January 7, 2008 – “We might hope to see the finances of the Union as clear and intelligible as a merchant’s books, so that every member of Congress and every man of any mind in the Union should be able to comprehend them, to investigate abuses, and consequently to control them.”- President Thomas Jefferson to Treasury Secretary Albert Gallatin, 1802
Unfortunately President Jefferson’s hope has not been realized. Instead of striving for accuracy and honest reporting, the accounts of the US government have been plagued by all sorts of abuses perpetrated by politicians for decades. Any reasonable person viewing these accounts can only conclude that they have been prepared to obfuscate rather than enlighten, to mislead rather than inform.
For example, the government reports that its deficit for the fiscal year ending September 30, 2007 was $162.8 billion. In other words, expenses exceeded revenue by this amount. This shortfall of course needs to be made up by borrowing, which the report itself acknowledges by saying: “The Government borrows from the public to finance the gap between expenditures and revenues“. But a little digging into the numbers reveals that the government is borrowing far more than its reported deficit. Total federal debt during the past fiscal year actually grew from $8,530.4 billion in 2006 to $9,030.6 billion in 2007, which is a $500.2 billion increase – or more than three-times the reported deficit.
Why the big difference between the growth in debt and the annual deficit? It seems reasonably clear that the accounts were prepared and are being reported to the public to make the financial picture of the US government look better than it really is. And believe me, after reading the recently released Fiscal Year 2007 Financial Report of the United States Government, there is every reason to believe that the US government financial position is even worse than we think. The full report can be downloaded by clicking here.
It has only been a little more than a decade ago that the US government started preparing its accounts according to Generally Accepted Accounting Principles. The Secretary of the Treasury, in coordination with the Director of the Office of Management and Budget, is required to submit financial statements for the U.S. government to the President and the Congress each year. The Government Accounting Office is required to audit these statements, but to give you an indication of the slipshod way things are done by the government, its financial statements have never received an unqualified opinion.
Here are some quotes from the 2007 Financial Report to highlight just how dire the US government’s financial condition really is. Let’s start with some comments by the Comptroller General of the United States:
“Certain material weaknesses in financial reporting and other limitations on the scope of our work resulted in conditions that, for the 11th consecutive year, prevented us from expressing an opinion on the financial statements…“
“About $895 billion, or 57 percent, of the federal government’s reported total assets as of September 30, 2007, and approximately $740 billion, or 25 percent, of the federal government’s reported net cost for fiscal year 2007…were disclaimed on or not audited…” Think about that statement for a minute. Some $740 billion is being spent each year without any audit or independent third-party review. Why?
As the Comptroller General explains: “The federal government did not maintain effective internal control over financial reporting (including safeguarding assets) and compliance with significant laws and regulations as of September 30, 2007.” He then goes on to highlight a particular problem; there exists “serious financial management problems at the Department of Defense“.
Here is what the Comptroller General considers to be the bright spot: “This year, we were able to render an unqualified opinion on the 2007 Statement of Social Insurance [i.e., Social Security]. This is a significant accomplishment for the federal government. [Balancing its books so that they can be audited – which is standard procedure for any business – is considered to be a “significant accomplishment” for the government.] This statement shows that projected scheduled benefits exceed earmarked revenues by approximately $41 trillion in present value terms for the next 75-year period.”
Having been able to successfully verify that portion of the government’s total obligations, here’s the downside of this bright spot he identifies: “Considering this projected gap in social insurance, in addition to reported liabilities (e.g., debt held by the public and federal employee and veterans benefits payable) and other implicit commitments and contingencies that the federal government has pledged to support, the federal government’s fiscal exposures [i.e., its aggregate direct and indirect debt obligations] totaled approximately $53 trillion as of September 30, 2007, up more than $2 trillion from September 30, 2006, and an increase of more than $32 trillion from about $20 trillion as of September 30, 2000. This translates into a current burden of about $175,000 per American or approximately $455,000 per American household.”
Did you know that the US government has accumulated $53 trillion of direct and indirect debt? If so, you are no doubt in a minority because most people are oblivious to the size of the government’s debt.
These debts are overwhelming by any measure, but here’s one way to put them into perspective. We can compare them to debts carried by General Motors, which we all know is financially strapped because of its huge debt load.
GM’s 2006 audited accounts indicate that its debts totaled $190.4 billion, which is a daunting 91.8% of the $207.4 billion of revenue GM generated that year. In contrast, not only is the $53 trillion US government debt greater than its annual revenue, it is in fact 20-times greater than the $2.6 trillion of revenue it received last year. The US government’s debt load by comparison makes GM look like a paragon of financial prudence.
What about all the US government’s assets? Good question. The report values them at $1.6 trillion, but this total excludes the value of so-called Stewardship Land, which equals about 650 million acres, most of which is barren Alaska tundra and desert in Nevada and other Western states. What is this land worth? Yellowstone National Park is worth more than frozen tundra, but let’s say that the land is worth $10,000 per acre on average, which is probably a generous valuation. The total therefore is $6.5 trillion, which when added together with the $1.6 trillion of assets in the financial report, totals $8.1 trillion, which is just 15% of the US governments total debt obligations. Any way one looks at it, the US government has a huge negative net worth, and owes far more than it can possibly repay.
However, not to worry. The report does disclose a unique asset that the US government can use to make sure it can repay all of its debts. “Assets included on the balance sheets are resources of the Government that remain available to meet future needs. The most significant assets that are reported on the balance sheets are property, plant, and equipment; inventories; and loans receivable. There are, however, other significant resources available to the Government that extend beyond the assets presented in these financial statements. Those resources include stewardship assets [the value of which I calculate above]…and the Government’s sovereign powers to tax, regulate commerce, set monetary policy and the power to print additional currency.“[emphasis added]
Yes, that’s the same so-called ‘asset’ Zimbabwe has been using to pay its debts, the same ‘asset’ Weimar Germany used, and the same ‘asset’ countless governments have used. Just print more fiat currency. If you own any dollar denominated asset, and particularly T-bills, T-bonds and other debts of the US government, caveat emptor.
I’ll leave the last word to the government’s own auditor, the General Accounting Office: “Because of the federal government’s inability to demonstrate the reliability of significant portions of the U.S. government’s accompanying accrual basis consolidated financial statements for fiscal years 2007 and 2006, principally resulting from certain material weaknesses, and other limitations on the scope of our work, described in this report, we are unable to, and we do not, express an opinion on such financial statements. As a result of these limitations, readers are cautioned that amounts reported in the accrual basis consolidated financial statements and related notes may not be reliable.”