The Biggest Ponzi Scheme on the Planet-The U.S. Government
"American Economic Exceptionalism Explained"                     USAPonzi                                      by John W. White   Mar 29, 2013

Cooking the Books!
May 2013


The Federal Government is "cooking the books"!
 
But unlike Madoff, Enron, Worldcom, and Healthsouth; at least the Federal Government is "cooking the books" in plain sight!  The Federal Government is just not telling the U.S. citizenry and the world the whole story regarding our fiscal health.  Now I know that Congress and the White House will deny these allegations and technically they may even be right since the correct numbers can be found if you look hard enough but it is my contention that the way they are presenting our fiscal situation to the U.S. public and to the world does not accurately reflect our "real" financial condition.   Our unfunded liabilities are real and massive financial commitments that are not openly presented in our financial reporting.  Until the current financial picture is accurately reported and openly communicated we stand no chance of getting the situation resolved.


Cash Accounting vs. GAAP Accounting


The primary reason for this misleading communication of our financial status is due to the use of cash accounting for our Federal Government financial reporting rather than the appropriate accrual accounting principles used in GAAP (generally accepted accounting principles) accounting.  In simplistic terms, the following statements indicate the difference between the two methods.  When using cash accounting the cash surplus/deficit is calculated simply by subtracting current period cash outflows (expenses) from current period cash inflows (tax revenues).   With GAAP (accrual) accounting the GAAP surplus/deficit is the current period cash surplus/deficit plus the current period change in present value of future cash inflows and outflows.  It should be noted that public companies are required to use GAAP accounting as their primary financial reporting method.   It should also be noted that the GASB (Government Accounting Standards Board www.gasb.org) is recommending that state and local governments adopt GAAP accounting as soon as feasible so that their unfunded liabilities can be appropriately reflected in their budgeting and financial reporting.


How did this "Cooking the Books" get started?


This problem had its genesis in the Social Security Act of 1935, that being the first major entitlement program of now many entitlement programs.  These entitlement programs, in some cases (Social Security, Medicare, Medicaid, etc.), make promises to pay future entitlement benefits often times for the lifetime of the benefiting individual. These early social benefit programs were established as independent programs each with their own funding from segregated tax revenues that were then used to pay out current period benefits with the excess held in program specific trust funds to pay future benefits.   The money held in these trust funds was to be invested in conservative financial instruments to earn income for these trust funds.  This changed under Lyndon Johnson in 1968-69 when he was forced to deal with the cost of the Vietnam war and the budget issues that war created.   LBJ proposed and got approved a new budgeting approach for the U.S. Government called the "Unified Budget".  This approach allowed him to roll the cost of the Vietnam war under the rug and even claim a budget surplus in fiscal year 1969. 


This "Unified Budget" rolled all of these social benefit programs into the general operating budget.  Sort of?   What it did was roll all of the accrued money ($47 Billion) in these trust funds for these social benefit programs into the U.S. Treasury general fund to help finance $186 Billion of spending in the Fiscal Year 1969 budget, roll the tax revenues from these programs into the general tax revenue stream, BUT left the liabilities for these social benefit programs off budget.  As a result the "Cash-based" general budget got the benefit of the income from these entitlement program revenue streams but did not reflect the changes in the future liabilities of these entitlement benefits only the current budget year payouts for these programs.   


This continued use of "Cash-based" accounting after adopting this "Unified Budget" essentially created an "off budget" credit card on which the Government could charge these future entitlement liabilities.   The Federal Government has been using this credit card for the last 45 years for more and more entitlement programs that do not have to be justified at budget time since as these new programs are first started, they have little to no effect on current period cash expenditures and therefore they do not have to be directly discussed with the public when explaining the cash budget and cash deficit.  When the "Unified Budget" was adopted the accounting method should have been changed from Cash-based to GAAP-basis, but if that had been done then LBJ would not have achieved his objective of paying for the Vietnam war with the "Unified Budget".  No president since that time has dared to propose the switch to GAAP-basis accounting because with each year and with each president the problem (i.e. the deficit and the implied obligation that would have to be reported to the public) got bigger and harder to swallow.  But in any case, GAAP-basis (accrual) accounting is required to accurately reflect the impact of these future liabilities.  In today's Federal Government financial reporting t
here are budget schedules and footnotes that present and analyze these future liabilities but the bottom line budget does not show the consolidated impact of these entitlement programs as is reflected by GAAP-basis accounting.


There are two organizations which I follow that offer estimates as to the size of the charges that have been put on this "off budget" credit card.


The Comeback America Initiative (CAI) keeps a running total of what they call the National Burden (the sum of our national debt and the present value of our unfunded liabilities).
http://keepingamericagreat.org/10-million-a-minute-tour/ (this website is no longer active
)


Shadowstats.com
provides a periodic update of the Federal Government Cash-based Deficit, the GAAP-basis Deficit, the Federal Debt, and the Federal Obligation (the sum of our national debt and the present value of our unfunded liabilities).
Shadowstats.com No. 500 Special Commentary February 5, 2013


The Comeback America Initiative National Burden, as of July 13, 2013, was $73.1T and increasing at an estimated rate of $10Million/minute or $5.3T/year.


The Shadowstats Federal Obligations, as of Sept 30, 2012, were $85.4T and increasing at an average rate of $5.2T/Year over the last 5 years.


Note: I used the Comeback America Initiative data as my primary source for financial data for this website and the associated White Papers for writings published before midyear 2013 when I switched to Shadowstats.com.


One of the issues with accrual accounting is that the discount rate assumed for calculating the present value of future liabilities can have a significant impact on the results presented in the financial reporting and I can only assume that this would at least in part explain the difference between the CAI Burden of $73.1T and the Shadowstats Obligations of $85.4T.  The estimated annual rate of change for the CAI National Burden and the Shadowstats Federal Obligations are essentially the same ($5.3T/$5.2T) and represent a first order approximation of our GAAP-basis Deficit.


Cash-based (Non-GAAP) Reporting for the Federal Government!


LBJ and his friends in Congress came up with the comforting name "Unified Budget" for this change and it does sound a lot better than "non-generally accepted accounting principles" budget but then "Quantitative Easing" sounds a lot better than "printing money" or "counterfeiting".   At least "Unfunded Liabilities" is a term that means what it says.  While the Social Security Act of 1935 was the beginning of the entitlement programs and the seed that started USAPonzi, it is the continued use of Cash-based accounting as our primary budget reporting methodology that has allowed our Government to dramatically expand "The Biggest Ponzi Scheme on the Planet" without having to explain the massive GAAP-basis Deficit we have been incurring to the U.S. citizenry and the world.  


The following Table 1 from Shadowstats.com details the dramatic difference between our Government reported Cash-based Deficit (column II) and the much more informative GAAP-basis Deficit (column V).   In fiscal year 2012 the Government's headline deficit (Cash-based) was $1.1 Trillion while if the Federal Government was reporting (as public companies' are required to report) according to GAAP, the reported deficit would be $6.6 Trillion.   Each year since the turn of the millennium we have incurred a significant GAAP-basis Deficit with a cumulative GAAP-basis Deficit of $54.4 Trillion over these 13 years.

     I                        II                     V                        VI                    VII 

Fiscal               Formal                                        Gross               Total
Year             Cash-Based    GAAP-basis           Federal             Federal
Ended              Deficit             Deficit                   Debt             Obligations
Sep 30           ($Billions)      ($Trillions)           ($Trillions)        ($Trillions)    

2012            $1,089.4        I---> $6.6          I---> $16.2        I---> $85.4                           
2011              1,298.6        I        4.5          I         14.9         I        80.9
2010              1,294.1        I        5.3       $6.2T    13.6   $19.8T   76.3       
2009              1,417.1        I        4.3          I         11.9         I        70.5
2008                 454.8        I        5.1          I--->    10.0         I--->  65.6
2007                 162.8        I        4.2                      9.0                  59.8
2006                 248.2    $54.4T  4.6                      8.5                  58.2
2005                 318.5        I        3.5                      7.9                  53.3
2004                 412.3        I        3.4                      7.4                  49.5
2003                 374.8        I        3.0                      6.8                  39.1
2002                 157.8        I        1.5                      6.2                  35.4
2001                [127.0]       I        4.5                      5.8                  30.3
2000                [236.9]       I--->  3.9                      5.7                  25.9

  
Source: Shadow Government Statistics No. 500 Special Commentary Feb 5, 2013
            Shadowstats.com
Note: Federal Obligations=Gross Federal Debt + Present Value of Future Liabilities

Table 1:  Federal Government Deficit, Debt, and Obligations


As one would expect, the annual change in the Federal Debt approximates the annual Cash-based  Deficit since we typically issue new debt to finance the cash deficit.   However our debt is increasing by more than our "Government reported" Cash-based Deficit since we are immediately borrowing and spending any excess  "entitlement tax revenues" on general operating expenses so the money that should be going into the entitlement trust funds for future entitlement payouts gets added to our Gross Federal Debt.   Plus we have to add the virtual interest on the previously "borrowed" funds (called Intragovernmental Holdings) to our Gross Federal Debt.    So even our "Cash-based" accounting does not accurately reflect the true magnitude of our Cash-based Deficit spending.


Similarly the annual change in our Federal Obligation (and National Burden) approximates the GAAP-basis Deficit but even more variables come into play between these two accounting measures than between Cash-based Deficit and Gross Federal Debt.


I find it almost humorous to hear people say that Social Security and Medicare will be self funding until 2037 or 2045 (or some other future date) so we should not worry about that right now when in actuality the funds collected to finance these future benefits have already been borrowed and spent and now are sitting as IOUs or IOmes on the ledger for the Gross Federal Debt.  Any financial advisor worth his or her salt will tell you it is not a good idea to borrow from your retirement account to finance your day to day expenses, but the Federal Government has been immediately borrowing and spending each and every "excess" entitlement revenue dollar for each and every year since fiscal year 1969.


An interesting observation that is evident in the Table 1 above is what happened in fiscal years 2000 and 2001.   President Clinton gets accolades for being the only president to preside over budget surpluses since LBJ pulled his "Unified Budget" trick in fiscal year 1969.  This table shows that while there were "Government reported" Cash-based Surpluses in 2000 and 2001 both years had huge GAAP-basis Deficits: 2000 (a deficit of $3.9T) and 2001 (a deficit of $4.5T).   The "Government reported" Cash-based Surpluses in 2000 and 2001 (also in 1998 and 1999) were the result of the significant tax revenue windfall that was produced by the stock market spike caused by the inflating of the Internet Bubble and really were not  surpluses at all if the Government was reporting its financial condition correctly.   And even these reported Cash-based Surpluses were not in fact surpluses since the Government borrowed and spent future year entitlement trust fund money so our Federal Debt continued to increase even during the Cash-based "surplus" years.   Our Federal Debt has increased each and every year since fiscal year 1969  ( see U.S. Government Financial Data (1969-2012) ) and until 
USAPonzi is addressed or implodes it will tend to rise at an increasing rate.  As time goes on our Unfunded Liabilities (currently $57-69 Trillion and rising by over $4 Trillion per year) will have to transition to formal Federal Debt.


LBJ kicked off the USAPonzi scheme!


By creating this "Unified Budget", LBJ "borrowed" from the Government's social benefits nest egg to close his operating budget gap and we have never been able to pay back what was borrowed nor have we been able to restart a savings plan for these "entitlement" benefits.  While LBJ gets the credit/blame for starting USAPonzi, I contend that every president and every member of Congress since 1968 knew or should have known that the Federal Government was reporting our financial condition incorrectly by using non-GAAP (Cash-based) accounting and was running a massive Ponzi scheme as a result of this accounting trick.  


The unfunded liabilities that are on this credit card are a fully committed (promises to recipients) line of credit that the Government has taken out backed by the taxpayers that the Government draws down on as necessary to meet these committed liabilities as they come due.  That is why President Obama is correct when he says raising the debt ceiling should be an unnecessary step in the budgeting process.  The horse is out of the barn.  These commitments have already been approved by Congress so the executive branch must have authority to meet the Government's obligations.   At that point it is too late for Congress to say "king's x" we really didn't mean to spend that money.


Who will get the credit/blame when USAPonzi implodes?


While it is clear to me that it was on LBJ's watch that USAPonzi was started, it is unclear when it will implode.  I frankly think the problem is becoming acute enough that it could possibly happen during President Obama's second term.  As I say in My Conclusions (and give a detailed analysis of in U.S. "Real" GDP), our total financial commitments as a percent of GDP are more than 4 times what they were at the start of the Great Depression and basically half of that is the $57 Trillion that has been charged to this "off cash budget" credit card.  I do not know who it will be that finally stands before the U.S. public and says; "oh by the way we have $57 Trillion ($69.2T according to Shadowstats) that has gone missing" but whoever it is they will not be a popular person.


Federal Burden/Obligations Tsunami!


As a result of using these inaccurate accounting principles and the deficit spending that it has concealed, we have this huge financial liabilitiy that will hit us like a tsunami in the near future and very few people even have a clue that it is coming.   Yes some people say we should be worried about the $16.9T federal debt (and we should be worried about that since there is no way in the world we can pay that debt) but the big enchilada is the $73T National Burden/or $85T Federal Obligation.   As I explain in USAPonzi March 2013, our tax revenues of $2.5T/year are totally
swamped by current year expenditures so of course we have no hope at all, with current fiscal policy, of paying down any of our $16.9T national debt let alone our $73T-$85T Burden/Obligation.  As Shadowstats.com clearly demonstrates in Table 1 above, our problem is getting worse very rapidly and John Williams (author of Shadowstats.com) states; "hyperinflation is a virtual certainty".    I agree with him that unless Congress gets serious (see Take away the Punchbowl) about preserving the value of the dollar and makes dramatic cuts to our entitlement promises and other Government spending, there is no way to avoid the hyperinflation result (see Hyperinflation/Austerity).


Next page:
Debt/Deficit Discrepancy