our government to reduce taxes or better still, eliminate income taxes in favor of a consumption tax. Consumer spending accounts for about 70% of the growth in our economy, so encouraging people and businesses to spend is helpful if you want to expand the economy. However, in contrast to the government’s plan of encouraging us to borrow more money we don’t have, lowering or eliminating taxes encourages people to spend money they have already earned. Though this process would still take time because Americans may still choose to pay down their debt before they spend, the overall economic and market recoveries would be more rapid with the government alleviating some of the tax burden from the shoulders of American workers.

- Travis W. Raish, CFA