In this commentary I will explain why the U.S. stock market and in fact all U.S. private assets are dramatically overvalued. This is caused by the U.S. Government assuming public liabilities so that the value of private assets appear to increase. By using Cash Accounting vs. the appropriate GAAP Accounting, the U.S. Government has made the decision to not fund the social benefit trust fund, dramatically reducing the taxes paid by the U.S. citizens and U.S. businesses. This has dramatically increased the apparent wealth of the prosperous U.S. citizens and U.S. businesses but leaves the social benefit recipients with nothing in the social benefit trust fund when the U.S. Government has promised that it will pay them $86.4 Trillion worth of social benefits. This has allowed the U.S. Government to operate "The Biggest Ponzi Scheme on the Planet"; USAPonzi.
Cash Accounting vs. GAAP Accounting
The fundamental cause of USAPonzi is the use of an improper accounting methodology. By using Cash Accounting, the U.S. Government is ignoring the future expense of the U.S. Government's social benefit promises. GAAP Accounting, sometimes called Accrual Accounting, says that if you make a commitment to make a payment in a future period, you must accrue (collect or set aside) the present value of that future commitment as a current period expense. In the case of our social benefits, that means we should fund (add money to) the social benefit trust fund, when each new social benefit recipient becomes eligible for a benefit, so that the U.S. Government can pay that future liability as it comes due. For the last 46 years the U.S. Government has not been funding the social benefit trust fund creating what is now estimated to be $81.3 Trillion of Unfunded Liabilities.
GAAP Accounting therefore recognizes not only the current period Cash Deficit/Surplus but also includes any change in the present value of future commitments creating what is called the GAAP Deficit/Surplus. Just as the cumulative effect of our Cash Deficits is our Cash Debt, the cumulative effect of our GAAP Deficits is our GAAP Obligation which is the sum of our Cash Debt and our Unfunded Liabilities.
The U.S. Government is overspending/undertaxing in FY2015 by $0.5 Trillion on a Cash basis and by $6.5 Trillion on a GAAP basis. The U.S. Government has overspent/undertaxed through Dec 1, 2014 by $18.0 Trillion on a Cash basis and by $99.3 Trillion on a GAAP basis. Now the U.S. Government has no way to pay the promised social benefits since the social benefit trust fund is short by $86.4 Trillion but the prosperous U.S. citizens and U.S. businesses are $99.3 Trillion richer because the U.S. Government chose to overspend/undertax by $18.0 Trillion and to not make provisions for how it would pay the $81.3 Trillion of now Unfunded Liabilities for promises made to the social benefit recipients (see Empty Promises to the Underprivileged). This has introduced $99.3 Trillion of counterfeit money into the U.S. (and global) economy making the rich appear to be very rich while leaving the underprivileged to face financial devastation (see The $100 Trillion Counterfeit Money Machine).
By using Cash Accounting instead of the appropriate GAAP Accounting the U.S. Government is printing counterfeit money at the rate of our GAAP basis Deficit Spending which in FY2015 is projected to be $6.5 Trillion. This Deficit Spending is stimulating the U.S. economy causing our GDP to be nearly twice what proper accounting would indicate (see U.S. "Real" GDP FY2015). The Fed's irrational monetary policy is not what is causing the distortion to our economy. The Fed is only printing enough money to cover up for our Cash basis (real) overspending. The U.S. Government is printing virtual money at a rate that is 5-6 times the rate at which we are having to borrow real money as determined by the ratio of our GAAP Obligation (virtual debt) to our Cash Debt (real debt) ($99.3 Trillion/$18.0 Trillion = 5.5) as of Dec 1, 2014.
Author note: I refer to our GAAP Obligation as our virtual debt since our GAAP Obligation is our Debt plus Unfunded Liabilities and we will eventually have to borrow the money to pay our Unfunded Liabilities as these future commitments come due.
If we look at what happened in FY2014, the rate of increase of our virtual debt to our real debt is very similar to the ratio of our current virtual debt to our current real debt. The following table shows our Cash Debt and our GAAP Obligation at the end of FY2013 and FY2014.
Cash Debt GAAP Obligation (Debt plus Unfunded Liabilities)
(real debt) (virtual debt)
Sept 30, 2013 $16.7 Trillion $91.6 Trillion
Sept 30, 2014 $17.8 Trillion $98.2 Trillion
Increase $1.1 Trillion $6.6 Trillion
Ratio of virtual debt increase to real debt increase = ($6.6T/$1.1T = 6.0)
Data Source USAPonzi Fiscal Model which is derived from www.usgovernmentspending.com and www.shadowstats.com.
While the TV talking heads seem to focus on the Fed's monetary policy as the issue that is stimulating the economy it is the U.S. Government's fiscal policy that is the real stimulus. The Fed is NOT the Problem! The U.S. Government IS the Problem!
U.S. Total Asset Bubble
This means that U.S. citizens and U.S. businesses as a group appear to be a lot wealthier than they really are since they still owe this $99.3 Trillion even though it does not show up on their balance sheet. It is on the balance sheet (if the Government was using proper accounting) of the U.S. Government. As long as you assume that the future taxpayer can magically come up with $99.3 Trillion (our GAAP Obligation that is growing exponentially) then the private citizens and businesses are really rich otherwise we have just moved $99.3 Trillion (our GAAP Obligation) from the public pocketbook into the private pocketbooks of the U.S. citizens and U.S. businesses.
As of Dec 1, 2014 we have $113.4 Trillion of U.S. Total Assets (the private net worth of all U.S. Households, Corporations, and Small Businesses) as reported by the Federal Reserve Bank. If the U.S. Government was operating with proper GAAP Accounting and a balanced GAAP basis Budget, the "Real" Net Worth of all U.S. Households, Corporations and Small Businesses would be $14.1 Trillion. By undertaxing the U.S. citizens and businesses the U.S. Government is stuffing counterfeit money into their pockets.
Perceived Net Worth $113.4 Trillion (source www.usdebtclock.org)
- Federal Debt $18.0 Trillion
- Unfunded Liabilities $81.3 Trillion
= "Real" Net Worth $14.1 Trillion
Ratio of Perceived Net Worth to "Real" Net Worth = $113.4T/$14.1T = 8.04 which means that the "real" private net worth is only about 12.5 cents on the perceived dollar.
Bottom line is that the U.S. Government is making U.S. citizens and businesses appear to be 8 times as rich as they really are by undertaxing the U.S. citizens and U.S. businesses by $99.3 Trillion due to our GAAP basis Deficit Spending over the last 46 years.
See U.S. Total Assets Bubble for a historical look at how this asset bubble has evolved over the last 46 years.
That is why I say that the Stock Market is overvalued by nominally 8X if you assume that the Stock Market is linear with U.S. Total Assets. There is a possibility that the Stock Market is more overvalued than U.S. Total Assets since stocks may be more volatile than other assets such as bonds and real estate due to the more active real time "mark to market" trading of stocks.
Because of this undertaxing of U.S. citizens and U.S. businesses, they appear to be 8 times wealthier than they really are and most of this difference is because the U.S. Government is using Cash Accounting rather than the appropriate GAAP Accounting and is a result the U.S. Government is not funding the social benefit trust fund. If the current taxpayer does not have to come up with that $86.4 Trillion ($81.3Trillion of Unfunded Liabilities and $5.1Trillion of intragovernmental borrowings) for the trust fund to pay for the social benefits or for the $12.9 Trillion that the U.S. Government has borrowed from the public, they can appear to be really rich.
I estimate that (as of May 2014) $55.9 Billion of Warren Buffett's $65.2 Billion net worth was due to this GAAP basis undertaxing (see The Buffett Investing Genius Magnified).
This is why I say that we have $100 Trillion of Counterfeit Money (our GAAP Obligation) in our financial system. The U.S. Government has been creating this counterfeit money out of "thin air" with GAAP basis Deficit Spending for the last 46 years. This money is counterfeit because it is to be paid by the future taxpayer that already has all of his/her tax revenue (and more) committed to current period expenses.
This is why I do not invest in the Stock Market. The U.S. Government is using corrupt and fraudulent accounting to make the rich appear to be 8X richer, to over pay the direct and indirect government employees, and to cheat the underprivileged by not funding the social benefit trust fund (see The U.S. Government is Corrupt and Fraudulent!).
The U.S. economy, and in fact the global economy, is living on the GIANT CREDIT CARD of the future U.S. taxpayer that currently has an outstanding balance due of $99.3 Trillion. And the way USAPonzi works, the amount that this outstanding balance increases each year is growing exponentially. It is just like your mastercard, if you don't make the minimum payment you have no hope of ever paying it off. We make no payment on this GIANT CREDIT CARD. The balance on the future U.S. taxpayer's GIANT CREDIT CARD is increasing each year by twice the U.S. Government's annual income from the taxpayer.
Because of our current fiscal policy, the U.S. Government is running
"The Biggest Ponzi Scheme on the Planet"; USAPonzi.
This distortion will continue until the U.S. Government adopts GAAP Accounting and commits to a balanced GAAP basis budget.
Next Page: Fixing Fiscal Policy