You are encouraged to sit and take a deep breath before reading this. We will not be precise here (but close enough) in looking at the U.S. national debt situation, which at the end of 2008 was composed of Social Security obligations accruing to $6.6 trillion (T), publicly held debt including civilian and military retirement benefits of $13.5 T and health-care obligations of $36.3 T for the existing population.
Total operating debt accrued was $10.8 T entering the year and various stimulus actions to date in 2009 added another $1.8 T. So as you read this late in 2009, America has debt obligations of $69 T and a gross domestic product last year of $14.2 T, likely to be less in 2009. So, the public debt as a percentage of GDP is 485.9%, by far the worst ratio of any country on Earth. Glad you were sitting down?
Using economic data sources (CIA, OECD and IMF) to determine this ratio for example nations, in descending order, reveals: Zimbabwe 241.2%, Japan 170.4%, Italy 103.7%, Egypt 84.7%, India 78%, Germany 62.6%, Canada 62.3%, Switzerland 44%, Mexico 20.3%, China 15.7%, Australia 15.4% and Russia 6.8%.
America is twice as bad off as Zimbabwe, the world’s premier basket case. Making matters worse, the U.S. has an economy many thousand-fold bigger, so failure is devastating both at home and abroad. If America does nothing and merely allows its debt balloon to exist, debt interest increases $2-3 T annually. As you read this, U.S. debt exceeds the combined net worth of all U.S. households, including assets in real estate, corporate stocks, private businesses and all consumer goods. The shortfall is $195,152 for every living American in all U.S. households (116,783,000).
The outlook is not good for an economy where unemployment was 5.5% in 2004, 8.9% in April 2009 and 9.7% in September 2009 as a means to improve the private-sector economic recovery and, therefore, enhance the tax base. All this presents a nervous situation because raising taxes is politically risky, more “print money and borrow” deficit spending is not feasible (as the Chinese have pointedly us) and where almost a third of all home loans are upside-down. All of this is happening when U.S. financial markets remain a hall of mirrors.
Let me state that this is not my mental aberration. During the last two weeks of August, the U.S. government reportedly transferred between $1-2 T offshore to meet “obligations,” personally attended by Messrs. Geithner and Bernanke in Asia, for the government. It was reported to me that this was “T-Bill redemption” and that other creditors have asked and received similar “back and fill” actions. My message is that a growing chorus of investors is expressing concern about faith in the dollar. All of this is exacerbated by the under-regulated financial sector of the economy that has raped and pillaged in recent times, without recourse.
Raping and pillaging can be countered. A first issue for correction is federal use of “off-budget” gimmicks, unrecorded liabilities and financial manipulations that would put private-sector people in jail. A double standard allows government (Congress and the President) to misrepresent facts and fiscal conditions. America needs restoration of integrity in the budget process and GAAP (generally accepted accounting procedures). This would return sanctity and reality to accounting and force disclosure of all federal appropriations and spending commitments. All 50 states and 84,000 state and local governments use GAAP. Go figure: Federals don’t use GAAP and don’t go to jail, but the Federal Accounting Standards Advisory Board recommends the procedures.
What GAAP processes could allow include:
- A line item veto to enable the President to rescind individual appropriations unless specifically overridden by both Congressional bodies in simple majority vote.
- A biennial budget that requires Congress to balance the budget, avoiding the practice of treating long-term expenditures as current expenses and force consideration of associated long-term liabilities.
- Consideration of “credit budgets” acknowledging that loan guarantees are not free.
- Creation of two separate budgets (a capital and an operating budget) to allow understanding of “cash or credit budgets.”
- Accrual accounting that correctly records future economic obligations.