Lighthouse Wealth Management, LLC

To make sure we're not just piling on and adding to the confusing media spectacle that makes your head spin from one day to the next, we'll stick to plain English. And since what happens over there will surely affect us over here, we're going to speak in plain English about both Europe and the U.S.

That's what we just got smacked with – one after the other. Meanwhile most of us here thought the New York Metro area was one of those relatively "safe" places on earth. Weather's usually not that big of a deal – at least it wasn't.

With the earthquake, it wasn't so much the shaking as the shock of it all: an earthquake that shakes buildings in Manhattan? Since when?

With the hurricane it wasn't so much the wind as the flooding. Some of us had a pretty rough time. And for many, it followed on some serious flooding caused by the record snowfalls we had last winter…along with the record rains we had during the summer.

Then along comes this October snow storm – the first one in over 50 years. It wasn't so much the snow; we're all pros with the snow after last winter (the most snow we've had since they started keeping track of these things). It was the fact that the trees were still full of leaves. And when all that heavy snow hit, the trees came down – thousands of them – which wouldn't be so bad except for the fact that so many of us live in areas where the power lines are above ground, but below the trees: lights out, no heat…for days and days.

What's next? Maybe more to come; maybe nothing. Who really knows? One thing we do know though, it's not like we can't explain it all.

Mother Nature's not always predictable, but she does follow certain laws. That may be small consolation if you've been flooded out or you're waiting for your power to be turned on, but there's really no mystery to it; no reason to wonder what the heck is going on. You don't need to start worrying about TEOTWAWKI - the end of the world as we know it. Lots of stuff in life isn't expected or pleasant, but if you understand what's going on you can at least deal with it.

As for understanding the European debt crisis, it's going to be a bit more challenging. Just look at the "solutions" we keep hearing about every other day. Every time Merkel, Sarkozy, Berlusconi et al get together, they come up with a new solution – the one that really will take care of things. What happened to yesterday's solution? Never mind. We only thought we had a solution yesterday. Now we've got it right.

If you take a deep breath and look at all this using a little common sense, you've got to wonder about this daily drama. Is the problem that hard to solve, or are they just not capable of finding a solution – or maybe some combination of the two?

Rather than getting sucked into all the issues surrounding the Euro, the ECB, the ESFS, whether or not Greece will default, how much of a "hair-cut" banks are taking on the Greek debt they hold, whether Italy is in danger of defaulting on its debt (Heaven help us), and all the rest, let's focus on exactly what the problem is, and how it led to this crisis.

The problem: too much debt. Governments in Europe, just like the U.S. government, borrowed too much money.

What do we mean by "too much"? Simple: they borrowed more than they can pay back – now or in the future.

Sound simplistic? Maybe. But all "simplistic" means is the tendency to oversimplify an issue or a problem by ignoring complexities or complications. It doesn't mean that what we're saying isn't true. It is true. Now let's get into some of those complexities.

Governments have to borrow because they spend more money than they take in. Remember that governments don't "earn" money the way we do. They get their money through taxes. We work; they tax the money we earn. They take the taxes they collect and spend that money.

What do they spend it on? Let's keep it simple and just break it down into defense (e.g., Army, Navy, Air Force) and non-defense (various government services like social welfare, health care, public education, etc.)

So why can't government just spend what they take in? It's not like government officials don't know how much money they're taking in.

You can understand how every once in a while, if governments don't take in enough money in taxes for a year or two, they might borrow to keep things going. After all, not every year's a good year in the economy. Sometimes economic activity gets weak. Individuals and companies don't make as much money. With less money out there to tax, the government takes in less.

Of course, prudence might call for government to cut back spending during those lean years – but let's not get sidetracked by that. Let's say that it's in the interest of the common good for government not to cut back certain services even when they're not taking in enough money to afford them.

But really, that shouldn't be all that complicated when you think about it. After all, when the economy picks up again, governments can just pay back the debt they ran up: When more taxes roll in, take the extra money and pay down debt. Seems like a pretty simple solution doesn't it? Not only does the solution seem simple, but isn't that the responsible thing to do?

The answers are yes, it is a simple solution and yes, that would be the responsible thing to do. So why haven't governments done this? Let's start with an observation:

You already understand this, right? For example, a lot of unemployed people who are trying to figure out how they're going to pay their bills already know that the simple solution to their problem would be to find a good-paying job. Of course, finding a good-paying job isn't easy these days.

But while most of us understand why finding a job isn't easy, some of us may not necessarily understand why it's been so hard for governments to simply pay down their debt and act responsibly. What's the big deal?

Governments Don't Get Smaller – They Only Get Bigger

For example, the last time the U.S. government got smaller was right before Franklin Roosevelt was elected president – in the teeth of the Great Depression. But once he was elected, it started growing again – and hasn't looked back.

Even Ronald Reagan, whom many of us identify with the idea of making government smaller – started with a federal budget a bit over $600 billion in 1981 and left office in 1989 with a budget around $1.2 trillion – almost double what he started with.

Now, we can debate all day whether bigger government is good or bad. Even some politicians do. The way the debate works is like this:

When things are going well with the economy, no one really listens to anyone who says we should cut back. There's no pressing need. It's only at times like this that anyone even pays attention to the arguments for smaller government.

Of course, you inevitably wind up with the ones who want to cut being portrayed as insensitive and heartless. Without big government, who's going to take care of those of our fellow citizens who've fallen through the cracks?

This time around, however, things may be playing out a bit differently. Lots more of us are falling through the cracks and need help. But more of us are also spooked by how much the government's been spending. More of us look at our national debt (the money the government already spent) and wonder whether we might be approaching some sort of breaking point.

Wall Street Journal columnist Peggy Noonan recently described what she's seeing – and it's not business as usual:

"The economy is tanking and can take a whole world with it. But what's interesting—and new—is that the fear is not finding its expression…in rage, or in deeper partisan antagonism. Democrats could be feeling bitter and snarky: President Obama didn't work, and they're not in love with him anyway, so why not bash Republicans just for fun? Republicans could be feeling mindlessly triumphant: We're on the verge of a major victory, make way for your new rulers. But that's not what I'm seeing. What I'm seeing is a new convergence of thought among Democrats and Republicans who are not in Washington and not part of the political matrix. They are in new agreement about our essential problems and priorities: that the economy comes first, all other crises (in foreign affairs, in our culture) come second, because they cannot be helped without an economy that is healthy and growing. They all agree—no one really argues about this anymore—the government is going bankrupt. They all agree the entitlement system has to be reformed. Heck, they all respect Paul Ryan, for his seriousness. They all want grown-ups to come forward with ideas that maybe each party wouldn't love but that might do the country some good.

"That is what I see in every business and professional meeting, in conversations with Democrats and Republicans: a new convergence of thought among the thoughtful."

Now the sentiment Ms. Noonan expresses is admirable – even hopeful. But notice that we emphasized the fact that these are folks who are not in Washington and not part of the political matrix.

This is crucial. The simple fact remains that, going back to the Great Depression, those in power have not demonstrated either the desire or the will to reduce the size of government.

This goes for those in power here in the U.S. and those in power in Europe, and it's critical that we realize this. It helps us understand, without being in any way simplistic, why governments don't pay down their debt. Not only does this help us understand why governments don't pay down their debt, it also helps us understand all the spinning around and back and forth solutions the European leaders keep churning out.

Take Greece for example. They're just about over the cliff. No one thinks they can ever pay back their debt – including the Greeks. You hear about how the Greeks have to cut back on the size of their government. But, let's face it, a lot of the governments proposing that the Greeks cut back – while not quite as bad off as Greece – will be heading for the edge of the same cliff sooner or later.

But we're not finished. We've only been talking about how governments spend today more than they're taking in today. It doesn't end there. And here's where it gets a bit more complicated.

You see, governments don't just spend more than they take in today, and borrow money to cover the shortfall today. To understand how bizarre and outlandish government spending can get, we'll turn back to the Greeks again – today's poster child for the European debt crisis.

The example we'll use is a bit extreme, but not by all that much: Greek trains. It costs about $400 million to run them. They take in only about $100 million in revenue – year after year after year. This is so absurd that it's been estimated that Greek commuters could more efficiently be driven to work by taxi. Incredible.

If the Greek government used some of its surplus revenue to subsidize the railroad, that would be one thing. But, as you must have suspected by now, they don't have any surplus. So they borrow. Just to run the railroad, they have to borrow $300 million year after year.

You don't need to do a lot of complicated calculations to understand that this doesn't work out over time. So what's up with that? Are the people who run the Greek railroad incompetent? Are the Greek politicians financial dunces? Have they all lost their minds?

As it turns out, the reason the politicians in Athens keep borrowing to subsidize the railroad is that the people employed by the railroad vote. (Okay, say it's simplistic if you want to, but if you do, we'll just ask you to come up with a better explanation.)

And to make matters worse, the people who work for the railroad not only get paid to work today, but the Greek politicians have agreed to pay them a generous pension when they retire. Now remember, the railroad will still keep running when today's workers retire. There will be new workers to take their place who will want to be paid at the same time that the retired railroad workers want their pensions. Not only that, but you can bet the new workers will want to be paid even more.

The railroad workers get to retire early. (This isn't unique to Greece's government employees, but let's not get distracted.) Plus, people – as you must know – live longer than ever these days.

So the workers retire, collect a pension that lasts longer and longer as people live longer and longer, and the new workers get hired to make – what's this – something along the lines of $65,000 per year, compared to the average private salary of roughly $40,000. Plus they'll probably want to be paid even more.

Does any of this make any sense? How do people who run things this way get anyone to lend them money? We'll get to that, but there's one more thing to know.

A lot of the money the Greeks borrow today doesn't have to be paid back for years – sometimes as much as 30 years. And remember how we said that governments only get money from taxes they collect from people earning money today? Well the more debt they build up that has to be paid back years from now, the more people who will be working years from now will have to pay in taxes to pay off that debt. And some of those people who will have to pay back the debt years from now haven't even been born yet.

This is true of most countries in Europe, as well as in the U.S. Millions of people who haven't been born yet will start out life owing billions, maybe even trillions of dollars of debt that went to pay for the standard of living of people alive today.

Look at it this way. When a Greek couple has a child (and it's rare that they have more than one), that child is going to be expected to work when they grow up to pay taxes so that people today could have enjoyed all those salaries, benefits and pensions. Maybe they'll be paying off the debt used to provide their own parents' salaries, benefits and pensions.

Question: Would you want your child to have to work to pay for your salary, benefits and pension? Does that seem fair?

Oh, and if you want to point your finger at the unions, go ahead. Americans love to wag their heads and talk about the ridiculous demands of European unions. (That's at least when they're not complaining about American workers' unions.) And you can certainly understand how frustrating it must be for the typical American who gets in to work earlier and leaves later than his European counterpart, hoping at the same time that they're not about to be laid off – especially when they hear about how European workers, in addition to having a shorter work day, basically can't be fired, have more holidays, and take off somewhere around four to six weeks for vacation. But before you get all lathered up, just remember this: All these people vote, and politicians want those votes.

So to our previous statement that governments don't want to get smaller, that they only want to get bigger, you can add that politicians always and everywhere want to get re-elected. And you can probably figure out that so far politicians have obviously decided that they'd rather get the votes than tell the demanding workers that they're out of their minds and no way can the government afford to pay these salaries and benefits, plus pensions.

Knowing all that, the next time you see Greeks demonstrating and rioting over the "austerity" measures the government says they're going to impose, instead of grinding your teeth and venting your disapproval, remember that the politicians imposing all this austerity are the same ones who – just a short time ago – agreed to all these unaffordable, absurd salaries, benefits and pensions in exchange for the demonstrators' and rioters' votes.

Well, time is running out for this month and we haven't quite gotten to how all this ends and why it's going to come over here to bite us too. So next time we'll pick up our discussion with who the heck lends money to a Greek government – or any government - that operates this way.

For now, just remember that it's important that we all understand that, while the people and their unions have been and continue to make demands that are outrageous, for their part politicians have decided that it was better to just get votes rather than face getting voted out of office by explaining how all this will no-way-no-how end happily.

And as a result, we're all facing off against each other – over there and over here – with no one wanting to back down or even have a reasonable discussion – except maybe for those people Peggy Noonan seems to have scouted out.

Meanwhile Italy slowly but surely has taken center stage in the crisis. And if you thought the Greek situation was impossible, just remember that Italy's economy is the third largest in Europe after Germany and France. Which means more talk about the Euro, the ECB, the ESFS, whether or not Greece – and now Italy – will default, how much of a "hair-cut" banks have agreed to take on the Greek – and now Italian – debt they hold.

Add to that a new round of "solutions" – ones that really will take care of things, not like yesterday's solutions, which didn't really address Italy, where they thought they had a solution. But this time they're going to get it right. Right?

Richard S. Esposito, ChFC
Lighthouse Wealth Management LLC
405 Lexington Avenue, 26th Floor
New York, NY 10174
Tel: 212-907-6583/Fax: 866-924-1952

A Simple, Direct Explanation of the European Debt Crisis and Why It Matters to Us

An Earthquake, a Hurricane and a Snow Storm

What Exactly is the Problem?

What Makes the Problem So Complicated?

What's Simple Isn't Always Easy

Governments Don't Get Smaller – They Only Get Bigger

How Governments Spend Money in the Future