_The dirty secret in Uncle Sam’s Friday trash dump

Washington Post

Bryan R. Lawrence

Releasing information on the Friday before a big holiday is a time-tested way to bury bad news. So when the Government Accountability Office’s fiscal 2011 financial statements for the federal government were released on the Friday before Christmas, it made sense to read them closely.

Since 1997, the United States has been a rare example of a government willing to publish financial statements using accrual accounting, which counts the cost of promises made as well as cash paid out. And the GAO’s professionalism over the years has won it a reputation for impartiality and effectiveness.

That professionalism is evident in the GAO analysis of the net present value of the Social Security and Medicare promises Washington has made to Americans. “Net present value” means the total that would have to be set aside today to pay the costs of these programs in the future. The government puts these numbers in appendices, rather than in headlines. But the costs are real.

In fiscal 2011, the cost of the promises grew from $30.9 trillion to $33.8 trillion. To put that in context, consider that the total value of companies traded on U.S. stock markets is $13.1 trillion, based on the Wilshire 5000 index, and the value of the equity in U.S. taxpayers’ homes, according to Freddie Mac, is $6.2 trillion. Said another way, there is not enough wealth in America to meet those promises.

If the government followed corporate accounting rules, that $2.9 trillion increase would be added to the $1.3 trillion cash deficit for fiscal 2011 that has been widely reported. And a $4.2 trillion deficit is something that Americans need to know about

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The GAO report is here.

_Daily Reckoning

Dow up 198 points yesterday. Why? People think the Europeans are going to sort out their problems. But are they?

Europe is the world’s biggest economy. It is menaced by bank and government debt defaults. It is growing old and has far more social spending obligations than it can afford. It is paralyzed by competing national governments and decentralized financial institutions. It can say ‘drop dead’ in 17 different languages. And if Europe goes into a deep or prolonged economic slump, the rest of the world follows. Because Europe is a big customer, not only for Asia, but for America too.

The only way out of the debt problem for Europe is growth. Austerity alone won’t do it. Europe’s debts can only be serviced if the economy grows. Not that we’re counting on it. On the contrary, we’re guessing it won’t happen.

Europe’s social spending can only continue if there is growth. Without growth, everything goes bad. Debts can’t be paid. Public workers can’t be paid. And neither the stock market or the bond market are worth nearly as much as people think they are.

Everybody assumed growth would continue — even if it were interrupted from time to time by recession. Every recession since the ’40s has been a relatively quick and relatively painless pause, not a major change of direction.

But now, something seems to have changed. Maybe it is a Great Recession, as some call it. Maybe it is a Great Correction, as we call it. And maybe the age of growth is over.

What a helluva thing that would be if it were true. When people lent money to government and private borrowers they were betting on growth. When the government extended its promises of pensions and health care, it was counting on growth.



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