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2012 Financial Report of the US Government

I have written about this overlooked report for about ten years now.  I feel like a lonely warrior defending a tough location, with little assistance. If I could give a subtitle here, I would call it “Lies of the Past, Present, and Future.”  If I were more poetic, I would call it, “The end of a once Great Nation, Bedeviled with Corruption.”

This report is so despised by the US Government, that they always release it at a time where it will be buried by the news cycle.  This year is no different; they released it near the inauguration.  As an aside, I have talked with a representative from the group that puts this together, and they like me because I publicize it.  They called me to ask for advice on how they can make it better.

I may not be much, but I get 2-3 calls per year from government agencies asking for advice.  I block out at least an hour for them; it’s the least I can do for my country.  The last one from the GAO thanked me profusely.  They said they talked to many other people, but few that made the issues so clear.

Let me give you the first graph:

Excluding the times when new social entitlements were added, or added to the report, the unfunded liability of the US Government tended to increase at a rate of 9%, because less was being contributed to the social insurance programs than was necessary to keep up with the liability.  We have cheated these programs since the beginning, as a political ruse to gain favor for them, and giving a huuge subsidy to all who came before the baby boomers… now the price tag is coming due, and it ain’t pretty.

In the graph above, I attempt to explain two scams of the US government.  They stem from the same source — PPACA (Obamacare).  First, the true cost of PPACA was a lie.  Taxes were front-ended.  Benefits were back-ended.  The net benefit is gone now, and we face the black hole of insufficient taxes to meet benefits.  Second, Medicare was raided by reducing reimbursements, which C0ngress then undoes. There is no true savings, and there can’t be; government almost never produces anything as efficiently as the private sector.  It is normal for government to downplay the initial cost so that the program will be approved.  Once approved, cost overruns are the norm.

As such I expect the liability to grow until it is broken, or until it breaks us.  I am not trying to be a Scrooge, I am just trying to point at what may break the system, and produce a greater heartache.  A broken government is worse than one that does less, but survives.  One who is heartless continues to add liabilities to a system that can’t afford them, e.g., Bush 43 and Obama, rather than doing the tough work of scaling back entitlements so the past promises and the system survives.

In the above graph, what I call alternative Medicare Scenario, is the alternative scenario in the report which is the more likely scenario, which assumes that Congress does not enforce lowered medicare reimbursement that PPACA required (a dishonest aspect of the bill).  The portion called “Obamacare and Redefinitions” is my estimate of assumption changes that reflect an effort to make things cost less that will be undone as the true costs emerge.  No one is trying to be honest here — those writing the report, and the actuaries at the Social Security Administration are doing their best, but the politicians that passed PPACA twisted the math to make it look like a win for the American people, and bit-by-bit, it will be revealed to be a loss.

One more note: I have added into my estimates the “Infinite Horizon Increment,” which adds in the present value of the net value of entitlements beyond 75 years from now.

Here’s my second graph:

Here is where the past gets cheated: as I did this graph, I noted that GDP figures had been revised down from past estimates.  This makes recent growth look better than before, which people care about today, and past growth look worse, which few care about much.  (Note: the adjusted ratio takes out the wishful thinking of the Obama Administration.)

Regardless, watch the upward march of liabilities versus GDP… this is the march of rising promises that will eventually be broken.  Maybe we need a Constitutional Convention to sort this out, because the politicians just keep adding to the problems, and we keep re-electing them.  The US was originally based on a concept of limited government, with most domestic powers granted to the states.  That has been overturned, and over the last 100 years, big government as the protector of little people who cannot fend for themselves has been the policy.

Maybe I should go back to my saying, “Bubbles are predominantly phenomena of finance.  They continue to exist until the asset in question yields less than the liability that carries it.”  We await the moment where the majority of assets no longer trust the US Dollar, which would have been sooner than this, but most major nations have compromised their currencies to satisfy politically important exporters, in this “beggar thy neighbor” world, importing asset bubbles in their wake.

Unsustainable policies are the rule of the day.  I don’t what what will come of them, whether it will inflation or deflation, higher taxes or reduction in spending.  But a day is coming where we will be forced to choose, and under conditions less favorable than if the choices were made now.






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5 Responses to 2012 Financial Report of the US Government

  1. woolybear1 says:

    A very scary post, one of your best. Keep up the good work please.

  2. [...] The Hill America’s deficits: The problem is more than fiscal – Summers, Washington Post 2012 Financial Report of the US Government – The Aleph Blog What Is Driving Growth in Government Spending? – FiveThirtyEight How [...]

  3. Greg says:

    In the 5-10 years ending September 10th, 2001 … we had dozens of US government agencies that “knew” something was up with al-qaeda (or they at least knew a big part of the picture).

    Before the smoke had cleared from September 11th — we learned that the attack had not been stopped because this agency of the government did not talk to or listen to this other agency.

    So in the last 5-10 years, we have this part of government (that produced this report) showing quite clearly that the US government is actuarily bankrupt and continues to grow spending much faster than GDP (aka our ability to pay for it).

    We grow spending 9% annually (and faster when some con-artist politician promises new benefits). Yet GDP has historically grown about 4-5% in nominal terms; although much slower in the post-2008 “recovery”

    And yet, another part of government refuses to talk to or listen to the facts. They insist there is nothing to worry about. The subprime contagion is well contained, just a temporary liquidity issue. And the really big whopper lie: There is no spending problem.

    Spending increases twice as fast as the underlying economy — yet that is not a problem?

    And its not like the US government doesn’t know about the crisis — we have another case where agency “A” has the data but agency “B” refuses to listen / share intelligence about its own economy (aka tax base).

    So what is it going to take for the US government (aka “we the people”) to pull our heads out of our rear ends and accept that we have a spending problem? Please tell me we aren’t going to wait for an economic version of 9/11?

    • alex edgar says:

      Yes, we are because we Hope not to have to Change.
      (and just like children, we don’t respond to words (oh no! Moody’s downgraded US debt!); we only respond to actions (suppose our gov’t borrowing costs jumped from 1.8% to 8.8% because people wouldn’t lend to it anymore, finally realizing what a Nation of Deadbeats we are?)

  4. cig says:

    I’ve only skimmed the report very briefly but it seems to me methodologically flawed (as much as similar reports produced by other governments): it seems to project current policy to 2086… come on, we already have only a vague idea of what the world will look like at Christmas this year…

    in practice what happens in 2086 will be decided there and then by people alive at the time. discounting far into the future is a bit futile because we don’t know the future, maybe technology will have progressed so much that $20 per capita per year gives top notch healthcare and then there’s no problem. if it’s expensive, people alive then will make the choices of the sort of mix of benefits and taxes they want.

    that may mean reneging on some promises made now, but that has always been like that, we can only imagine the future, not control it. of course ideally politicians (or anyone else) shouldn’t make any commitment (much) beyond the end of their mandates, but well it’s a human failing that in the end is rather harmless: future people will have no problem ignoring mistaken projections of their reality and will do as they wish.

    also, if doing a discounting exercise, it seems to me inconsistent to apply it only to medicare and a few select other things. most people in a developed country expect to keep on benefiting from maintained roads, street lighting, and many other government services, why not discount the next 60 years of road maintenance as well (or at least the prorata expected usage of people alive today) and all the rest, and add some more trillions to the liabilities for effect?

    the negative valuation is also ridiculous, it implies that nobody would bid if the US was putting itself (or parts thereof) up for sale…

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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