HYPERINFLATION PART 4

U.S. Government Cannot Cover Existing Obligations

The U.S. Treasury publishes annual financial statements of the United States Government, prepared using generally accepted accounting principles (GAAP), audited by the General Accountability Office (GAO) and signed off on by Treasury Secretary Paulson.

The statements show that the federal government’s annual fiscal deficit, far from being officially in the low hundreds of billions of dollar — although 2008 numbers rapidly are moving towards the $500 billion mark — is careening wildly out of control, averaging $4.6 trillion dollars per year for the six years through 2007. The difference is in accounting for the net present value, and year-to-year changes in same, for unfunded Social Security and Medicare liabilities.

The government’s finances not only are out of control, but the actual deficit is not containable. Put into perspective, if the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis. In like manner, given current revenues, if it stopped spending every penny (including defense and homeland security) other than for Social Security and Medicare obligations, the government still would be showing an annual deficit.

The results summarized in the following table show the various deficit/debt/obligation measures. The official GAAP-based deficit, including the annual change in the net present value of unfunded liabilities for Social Security and Medicare is estimated at more than $4.0 trillion in 2007 versus $4.6 trillion in 2006. The 2007 estimate is based on a consistent year-to-year accounting basis.

Further, contrary to the suggestion of Treasury Secretary Paulson — aside from a weakening economic outlook discussed in the next section — if the annual deficit is beyond containment through standard fiscal actions, then the United States has no way to grow out of this shortfall.

U.S. Government - Alternate Fiscal Deficit and Debt

Reported by U.S. Treasury

Dollars are either billions or trillions, as indicated.

Sources: U.S. Treasury, Shadow Government Statistics.

Total

Formal GAAP GAAP GAAP Federal

Cash- Ex-SS With SS Federal Gross Obilga-

Fiscal Based Etc. Etc. Negative Federal tions(2)

Year Deficit Deficit Deficit Net Worth Debt (GAAP)

(1) ($Bil) ($Bil) ($Tril) ($Tril) ($Tril) ($Tril)

----- ------ ------ ------ ------ ------ ------

2007 $162.8 $275.5 $4.0(3) $57.1 $9.0 $62.6

2006 248.2 449.5 4.6 53.1 8.5 58.2

2005 318.5 760.2 3.5 48.5 7.9 53.3

2004 412.3 615.6 11.0(4) 45.0 7.4 49.5

2003 374.8 667.6 3.0 34.0 6.8 39.1

2002 157.8 364.5 1.5 31.0 6.2 35.4

(1) Fiscal year ended September 30th. (2) Revised to include gross

federal debt, not just "public" debt. (3) On a consistent reporting

basis, net of one-time changes in actuarial assumptions and

accounting, SGS estimates that the GAAP-based deficit for 2007

topped $4 trillion, instead of the gimmicked $1.2 trillion.

(4) SGS estimates $3.4 trillion, excluding one-time unfunded setup

costs of the Medicare Prescription Drug, Improvement, and

Modernization Act of 2003 (enacted December 2003). Link to the 2007

statements: http://fms.treas.gov/fr/07frusg/07frusg.pdf

The GAAP-accounting is what a U.S. corporation would have to show. The Administration’s rationale as to why Social Security and Medicare should remain off balance sheet runs along the lines that the government always has the option of changing the Social Security and Medicare programs. That said, there clearly is no one in political Washington willing to go public with the concept of eliminating or substantially cutting those programs. Such includes the prospective presidential candidates.

Consider that given the current financial condition of the government, various politicians are pushing ever further for expensive cradle-to-grave programs for the electorate, ranging from national health insurance to bailouts of mortgaged homeowners at risk of foreclosure. With no full funding available for any new programs, the government again is showing its willingness to spend whatever money it has to create. The intent going forward is inflation — hyperinflation. This circumstance has evolved with the full knowledge of political Washington and the Federal Reserve.

As shown in the above graph, U.S. federal obligations are so huge versus the national GDP that the country’s finances look more like those of a banana republic than the world’s premiere financial power and home to the world’s primary reserve currency, the U.S. dollar.

If not for the special position the United States holds in the world, its debt — U.S. Treasuries — likely would be rated as below investment grade, instead of triple-A. Moody’s has even hinted at a longer-term downgrade on Treasury securities. While a three-month Treasury bill should be safe, I would not want to bet on receiving full value on a 10-year Treasury note or 30-year Treasury bond.

Yet, as shown in the following two graphs, most U.S. Treasury issuance has been purchased by investors outside the United States. Not only have these investors been taking a hit in terms of the value of the U.S. dollar, but also they face meaningful default/devaluation risk in the future. It is only a matter of time before this accommodation of foreign investors shifts to flight to safety outside the greenback, and therein will develop the early pressures for the Fed to start becoming the lender of last resort to the federal government.