If our federal government was a person making $50,000, there would be $53,000 of credit card debt. It’s worse than that. There would be $25,000 on layaway. It’s worse than that. Our consumer would be overspending at an annualized rate of $1,600.
Most of the above data can be derived at www.usdebtclock.org, as it relates to our government. As Dr. Laurence Kotlikoff, Professor of Economics, Boston University, explained to the Senate Budget Committee on February of 2015, the primary data used to describe the government’s financial position is deceptive.1 A business could never cook their books the way our government does.
We’ll use Johnson and Johnson as an example. When JNJ offers their employees a pension, they can’t simply report the current pension expense as their total cost. Unless the top executives want to wear orange jumpsuits at a federal prison, they have to use an accounting method which books the future cost of this program as a current cost. In other words, they have to show in current dollars, what they expect to be the future pension costs. This is called GAPP accounting (Generally Accepted Accounting Principles).
Without GAPP, a company like JNJ could make an unlimited number of promises without proving their capability to fulfill those promises. Only the federal government can make promises without using the GAPP method of accounting.
When we see a national debt of $20 trillion, it’s just spit in the ocean, compared to the GAAP debt. Professor Kotlikoff has been the leading voice for proposing the government use GAPP accounting. (He calls it the Purple Plans.) He estimates our GAAP debt is $200 trillion. This is how much, he says, we would need, today, to fund all future government promises. In our opening example, for a person with $50,000 of income, the true GAAP debt would not be $53,000, but rather, $530,000!
If a chic shopper made $50,000 of annual income and had $530,000 of credit card debt, at what point do the credit cards get cut-up? In our above picture, we joke she has a rich daddy. In reality, our federal government’s rich daddy is China and other countries, holding just over 30% of our debt. More than twice the amount of debt held by China, the Federal Reserve holds $2.5 trillion of U.S. treasury debt (about 18%).2 So let’s pause, our story. How did the Fed get $2.5 trillion to buy government bonds? (If you don’t know the answer, we have a lot of ground to cover in the future! Meanwhile, you may want to start your study here.)
Nearly 30 percent of our national debt is owed to 230 other federal agencies. In other words, our government has written IOUs to itself. How about if you try that! Before you continue reading, why not get your checkbook and write yourself a check for $1,000,000. How does that feel?
I’m not joking. In accounting, your balance sheet would look like this, assuming you held the asset.
So how do you pay yourself? It wouldn’t make any sense, if you had $1 million and also owed yourself $1 million. What is the value of that IOU?
Let’s suppose you wrote yourself an IOU for $1 million, but rather than having $1 million of assets, you have no assets. If you wanted to pay yourself interest on your debt, you would have to borrow more money. If you wanted to pay off the liability to yourself—and be debt-free, you would have to borrow money to do that. Right?
My analogy only makes sense for a politician. A Washington DC politician thinks this is normal. It makes perfect sense. This is the type of stuff they discuss in bars.
There are a handful of smart politicians on Capitol Hill; they correctly understand this dilemma. They valiantly try to change things. But generally, the smart ones don’t want you to know what they know. Like the dumb politicians, the smart ones also are afraid of pitchforks.
What Comes Next?
In the coming weeks, we will discuss how our banking system is broke. We will discuss how the Social Security system is broke. We’ll prove our government is broke. Eventually, we will discuss solutions.
When President-elect Trump sits in the Oval Office on January 20th, there will be $20 trillion of debt, $200 trillion in future promises (unfunded liabilities) and 80% of all government revenue will be used for mandatory spending and interest on the debt.3 For the remaining 20% of revenue, 54% of it will be spent for the military.4
Perhaps you should read that last paragraph again. I voted for Donald Trump, but not because he is going to make America great again. As a nation, we have already jumped out of the Sears Tower (now called, “Willis Tower”—who’s Willis?). There is a consequence for walking on air. The law of gravity overtakes our enthusiasm, and we suffer the consequence. The same thing happens in the financial world. President Trump will not be able to circumvent the laws of economics.
If you want to experience something different than the masses of Americans, I suggest you take a reality check. Do it quickly.
“Dollar” Bill is a real guy, with real knowledge on our nation’s financial calamity, and real solutions for what must be done to dig ourselves out of the hole we are in. Due to his career, Bill must remain disguised to protect his position.