US Federal Obligations Exceed GLOBAL GDP

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machinehead's picture
machinehead
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US Federal Obligations Exceed GLOBAL GDP

In an interview with Jerome Corsi, John Williams of ShadowStats
summarizes the U.S. government's Financial Report of the United States
for the past seven years. These reports are based on accrual accounting
-- that is, the accounting used by every one of the S&P 500
companies, because of the fact that they have long-dated obligations
such as corporate debt and pension plans. Usgov has long-dated debt and
benefit plans as well, but deceptively uses cash accounting because it
produces smaller deficits. Make no mistake: this is outright fraud, for
which a publicly-traded company's management would go to prison.

Anyhow,
when proper accrual-based accounting is applied, the present value of
unfunded federal obligations has reached $65.5 trillion, which exceeds
the annual GDP of the entire planet. That happened because the
accrual-based annual deficit has averaged $4 trillion a year during the
past 7 years. Just to put that in perspective, Usgov's annual income
averaged around $2 trillion during the period. So it was earning $2
trillion, spending or committing to $6 trillion, and producing a
deficit of $4 trillion.

Williams offers this conclusion: "Put simply, there is no way the government can possibly pay for the
level of social welfare benefits the federal government has promised
unless the government simply prints cash and debases the currency,
which the government will increasingly be doing this year."

http://www.worldnetdaily.com/index.php?fa=PAGE.view&pageId=88851

To
his statement, I would add that this absurd, preposterous level of
overcommitment illustrates the human tragedy of money illusion. With
the Federal Reserve's magic-beanstalk 'elastic currency,' the federal
Treasury literally appears to be a bottomless well for everyone. How
often do you hear state and local officials invoke the need for
'federal funding'? Unlike these governments, which actually have to tax
or borrow to balance their budgets, Usgov can just print and promise, ad infinitum. Or so we thought.

In
practice, the need to borrow and then monetize the debt service each
year ultimately 'goes exponential.' When interest rates start to rise,
debt service goes up, and rates rise further, the financial process
'goes critical' like a nuclear reactor overheating. 'Overheating' in
this context means hyperinflation. The subsequent 'meltdown' refers to
deflationary social collapse.

How could a society smart enough to fly to the moon be so stupid about
money? How could a country with thousands of PhD economists, some of
them Nobel Prize winners, drive off the cliff this way?
Here is my answer. Democratic government coupled with paper money
contains perverse incentives which guarantee this outcome. Paper money
is a doomsday mechanism. After the social crash, paper money must be
forever outlawed as an intrinsic, prima facie fraud.

When
most mainstream economists have been co-opted into being accomplices in
this vast criminal fraud, they are not in a position to help us. We've
got to help ourselves. Home economics, not fiat economics.

cmartenson's picture
cmartenson
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Re: US Federal Obligations Exceed GLOBAL GDP

Well, there it is all right there.

One of the pieces of information that can suffice as theentire context for a much larger conversation is the fact that the US government is insolvent.  

Whether these obligations are foisted back upon on an angry electorate (unlikely) or are "met" by printing (likely), the situation does not have a happy resolution.  This means it's not a problem, it is a predicament.

My goal is to surface the idea that we do not have an economic problem so much as we have an illness in the monetary system itself.   This is nicely reflected in the post above, although it goes further to lay the claim that paper money and Democracy are incompatible. 

Often when the insolvent condition of the US government/nation is raised, people will argue back that other countries are in worse shape as though this somehow mitigates the US condition.  While this may be a true statment of comparison, I fail to see how it has any real relevance to how things turn out in the US.  It's kind of like arguing that one car is in better shape  because it is only missing 3 tires compared to the another which is missing 4.  

 

csstudent's picture
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Re: US Federal Obligations Exceed GLOBAL GDP

I need to back up and ask a basic question about this.  I get confused by statements such as "the present value of unfunded federal obligations has reached $65.5 trillion."  I agree this is a huge number and unless radical changes are made will cause major problems.

However, my mortgage principal exceeds my personal annual GDP, but since I make payments on it over several years, I don't have a problem with it. Likewise, the 65.5 trillion dollar figure isn't being paid back in a single year.  If it had to be, obviously we should all stockpile food and head for the hills now.  However, if it's spread out of 100 years, that's not nearly as overwhelming.

So, what am I overlooking? 

 

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Re: US Federal Obligations Exceed GLOBAL GDP

"However, my mortgage principal exceeds my personal annual GDP, but since I make payments on it over several years, I don't have a problem with it. Likewise, the 65.5 trillion dollar figure isn't being paid back in a single year."

The difference here is if you report to the IRS how much debt you have you MUST include your full mortgage value, and not a yearly value of outlays that put against your mortgage.  Because in fact that would be much LESS debt than you actually have.  That is what the Government has done for years, not to include the full amount of current Social Security and Medicare obligations would be the same as you only reporting to the IRS the amount of payments you make per year as your actual debt, when in fact that is false.

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DrKrbyLuv
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Re: US Federal Obligations Exceed GLOBAL GDP

Thanks for the great post machinehead

machinehead said:

To
his statement, I would add that this absurd, preposterous level of
overcommitment illustrates the human tragedy of money illusion. With
the Federal Reserve's magic-beanstalk 'elastic currency,' the federal
Treasury literally appears to be a bottomless well for everyone. How
often do you hear state and local officials invoke the need for
'federal funding'? Unlike these governments, which actually have to tax
or borrow to balance their budgets, Usgov can just print and promise, ad infinitum. Or so we thought.

In
practice, the need to borrow and then monetize the debt service each
year ultimately 'goes exponential.' When interest rates start to rise,
debt service goes up, and rates rise further, the financial process
'goes critical' like a nuclear reactor overheating. 'Overheating' in
this context means hyperinflation. The subsequent 'meltdown' refers to
deflationary social collapse.

Excellent analysis!

machinehead said:

How could a society smart enough to fly to the moon be so stupid about
money? How could a country with thousands of PhD economists, some of
them Nobel Prize winners, drive off the cliff this way?
Here is my answer. Democratic government coupled with paper money
contains perverse incentives which guarantee this outcome. Paper money
is a doomsday mechanism. After the social crash, paper money must be
forever outlawed as an intrinsic, prima facie fraud.

I think you may drifting from the bigger issue by saying: "Paper money
is a doomsday mechanism."  I don't think the cyrrency matters in our case.  After all, we had a gold backed currency leading to the great depression - that didn't save us, in fact many experts will argue that the Great Deppression is the reason we don't have any gold now.  Sure, fiat currencies have failed over and over, but - has one ever been implemented with a sound monetary system?

The currency is secondary to the monetary system and ours is corrupt and terminally flawed. I don't think a democracy (republic), or a sound monetary system  is possible when a nation subjugates its most important power to a small group of private bankers.  We are a client state.

For example, look at the way the stimulus package was handled.  First Obama gave a teleprompter speech and says the details for the money stuff would come the next day - via Treasury czrar Geithner, and we are assured "it will be good."  Then Geithner shows up the next day without any details and explains - details are still be being worked out.

The details are being worked out in private meetings between policy makers and the big banks - clearly, at a minimum this is a huge conflict of interest.  Why is there no public debate?  Our congress is simply handed over a thousand pages of a proposed bill with no time to even read it - yet alone challenge or offer alternatives.

As you said, we are insolvent by any standard accounting measure - and the amount of debt, still growing, will take several generations to repay - if ever.  While this is insanity for a nation - it enriches and empowers the Non-federal Reserve Bank.  My personal belief is that any real solution must begin by abolishing the Federal Reserve Banking System.

Larry      

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csstudent
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Re: US Federal Obligations Exceed GLOBAL GDP
Craigmandu wrote:

"However, my mortgage principal exceeds my personal annual GDP, but since I make payments on it over several years, I don't have a problem with it. Likewise, the 65.5 trillion dollar figure isn't being paid back in a single year."

The difference here is if you report to the IRS how much debt you have you MUST include your full mortgage value, and not a yearly value of outlays that put against your mortgage.  Because in fact that would be much LESS debt than you actually have.  That is what the Government has done for years, not to include the full amount of current Social Security and Medicare obligations would be the same as you only reporting to the IRS the amount of payments you make per year as your actual debt, when in fact that is false.

Thank you for your reply and I understand what you're saying.  However, I think we're talking about two different things that can and often are overlapping.  I see two issues here - the reporting issue and the ability to pay.  In the crash course, Chris does an outstanding job showing how the government manipulates numbers to get values that they want.  I don't think anybody disputes this point.

What I was worried about was the ability to pay.  So, if the government had to come up with 65 trillion dollars today, obviously that's a major problem.  If they have to pay a little bit every year for 100 years, it's not nearly as big of a problem.   

Craigmandu's picture
Craigmandu
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Re: US Federal Obligations Exceed GLOBAL GDP

Csstudent,

Quote:

I need to back up and ask a basic question about this.  I get confused by statements such as "the present value of unfunded federal obligations has reached $65.5 trillion."  

 Ability to pay is not debt, and is not Obligations (I read that as all Obligations, which in standard accounting means debt as well).

You could have the ability to pay a credit card minimum payment of 100 a month for 200 years, but you would still have a huge debt on that credit for the majority of that time.

When debt is reported, which is what we are talking about, the entirety of that debt has to be taken into consideration and reported as such.  Without it, you can't have things like income/debt ratios, etc... because the numbers are artificially downplayed.  Another thing to consider is the Medicare and SS debt levels are based off of todays values and will do nothing but increase as the system itself isn't sound in nature and are a ponze (is that how you spell that?) scheme by robbing current SS tax from Paul to pay the dividend on Mike (All the while adding up Paul's tax and formulating a figure for him when it is his turn).  If Government was prudent and didn't dip into that money pool, or take funds to pay for other things, then maybe the SS wouldn't be such a debt number. 

In either case, "Ability to Pay" isn't a concern with a system in which money can be printed at a whim.  Ability to sustain however comes into question when the debt levels rise so much that bonds can no longer be sold (due to being worthless) to raise capital, and the value of the currency has dropped significantly due to the printing the "Ability to Pay".

Of course our Government can pay it's debts if it really wants to, however, that can only be accomplished in 3 ways:

Taxes - Would have to be raised significantly to pay our way out of our current position

Bonds - This is simply another debt instituting method giving interest out to buyers and thus only can help short term and in the long run, is more of a debt burden.

Printing - Simply put in artificial money to pay off the debts and thus causing massive Inflation that drops the currency level so low that it will be impossible to stay on the dollar.

The only other method would be for the Government to invest and acutally "make money" off tax money.  This won't happen for the sheer reason that it would allow the government to control markets and thus take away the "free market" society.

 

Craigmandu's picture
Craigmandu
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Re: US Federal Obligations Exceed GLOBAL GDP

One more thing.  According to everything I've seen we are at a massive budget deficit and have been for many years, in which case the Government is already borrowing to pay current debts.

machinehead's picture
machinehead
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Re: US Federal Obligations Exceed GLOBAL GDP
csstudent wrote:

My mortgage principal exceeds my personal annual
GDP, but since I make payments on it over several years, I don't have a
problem with it. Likewise, the 65.5 trillion dollar figure isn't being
paid back in a single year. If it had to be, obviously we should all
stockpile food and head for the hills now. However, if it's spread out
of 100 years, that's not nearly as overwhelming. So, what am I
overlooking?

This is a very reasonable question. In
fact, I like to reduce incomprehensibly large numbers (trillions) down
to family size to get a handle on them. Another point which csstudent
implicitly raises is that $65.5
trillion of debt is a stock quantity, while a similar level of global
GDP is an annual flow quantity,
not a cumulative amount. One crossing the other is purely a numerical
coincidence, not a clearly-demarcated transition from surplus to
deficit.

The
underlying question is debt servicing capacity. A conservative
guideline for a family used to be that they could afford a house
costing 2.5 times their annual income. A mortgage equal to 80 percent
of the house's value would represent twice their annual income.
Assuming an interest rate of 5 percent, property taxes of 3.5 percent,
and maintenance and utilities of 1.5 percent, then annual expenses on
the house would be around 20 percent of their gross income. Adding in
principal repayment would bring total housing expenses up toward 25
percent of gross income, another conservative limit.

How does the federal government look, when we apply these family-based ratios? Gross obligations of $65.5 trillion divided by annual gross income of $2.5 trillion gives a ratio of 26.5 -- TEN TIMES HIGHER than the 2.5 times recommended for a family's house value/income ratio -- typically their largest financial obligation.

Assuming a 4.6 percent interest rate on $65.5 trillion of obligations (4.6 percent is the average interest rate over the last 4 years -- the average maturity of Treasury debt), it would require annual set-asides of $3.0
trillion just to service that fixed amount.
Now let's apply the '25 percent of gross income' guideline mentioned earlier. To be carrying a $3.0 trillion annual interest nut, Usgov really should have a gross income of four times that amount, or $12 trillion. Plus, it would need another $4 trillion annual income to bring its chronic GAAP budget deficit into balance, making a total of $16 trillion target annual income to meet and maintain conservative guidelines.

But actual annual income is less than one-sixth that amount -- somewhere around $2.5 trillion -- not even enough to meet the $3.0 trillion existing debt service, much less prevent it from growing by another $4
trillion a year. [All of those conservative family ratios assume that
the family is balancing their budget, not digging themselves into a
hole by outspending their income.]

Given
this hard-nosed math -- with Usgov six to ten times beyond two conservative guidelines -- the only thing keeping debt service from going exponential
is the current depressed level of interest rates. However, if Treasury rates were to double over a period of
10 years, while a steady $4 trillion a year in GAAP deficits is added to obligations, where would we be in 2019? Let's see, then we would be paying 9.2 percent interest on a larger $105.5 trillion of obligations -- that makes $9.7 trillion annual debt service, way up from $3.0 trillion now. But since we didn't have the income to cover even today's $3.0 trillion of debt service, then the current $4 trillion annual GAAP deficits will have expanded to $10.7 trillion by 2019, as debt service rises. But then, the total obligation would have mounted not to $105.5 trillion, but $150 trillion. Oops, but then the annual debt service would have risen to $13.8 trillion instead of $9.7 trillion. And so on, in iterative fashion.


You
can see how the math goes exponential, if interest rates take off, debt
service goes up, and interest rates rise again in response. Pretty soon you are
living in Zimbabwe, counting in quintillions and sextillions. As I have
indicated, it would take a period of years for this exponential process
to fully play out. But if it ever gets underway, it will be a pitiless, relentless long march into oblivion.

The warning sign will
be interest rates. As long as sovereign rates remain low, governments
can keep piling on the borrowing -- no problem. However, if rates rise
into high single digits -- and especially into low double digits --
the mathematical process of exponential runaway is likely to become
irreversible.

Three times in U.S. history -- the late
1910s, the late 1940s, and the late 1970s -- inflation rates have shot
into double digits. All three of these events occurred after wartime
borrowing, which is going on today as well. The first two times, the
dollar was at least
partially metallic-backed, forcing some restraint. But in the late
1970s, after Nixon closed
the gold window on 15 Aug 1971, it was only Paul Volcker's radical,
personal decision to inflict near-20 percent policy rates that stopped
the runaway.
This occurred at a time when the U.S. debt level was a much smaller
percentage of GDP than today. And it still caused a 3-year slump from 1980 to 1982.

If Ben Bernanke were to 'pull a
Volcker' [unlikely] and attempt the same inflation-fighting feat, it
probably would not work this time. Imposing a 20 percent Fed Funds rate
on our fragile, vastly-overindebted economy would provoke a complete,
devastating output collapse,
all the way back to Paleolithic conditions. Since this is
unthinkable, Ben is more likely to follow in the footsteps of the
estimable Dr. Gideon Gono of the Bank of Zimbabwe, and just keep on
printing as long as the paper supplies hold out. As compared to the
previous inflationary incidents of the 1910s, the 1940s and the 1970s,
this time there are no seatbelts, no guardrails, no safety net ... and
NO HEROES. We
are going to attempt to negotiate a hairpin curve at 199 miles an hour,
with some drunken bozos driving the bus.
Hang on tight, folks!

 

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