Federal deficit reality

world | Jun 27, 2005 | By Walter J. John Williams

The U.S. government's fiscal ills have spun wildly out of control and no longer are containable within the existing system. As detailed in this article, the actual annual shortfall in U.S. government operations for fiscal year 2003 (September 30) was $3.7 trillion. Put in perspective, that means if the U.S. Treasury had seized all wages and salaries in 2003 with a 100% income tax, there still would have been a deficit! The outlook for fiscal 2004 numbers is even worse.

Considering that the popularly reported 2003 budget deficit was $374 billion, one-tenth the number cited above, this installment on government reporting concentrates on where the incredulous $3.7 trillion number comes from, how and why the Treasury is reporting it, and why the financial press and federal politicians are ignoring it.

Nonetheless, some implications of the current circumstance are touched upon briefly, here, conditioned by the promise of a full and separate analysis at a future date.

As brief background, the $3.7 trillion number is from government financial statements prepared using generally accepted accounting principles (GAAP), and a large portion of the expanded deficit is from the annual increase in the net present value of unfunded Social Security and Medicare obligations.

The impossibility of this circumstance working out happily is why lame-duck Federal Reserve Chairman Alan Greenspan suddenly has urged politicians in Washington to come clean on not being able to deliver promised Social Security and Medicare benefits already under obligation. He suggests, correctly, that there is no chance of economic or productivity growth resolving the matter. The funding shortfall projections already encompass optimistic economic assumptions.

Even if the Administration and Congress heeded Greenspan's advice, the unfolding fiscal disaster faces one of only two very unpleasant general solutions:

The first solution is draconian spending cuts, particularly in Social Security and Medicare, even if accompanied by massive tax increases. This appears to be a political impossibility, at present.

In the absence of political action, the second solution is the U.S. government facing some form of insolvency within the next decade or so. Shy of Uncle Sam defaulting on debt, the most likely outcome is the Fed eventually having to monetize U.S. debt heavily, triggering a hyperinflation. U.S. obligations eventually would be paid off in a significantly debased and devalued dollar.

Implications for the United States' sovereign credit rating is discussed more fully in a later section, but the unfolding fiscal crisis also opens the possibility of a credit downgrade for U.S. Treasury securities. This could happen before either of the two broad solutions discussed above comes into play.

Accounting Gimmicks Mask Underlying Reality for Decades

Misleading accounting used by the U.S. government, both in financial and economic reporting, far exceeds the scope of corporate accounting wrongdoing that has received partial credit for recent stock market turbulence. The bad boys of Corporate America, though, still were subject to significant regulatory oversights and the application of GAAP accounting to their books. In contrast, the government's operations and economic reporting have been subject to oversight solely by Congress, America's only "distinctly native criminal class."[1]

Nearly four decades ago, President Lyndon Johnson's political sensitivities led him and the Congress to slough off some of the costs of an escalating Vietnam War through the use of accounting gimmicks. To mask the rapid growth in the federal government's budget deficit, revenues from the surplus being generated by Social Security taxes were added into the general cash fund, without making any accounting allowance for the accompanying and increasing Social Security liabilities. This accounting-gimmicked


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