Monday, February 23, 2015

Fundamentally Flawed - Chapter 3.1, Why America is Bankrupt

There are many ways to look at the United States government’s balance sheet.  I prefer a simple comparison of all government debt & obligations (ultimately the obligation of its citizens) vs. all citizens’ assets.  Liabilities include Treasury debt held by the public or more broadly total Treasury debt outstanding.  There’s unfunded liabilities like Medicare and Social Security.  There are government and veterans pensions.  And then on other side of the ledger are the assets (minus their outstanding debt) of all citizens including the real estate, all equities, all bonds, all the deposits, and everything they own…all at today’s valuations. 

But let’s cut straight to the bottom line and add it all up using the governments’ own numbers…as of Jan 1 2013, it was $89.5 trillion in liabilities and $69.5 trillion in assets.  There.  It’s not a secret anymore…and although these are all government numbers, for some strange reason the government never adds them all together or explains them.  And making pretty conservative estimates, as of Dec 31, 2014 America’s balance sheet is $100.1 trillion in federal government debt and unfunded liabilities vs. $81.3 trillion in US held assets (see chart below).

Unfunded Liability Source: 2013 OASDI and Medicare Trustees’ Reports. (pg. 183); Pension Source, Bureau of the Fiscal Service; Federal Debt Source, Dept. of Treasury; HHNW Source, Federal Reserve System, Z.1 Financial Accounts – *2014 SMI, Medicare, SS unfunded liability authors estimate.

The $100 trillion in liabilities include:

  • $21.3 trillion in Treasury, Pensions, “other” debt
    • $13 trillion public Treasury debt as of Dec 31, 2014 (interest rate sensitive bonds sold to finance government deficit spending)
      • Fyi - $5.12 trillion of “intra-governmental” Treasury debt are not included as these Social Security surplus’ were spent and now held as Treasury IOU’s…they are considered an asset of the particular programs (SS, etc.)…they more realistically should be added to the above but what’s an extra $5 trillion among friends?
    • $6.8 trillion civilian and military pensions, est. for Dec 31 2014 (was $6.54 trillion, Sept 30, 2013)
    • $1.5 trillion in “other” liabilities
  • $79 trillion in unfunded liabilities estimated as of Jan 1, 2015.  This was $69 trillion as of Jan 1, 2013 (see table #6 below).  This represents, in net present value terms, what should be held in savings now to make up the present and future anticipated tax shortfalls vs. present and future payouts. This need can be satisfied only through increased borrowing, higher taxes, reduced program spending, or some combination thereof.
    • $4.1 trillion SMI (Supplemental Medical Insurance)
    • $44.9 trillion Medicare or HI (Hospital Insurance) Part B / D
    • $29.9 trillion Social Security or OASDI (Old Age Survivors Disability Insurance)
      • Fyi - $5+ trillion of additional unfunded state liabilities not included.

Table 6






Present Values of Costs Less Tax, Premium and State Transfer Revenue,

through the Infinite Horizon, HI, SMI, OASDI




(In trillions of dollars, as of January 1, 2013)













Part B

Part D



Present value of future costs less future taxes, premiums, and State transfers for current participants

 $           9.6

 $   13.1

 $       4.9

 $   26.4

 $54 Trillion

Less current trust fund balance

 $           0.2

 $     0.1


 $     2.7

 $3 Trillion

Equals net obligations for past and current participants

 $           9.4

 $   13.0

 $       4.9

 $  23.7

 $51 Trillion

Plus net obligations for future participants

 $        (5.9)

 $   12.0

 $       9.5

 $  (0.6)

 $15 Trillion

Equals net obligations through the infinite future for all participants

 $           3.5

 $   25.0

 $     14.4

 $   23.1

 $66 Trillion

Present values of future costs less the present values of future income over the infinite horizon

 $           3.7

 $   25.1

 $     14.4

 $   25.8

 $69 Trillion

Details may not add to totals due to rounding.





Source: 2013 OASDI and Medicare Trustees’ Reports.




It bears repeating…these unfunded liabilities can be satisfied only through increased borrowing, higher taxes, reduced program spending, or some combination.  And very noteworthy is that while total debt increased $73 trillion from ’00 to ’14, the Federal Government tax revenue only increased by $800 billion from $2 trillion to about $2.8 trillion…an absurdly low income to service such an immense and rapidly growing debt. 
  • $81.3 trillion in US Household “net worth”
According to the Federal Reserve Z.1 balance sheet, the US (as of Q3 2014) has a net worth of $81.3 trillion – significantly up from the ’09 low of $55.5 trillion…a $26 trillion increase in five years.  All while wages have been flat to declining, total household income increased only $1.4 trillion, and 1+ million fewer full time jobs.
A cursory glance at the Federal Reserve’s $4 trillion in balance sheet growth in the same time period shows how the lack of growth in “household” liabilities (US household debt down over a half a trillion from its record peak in ’08) has been co-opted by the Federal government and Federal Reserve’s willingness to take on new debt.  I believe it is clear when incomes no longer supported credit and debt growth in ’08, consumers tapped out and in stepped the Federal Reserve to bridge the slowdown.  But what the Fed may or may not have realized is once they stepped in...there was no stepping out.
Many try to dismiss these debts and unfunded liabilities assuming we will continue to only service the debt (rather than ever repay principal as well); assuming we will turn down the SS benefits via means testing, delaying benefits, reducing benefits; assuming we will bend the curve regarding Medicaid, Medicare, and Welfare benefits; assuming we will avoid further far flung wars and military obligations and stop feeding the military industrial complex; assuming no future economic slowdowns or recessions or worse; assuming a cheap and plentiful energy source is found to transition away from oil.  Assuming economic growth, population growth, and immigration growth.  But all these debts and liabilities are someone else’s future income which they are now reliant upon; and those payments are someone’s future addition to GDP.  If these debts or obligations are curtailed or cancelled to reduce the debt or future liability, the future GDP slows in kind and tax revenues lag and budget deficits grow.  Of course I advocate these debts and liabilities cannot be maintained, but austerity (real austerity) is painful and would set the stage for a likely depression where the nation (world) proceeds with a bankruptcy determining what and how much of the promises made can be honored until wants, needs, and means are all brought back in alignment.