In May of 2013, I published my first commentary that explained how the U.S. Government has been "Cooking the Books" since FY1969 by using Cash Accounting rather than the appropriate GAAP Accounting. This simple little accounting trick, pulled by LBJ and the 90th Congress, has allowed the U.S. Government to overspend and overcommit their income by $98.1 Trillion (our GAAP Obligation) over the last 46 years while only having to admit to $17.9 Trillion (our Cash Debt) of that by using Cash Accounting. By using this corrupt and fraudulent accounting, the U.S. Government has basically ignored the $80.2 Trillion of Unfunded Liabilities that have been incurred by not taxing the U.S. citizens and U.S. businesses enough to fund the social benefits trust funds as required to pay the social benefit commitments that the U.S. Government has made. Actually the U.S. Government has not funded these trust funds at all.
This $98.1 Trillion of undertaxing the U.S. citizens and businesses has been created by an exponentially increasing GAAP basis Deficit spending that was $6.4 Trillion in FY2014 and is now expected to be (see USAPonzi Fiscal Model) $6.9 Trillion in FY2015. This progressively increasing deficit spending over the last 46 years (for a total of $98.1 Trillion), has provided a massive stimulus to the U.S. (and global) economy for the entire life of USAPonzi. I estimate (see U.S. "Real" GDP June 2014) that this stimulus caused our U.S. GDP in FY2014 to appear to be 1.8X what it would have been without this deficit spending stimulus. But providing this massive stimulus to the economy is just one of the major consequences of this use of corrupt and fraudulent accounting. The Anatomy of USAPonzi includes a more detailed list of the consequences of USAPonzi.
A second consequence of USAPonzi that I will discuss here is the asset price bubble (see U.S. Total Assets Bubble) that been created by undertaxing the U.S. citizens and U.S. businesses. Since these U.S. citizens and U.S. businesses did not have to pay this $98.1 Trillion in taxes, they appear to be $98.1 Trillion richer! But at the same time the U.S. Government is passing the liability for these "unpaid tax" dollars on to the future taxpayers, which they will never be able to pay, creating $98.1 Trillion of public liabilities. These "unpaid tax" dollars are therefore counterfeit but today they appear to be real money that magically shows up largely in the pockets of the rich and the very rich.
But if this $98.1 Trillion of "unpaid taxes" is counterfeit as I claim, then what is the "Real Net Worth" of the private citizens and businesses. According to www.usdebtclock.org, U.S. Total Assets (Small Business Assets, Corporate Assets, and Household Assets) were valued as of Oct 3, 2014 at $112.3 Trillion but $98.1 Trillion of that is counterfeit (a public liability) therefore the "Real Net Worth" of the private sector is $14.2 Trillion ($112.3-$98.1T=$14.2T). So U.S. private assets are only worth about 12.6 cents on the dollar ($14.2T/$112.3T=0.126). The U.S. Government is making the private sector (at least the 1%ers) appear to be very wealthy and prosperous by accumulating a massive public liability.
USAPonzi is a magic money machine that systematically transfers counterfeit money from the future taxpayer to the current U.S. citizens and U.S. businesses at the rate of our GAAP basis deficit spending, currently $19.0 Billion a day. This GAAP basis deficit spending creates new but counterfeit money that can be used to buy stuff that U.S. (and global) businesses deliver, making these businesses look prosperous and profitable, and this counterfeit money can also be used to buy the stock in these artificially prosperous and profitable businesses. This is what causes the stock market to be in what is now a 46 year long bull run (see Why Stocks Outperform Bonds!) with of course a few very dramatic pull backs. But $98.1 Trillion of counterfeit money can buy a lot of stuff and buy a lot of stock.
This is also what makes the United States of America looks so productive and prosperous as compared to many other countries around the world. Most other countries do not have the ability to create a magic money machine like the USA, France, Japan, China, etc can create. For most countries, we demand that they be able to pay their debts with real money. What a novel concept!
But that is not the topic of today's commentary. Today I want to expose the gap between the U.S. Government reported FY2014 Cash Deficit of $506 Billion (CBO estimate as of Aug 27, 2014) and the change in the Federal Debt during FY2014. One would expect that if we had a deficit of $506 Billion that our Federal Debt would increase by that same (or at least a very similar) amount during FY2014. However, our Federal Debt is increasing much faster than our Government reported deficit would indicate. Of course my USAPonzi thesis is that the U.S. Government is reporting a $506 Billion Cash Deficit when it should be reporting a $6.4 Trillion GAAP Deficit in FY2014. But for now let's concentrate on the Cash basis reporting.
The following Federal Debt numbers were taken from "debt to the penny" on the U.S. Treasury website which I have captured and posted on this website.
Our gross Federal Debt as reported via "debt to the penny" on Treasury Direct was as follows at the start and end of of FY2014 (Fiscal Year 2014 started on Oct 1, 2013 and ended on Sept 30, 2014):
Oct 3, 2013 $16,747,468,275,799.27 Due to Debt Limit Freeze the Debt was flat for several days.
Oct 1, 2014 $17,875,258,091,207.08
Which means that our Federal Debt increased by $1,128 Billion during FY2014 when the U.S. Government reported a $506 Billion Cash Deficit. How can our Federal Debt increase by more than 2X what the U.S. Government claims?
This is due in part to the Government Shutdown in October 2013. During the Government Shutdown, the Federal Debt limit was not raised and the Government could not borrow during the last few days of FY2013 and the first few days of FY2014. When this Federal Debt limit was relaxed on Oct 17, 2013, the U.S. Treasury borrowed $328.3 Billion, in one day, to catch up with the spending levels during the freeze on the Debt Limit. Therefore some of this Oct 17, 2013 borrowing of $328.3 Billion may have been to cover prior year (FY2013) spending. An alternative and conservative estimate of the change in the Federal Debt during FY2014 would the change in the Debt Level on Oct 17, 2013 as compared to the Debt Level on Oct 1, 2014.
Oct 17, 2013 $17,075,590,107,963.57
Oct 1, 2014 $17,875,258,091,207.08
So our debt increased by $799 Billion from Oct 17, 2013 to Oct 1, 2014 when the Government is reporting a deficit of $506 Billion for the full 2014 fiscal year. How can it be that the U.S. Government is borrowing at least $293 Billion more than the U.S. Government is reporting to U.S. citizenry and to the world?
The U.S. Government is "Cooking the Books" by using Cash Accounting ($506 Billion Cash Deficit) rather than the appropriate GAAP Accounting ($6.4 Trillion GAAP Deficit) and "Cooking the "Cooked Books"" by reporting a Cash Deficit of $506 Billion in FY2014 but yet borrowing at least $799 Billion and possibly as much as $1,128 Billion during FY2014!
This discrepancy is explained in an earlier commentary Debt/Deficit Discrepancy. Because the U.S. Government is not funding the trusts funds for social benefits, it is borrowing and spending the current period social benefit tax revenues that should be put in these trust funds thus creating the illusion that the deficit is smaller than the increase in Federal Debt. The use of Cash Accounting is causing major distortions in our financial system and in our economy.
It is imperative that the U.S. Government implement an accounting methodology that supports and enforces a stable and sustainable Fiscal Policy!
Digging a deeper hole!
The USAPonzi Fiscal Model projects that the U.S. Government will have GAAP basis Deficit Spending of $6.940 Trillion in FY2015 up from $6.422 Trillion in FY2014. That's why the TV pundits are correct in saying that the U.S. is the place to be investing right now if you are prepared to invest in a Ponzi Economy. $6.94 Trillion of Deficit Spending in a nominally $17 Trillion economy should provide some serious economic stimulus in FY2015! The U.S. Government will create another $6.940 Trillion of counterfeit money in FY2015 that will mostly accrue to the 1%ers in the form of "unpaid taxes" and the future taxpayer's liability will increase from $98.1 Trillion to $104.7 Trillion. But that "won't make a hill of beans" anyway since the future taxpayer has just as good a chance of paying a public liability of $104.7 Trillion as he does of paying a public liability of $98.1 Trillion!!!!
Washington, you need to face up to the fact that you are lying to the U.S. citizenry and to the world and start using proper accounting!
Next Page: Fixing Fiscal Policy