Herbert Hoover, the 31st President of the United States, famously said: ?Blessed are the young for they shall inherit the national debt?. The current generation of the US are supremely blessed for they shall inherit at least $14,456bn of national debt. The US is now the biggest debtor in the history of the world. It may seem hyperbolic but it?s true that the future generation is going to inherit not $14.5tn of debt but an amount greater than $50tn.
To know the correct numbers, please refer to the 2010 Financial Report of the United States Government available at the US Treasury department?s Website. A thorough reading of this report would convince you that the government has dug a debt hole of $50tn for itself rather than the often quoted $14.5tn. The government numbers are presented in such a way that the debt appears to be a smaller amount. It is quite obvious that this misinformation is not by accident but by design. A similar manipulation by a non-governmental entity would have put them behind bars. But when the government itself misleads the people, it is difficult to call the bluff. The world urgently needs a GAAP (Generally Accepted Accounting Principles) for government reporting, so that they do not massage the numbers. With sovereign defaults looming large, the least these democracies can do is it to keep their citizens correctly informed. After all, democracy works best with an informed citizenry, and the common man has been in the dark about the finances of these governments for far too long.
At the heart of America?s fiscal fiasco is a double standard that enables Congress and the President to cover-up the real numbers. They purposefully misrepresent the dire financial condition of the government. Here are the debt components from the report. The total Federal securities held by the public including other governments is $9,060bn. The Federal debt securities held by investments by government accounts is $4,576bn. The shortfall in Medicare is $22,813bn and that in Social Security is $7,947bn. The Federal Employee and Veteran benefits payable are $5,720bn. And there are other sundry liabilities worth $1,673bn. If we do the math, the total debt of the US is $51.79tn.
Even in the estimate of $51.79tn, some numbers are underestimated. For instance, the government estimates Medicare cost to be $22,813bn. The number was $38,107bn in the previous fiscal year. Apparently, to make the number look controllable, it has been reduced by questionable savings projections after the recent healthcare overhaul. It is difficult to imagine the estimates of Medicare costs coming down from $38tn to $22tn in one fiscal year when the essential healthcare costs have actually gone up. It doesn?t take an accountant to figure that the numbers are calculatedly miscalculated.
In the report, the government proclaims that social security would keep 40% of all Americans aged 65 or older out of poverty. However, the scheme itself has now become destitute with a shortfall of $7,947bn. That is the kind of money the government needs to be able to keep its promise of paying insurance to the old and unemployed. The US government had embarked on this extravagant programme, which is the largest government programme in the world, without sufficient funds.
It is not as if the government didn?t know that it would have a problem meeting those expenses. It has been warned before and has been made aware of the consequences for long. The Gramm-Rudman-Hollings Act set a series of targets for eliminating the federal budget deficit. However, Congress and the President failed to agree on voluntary spending reductions. Much earlier in 1982, President Ronald Reagan was concerned about the waste and inefficiency in the Federal government. A commission was set up headed by Peter Grace. The Grace Commission urged the government to curb its spending and suggested reform measures to avoid getting into an eventual debt trap. It estimated that national debt, without the suggested reforms, would rise to $13tn by the year 2000, while with the reforms the projected rise was only $2.5tn. Congress ignored the commission?s report. The debt reached $5.8tn in the year 2000. The national debt reached $13tn in 2008 and now stands at $14.5tn, even by conservative estimates.
It is estimated that, going forward, almost 100% of government revenues will be absorbed by interest on the Federal debt and by government contributions to existing programmes. With current revenues, the government cannot repay existing debt, much less fund new programmes unless it wages a war against spending. And like in a war, the older men will declare the war, but it is the young that must fight and die. Ironically, that?s the blessed economy they inherit.
The author, formerly with JPMorgan Chase, is CEO, Quantum Phinance