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In February 2009, as the Obama administration pushed a $787 billion deficit-spending economic stimulus plan through Congress, the American public was largely unaware that the true deficit of the federal government was already measured in trillions of dollars.
Moreover, total U.S. obligations, including Social Security and Medicare benefits to be paid in the future, have effectively placed the U.S. government in bankruptcy, even before we take into consideration the future and continuing social-welfare obligations embedded within the Obama administration's massive new spending plan. According to the U.S. Treasury, the total obligations of the United States in 2007 exceeded a negative $59 trillion, a sum that was more than the 2007 gross domestic product, or GDP, of the world, which the World Bank estimated to be $54 trillion. By 2008, the total obligations of the U.S. had grown to over $65 trillion, with no end in sight.
There is no way the federal government could ever meet the future obligations of the massive social-welfare state we have created since Franklin Roosevelt signed the Social Security Act, even if we confiscated all salaries and corporate earnings of individuals and corporations in the United States as an emergency form of taxation. The United States today is bankrupt, whether or not the government wants to admit it, and whether or not the public is aware of how extreme the situation has become.
Understanding that the United States is bankrupt is fundamental to understanding the true dimensions of the Economic Panic of 2009. Had the United States been running federal budget surpluses on a cash basis, the nation would still be bankrupt. Why? The answer is that future liabilities in federal social-welfare-entitlement programs have grown beyond the ability of the federal government to raise by taxes enough money to pay what is already due to the baby boomers as they retire.
This reality severely limits the ability of the federal government to manage a financial crisis like what we have faced since the mortgage bubble burst. It is necessary to appreciate fully just how bankrupt the federal government truly is: Mortgage losses as well as losses in a variety of consumer credits plus losses in commercial loans and commercial real estate already total trillions of dollars. We are certain to have more losses in complicated investments including hedge funds and derivatives, regardless of how smart the federal government officials at the U.S. Treasury and the Federal Reserve appear to be or how clever Wall Street experts seem. Ultimately, financial bubbles have no alternative but to burst.
The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the 2008 Financial Report of the United States Government released by the U.S. Department of the Treasury.
The difference between the $455 billion "official" budget deficit number and the $5.1 trillion deficit based on data reported in the 2008 report is due to the fact that the official budget deficit is calculated on a cash basis, where all tax receipts, including Social Security tax receipts, are used to pay government liabilities as they occur. The calculations in the 2008 report are calculated on a GAAP basis ("Generally Accepted Accounting Principles"), which includes year-for-year changes in the net present value of unfunded liabilities in social-insurance programs such as Social Security and Medicare. Under cash accounting, money is spent as it comes in, while the government makes no provision for future Social Security and Medicare benefits in the year in which those benefits accrue.
"As bad as 2008 was, the $455 billion budget deficit on a cash basis and the $5.1 trillion federal budget deficit on a GAAP accounting basis does not reflect any significant money from the financial bailout or Troubled Asset Relief Program, or TARP, which was approved after the close of the fiscal year," John Williams, an economist who publishes the website Shadow Government Statistics, told World Net Daily.
"For 2009, the Congressional Budget Office estimated the fiscal year 2009 budget deficit as being $1.2 trillion on a cash basis and that was before taking into consideration the full costs of the war in Iraq and Afghanistan, before the cost of the Obama $787 billion economic stimulus plan, or the cost of the second $350 billion tranche in TARP funds, as well as all current bailouts being contemplated by the U.S. Treasury and Federal Reserve," he stressed.
"The federal government's deficit is hemorrhaging at a pace which threatens the viability of the financial system," Williams added. "The popularly reported 2009 budget deficit will clearly exceed $2 trillion on a cash basis and that full amount has to be funded by Treasury borrowing. It's not likely this will happen without the Federal Reserve acting as lender of last resort for the Treasury by buying Treasury debt and monetizing the debt."
"Monetizing the debt" is a term used to signify that the U.S. Treasury will ultimately be required simply to issue huge amounts of new debt to meet current Treasury debt obligations. We have monetized the debt when we are forced to issue debt both to cover current budget deficits and to pay interest on outstanding federal debt. So far, the Treasury has been largely dependent upon foreign buyers, principally China and Japan and other major holders of U.S.-dollar foreign-exchange reserves, including Middle Eastern oil-producing nations purchasing U.S. debt through their financial agents in London. "The appetite of foreign buyers to purchase continued trillions of U.S. debt has become more questionable as the world has witnessed the rapid deterioration of the U.S. fiscal condition in the current financial crisis," Williams noted.
The sad reality is that the U.S. Treasury has not reserved any funds to cover the future Social Security and Medicare obligations we are incurring today. "Truthfully," Williams pointed out, "there is no Social Security 'lock-box.' There are no funds held in reserve today for Social Security and Medicare obligations that are earned each year. It's only a matter of time until the public realizes that the government is truly bankrupt. No taxes are being held in reserve to pay in the future the Social Security and Medicare benefits taxpayers are earning today."
If President Obama manages to add universal health care to the list of entitlement payments the federal government is obligated to pay, the negative net worth of the United States government can only get worse.
Calculations from the 2008 Financial Report of the United States Government, as displayed in the chart below, show that the GAAP negative net worth of the federal government has increased to $59.3 trillion while the total federal obligations under GAAP accounting now total $65.5 trillion.
"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," Williams said, explaining in more detail why he feels the government is now in the process of monetizing the federal debt.
"Social Security and Medicare must be shown as liabilities on the federal balance sheet in the year they accrue according to GAAP accounting," he argued. "To do otherwise is irresponsible, nothing more than an attempt to hide the painful truth from the American public. The public has a right to know just how bad off the federal government budget deficit situation really is, especially since the situation is rapidly spinning out of control."
Williams makes a compelling case that in a post-Enron world, if the federal government were a private corporation, "the president and senior Treasury officers would be at risk of being thrown into a federal penitentiary."
On March 12, 2008, David M. Walker resigned as comptroller general of the United States and head of the Government Accountability Office, or GAO, out of concern that as head of the GAO, he could no longer certify the financial soundness of the U.S. government under the GAAP accounting analysis of the federal budget conducted annually by the U.S. Treasury. As the CBS television show 60 Minutes noted, even before he resigned Walker had begun "traveling the country like an Old Testament prophet, urging people to wake up before it is too late." Walker was highly regarded as a respected public official while head of the GAO, charged with managing its more than three thousand employees. The GAO serves as auditor of the government's books, as an investigative office of the U.S. Congress.
"I would argue that the most serious threat to the United States is not someone hiding in a cave in Afghanistan or Pakistan, but our own fiscal irresponsibility," Walker, once the nation's top accountant, told 60 Minutes, in an obvious reference to Al Qaeda terrorist leader Osama bin Laden.
"We are spending more money than we make," Walker told a group on his "Wake-Up Tour" throughout America. "We are charging it to a credit card," he said, warning that by 2040, U.S. tax dollars would not be able to keep up even with just the interest payments on our national debt. No federal funds would be left for any other programs, including national defense or homeland security. "We suffer from a fiscal cancer that is growing within us and if we do not treat it, the cancer will have massive consequences for our country," he said.