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by Free Market Duck

Off Balance Sheet, Out of Mind

By

Chris Wood (Casey Investment Reports)

Aug 5, 2009

Boise, ID – Whoa, girl friends, pull up the floor and pour yourselves another hot cup of Rocket Java.  The U.S Treasury's Financial Management Service recently released its monthly Statement of Receipts and Outlays for the United States Government and it sucks, for two reasons:  (1) it’s a Big Accounting Lie, and (2) the real U.S. Deficit is huger than huge.

   For the first time ever, the Treasury reported a deficit above $1 trillion -- $1.086 trillion, and that’s with three big-spending months left to go in the current fiscal year.

   To put things in perspective, the reported federal deficit for all of 2008 was $455 billion. At the time, that was a record. But it is less than 42% of the borrow-and-spend total at this year's nine-month mark.

   As shocking as that seems, it’s not even the real deficit story. Most of the real deficit is hidden by the Treasury's accounting methods.

   For one thing, the annual budget deficit supposedly refers to the difference between government receipts and outlays. But sly politicians sometimes remove a spending item from the regular budget and then bring it back as a supplemental appropriation. Supplementals are real costs that add to government debt, but they don't get counted in the reported deficit. For example, during fiscal 2008, the federal government’s net operating cost (the government’s “bottom line” – the difference between revenue and cost) was $1,009.1 billion, but the budget deficit was reported as “only” $454.8 billion.

   But it gets much worse.

   To quote John Williams’ Shadow Government Statistics: “Those [2008] numbers, however, did not account for the annual change in the net present value of unfunded Social Security and Medicare liabilities, except in discussions and footnotes. Counting those changes, as a corporation would for its pension and healthcare liabilities for retirees, the 2008 annual deficit was $5.1 trillion [compared to the reported figure of $454.8 billion], versus $1.2 trillion in 2007 [compared to the reported figure of $162.8 billion]. Such showed total U.S. obligations – gross federal debt outstanding plus the net present value of unfunded liabilities -- at $66 trillion, roughly 4.6 times the level of reported U.S. GDP, and greater than total estimated global GDP.”

   How is the government able to avoid admitting such staggering real deficits?

   Congress has written its own accounting rules. They call for “cash accounting,” similar to the way you track what comes into your checking account and what goes out. That shows how well you're handling today's bills, but it tells nothing about how well you're preparing to pay tomorrow’s bills – especially if you've made a lot of big promises.

   Making big promises is one of the things governments do well, and cash accounting lets them disregard each year's growth in the eventual cost of making good on those promises. In the case of the U.S. government, cash accounting allows the build-up in promised pensions for civil servants and military personnel, to cite one giant example, to simply be ignored. Overlooked. Passed over in silence. The build-up of future Social Security and Medicare liabilities is handled the same silent way. For the government, cash accounting isn't just an accounting method, it's a denial method.

   Generally Accepted Accounting Principles call for companies and institutions with annual revenue of $1 million or more to use accrual accounting, a method that reflects the build-up of liabilities. For a public company, it would be illegal to publish financial results based on anything else. But for the federal government, with receipts and outlays in the multiple trillions every year, using the no-tomorrow method of cash accounting is business as usual. – FM Duck

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