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The Math Does Not Work

In my essay "Enron - What's Next" I proposed that the biggest "Enron" was the US federal government. I used the figures from the Budget of the United States Government document¹. I would like to dig deeper into this document and provide some highlights and additional comments for the reader.

Some of the basic assumptions are from page 23:

As you can see, the unemployment rate will never hit 6%, peaking in 2002, and neither will the 10-year Treasury Note rate. In fact, it looks like we should expect a very flat yield curve for the next 12 years. Very rosy assumptions I would say.

From page 24:
"The yield on the 10-year Treasury note is projected to remain at around the 5.1 percent level reached when the assumptions were finalized. This projection assumes that the market price as of that date incorporated all relevant information, including the consensus view that the economy was about to enter an extended period of sustained economic growth."

Consensus view? Well, I'm glad we all agree. We'll see if the market obliges.

On page 32 there is a section titled QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ''BALANCE SHEET''. An example (underlines mine):

1. According to Table 3-1, the Government's liabilities exceed its assets. No business could operate in such a fashion. Why does the Government not manage its finances more like a business?
The Federal Government has fundamentally different objectives from a business enterprise. The primary goal of every business is to earn a profit, and the Federal Government properly leaves almost all activities at which a profit could be earned to the private sector. For the vast bulk of the Federal Government's operations, it would be difficult or impossible to charge prices-let alone prices that would cover expenses. The Government undertakes these activities not to improve its balance sheet, but to benefit the Nation-to foster not only monetary but also non-monetary values. For example, the Federal Government invests in education and research. The Government earns no direct return from these investments; but the Nation and its people are made richer if they are successful. The returns on these investments show up not as an increase in the Government assets but as an increase in the general state of knowledge and in the capacity of the country's citizens to earn a living. A business's motives for investment are quite different; business invests to earn a profit for itself, not others, and if its investments are successful, their value will be reflected in its balance sheet. Because the Federal Government's objectives are different, its balance sheet behaves differently, and should be interpreted differently.

2. Table 3-1 seems to imply that the Government is insolvent. Is it?
No (Would we admit it?). Just as the Federal Government's responsibilities are of a different nature than those of a private business, so are its resources. Government solvency must be evaluated in different terms. What the table shows is that those Federal obligations that are most comparable to the liabilities of a business corporation exceed the estimated value of the assets the Federal Government actually owns. However, the Government has access to other resources through its sovereign powers. These powers, which include taxation, allow the Government to meet its present obligations and those that are anticipated from future operations even though the Government's assets are less than its liabilities. The financial markets clearly recognize this reality. The Federal Government's implicit credit rating is the best in the United States; lenders are willing to lend it money at interest rates substantially below those charged to private borrowers. This would not be true if the Government were really insolvent or likely to become so. Where governments totter on the brink of insolvency, lenders are either unwilling to lend them money, or do so only in return for a substantial interest premium. END

There are 7 of these very enlightening Q&As. George Orwell would be proud.

Here is what the budget document says about Social Security, Medicare and Medicaid on page 40 (comments, underline mine):

"The baby-boom cohort has moved into its prime earning years, while the much smaller cohort born during the Great Depression has been retiring. Together these shifts in the population have temporarily held down the rate of growth in the number of retirees relative to the labor force. The suppressed budgetary pressures are likely to burst forth once the baby-boomers begin to receive Social Security, and that will begin to happen starting in 2008.

The pressures are expected to persist, however, even after the baby-boomers are gone. The Social Security actuaries project that the ratio of workers to Social Security beneficiaries will fall from around 3-1/2 currently to around 2 by the time most of the baby-boomers are retired. Because of lower fertility (or social experiment known as abortion) and improved mortality that ratio is not expected to rise again, even though it is projected to decline very little following the passing of the baby-boomers. With fewer workers to pay taxes that support the retired population, the budgetary pressures on the Federal retirement programs will persist. The problem posed by the demographic transition is a permanent one.

One way to see the extent of the budgetary problem is to examine the projected spending on Social Security, Medicare, and Medicaid. Currently, these programs account for 47 percent of non-interest Federal spending; up from 30 percent in 1980 (a 56% increase in 20 years). By 2040, when most of the remaining baby-boomers will be in their 80s, these three programs could easily account for two thirds of non-interest Federal spending. At the end of the projection period, the figure rises to almost three-quarters of non-interest spending. In other words, under an extension of current budget policy, almost all of the budget would go to these three programs alone. That would considerably reduce the flexibility of the budget, and the Government's ability to respond to new challenges. Measured relative to the size of the economy, the three major entitlement programs now amount to 8 percent of GDP.⁴ By 2040, this share almost doubles to 14 percent, and in 2075 it is projected to reach 18 percent of GDP. Current projections suggest, absent structural changes in the programs, that the Federal Government will have to find another 10 percent of GDP to cover future benefits in these programs."

Notice in the last paragraph the little superscript "4"? Here is what the footnote "4" says (underline mine):

"⁴ Over long periods when the rate of inflation is positive, comparisons of dollar values are meaningless. Even the low rate of inflation assumed in this budget will reduce the value of a 2001 dollar by about half by 2030, and by two thirds by 2050. For long-run comparison, it is much more useful to examine the ratio of budget totals to the expected size of the economy as measured by GDP."

So our government admits that comparing dollar values today with dollar values into the future are meaningless because the value of dollar is dropping so rapidly as to make the dollar a useless measurement of VALUE! This is quite an admission buried in the fine print.

The problem with this statement is that the GDP is measured in DOLLARS today AND in the future. So measuring a percentage of something that is measured in DOLLARS gives you a measurement in DOLLARS. You don't need a Ph.D. in economics to understand this.

What they are really saying is that their projections are meaningless and the value of the dollar is going to ZERO.

Soak the Rich

Some people seem to think that the answer to funding all these wealth transfer programs is to increase taxes on the mega-rich. But will this really work? Let's run through a couple of examples.

William Gates III - Estimated worth $50 billion². Most of this is still tied up in MSFT stock. He has 650 million shares³. What would happen if the government forced him to sell all of his stock and fork over the proceeds to the government? Well, as of this writing the stock is selling for roughly $60 a share (650 m x $60 = $39 billion). It trades an average of 27 million shares per day ($1.6 billion). If we dump 650 million shares on the market, what would happen to the price?

IT WOULD COLLAPSE!

What would potential buyers do if they knew that 650 million shares were coming onto the market?

NO ONE WOULD BUY!

This lack of critical thinking and understanding that for every action there is an equal and opposite reaction never ceases to amaze me. Gates stock would become worthless is he was forced to sell all at once. That's why he and Paul Allen sell a little at a time. They sell a few million or tens of million dollars worth when they need some pocket change and someone who does not know any better who has his money in a stock mutual fund ends up owning it.

But what about all those poor souls who might buy the stock in a forced liquidation? Are my altruistic friends not concerned with the saps who would be stuck with all this worthless stock? Maybe the government should buy it. But the government would have to issue more debt (because government does not create money, see Kitchen Table Talk ¹), thus burying our children and grandchildren further.

How about Warren Buffet? He has a lot of money, doesn't he? No, not really. He is worth $32 billion² but his is tied up in REAL ASSETS. Companies with real people working at them. Offices, plants, equipment. Maybe the federal government should confiscate it all and sell it?

If Social Security and Medicare need $1.3 trillion PER YEAR to fund themselves for the next 30 years, who has this kind of money?

NO ONE DOES.

Even the Rockefellers, Morgans, etc., don't have this kind of cash lying around. They have ASSETS. Buildings, offices, plants, factories. This is what real WEALTH is. The only way to tap this wealth for these programs is to CONFISCATE IT.

"In this sense, the theory of the Communists may be summed up in the single sentence: Abolition of private property."
From "Manifesto of the Communist Party" by Karl Marx and Frederick Engels.

This should warn you about where America is headed.

Dream A Little Dream
Lets assume for a minute that Gates and Buffet are making an extra $1.3 billion per year CASH. We need $1.3 Trillion per year. So we need 1,000 Gates and Buffets to ante up $1.3 billion per year, EVERY YEAR, for the next 30 years or more.

Is this realistic? Are there 1,000 Gates, Buffets, Soros', etc., and how would they raise $1.3 billion every year? They would most likely have to sell assets. This would drive asset prices down, feeding on itself, and taking the world economy with it. This also assumes they each have $40 TRILLION in assets to sell over a period of 30 years. Not realistic is it? Not even close.

According to the Forbes 400 richest in the US², number 400 is actually shared by 10 names all worth an estimated $600 million. But we need $1.3 BILLION PER YEAR from 1,000 people just to keep these social programs alive. But if Mr. 400 only has $600 million, how do we find 1,000 people with $1.3 billion each?

Maybe we could find 2,000 with $650 million each? But Mr. 400 only has $600 million. This leaves us 1,600 multi-millionaires short.

You could confiscate all the wealth of all the billionaires and multi-millionaires, forgetting for a moment that the wealth will lose value RAPIDLY and it will not be close to the money needed for these programs.

Time to face reality. The Math Does Not Work.

The Public Debt
According to The Bureau of the Public Debt Online⁴, as of this writing, the US public debt is (drum roll)

A little definition is in order:
Debt Held by the Public -- Is all Federal debt held by individuals, corporations, state or local governments, foreign governments, and other entities outside of the United States Government less Federal Financing Bank securities. Types of securities held by the public include, but are not limited to, Treasury Bills, Treasury Notes, Treasury Bonds, United States Savings Bonds, State and Local Government Series, Foreign Series, and Domestic Series.

Intra-governmental Holdings -- Government Account Series securities held by Government trust funds, revolving funds, and special funds; and Federal Financing Bank securities. A small amount of marketable securities are held by government accounts.

Just under $6 TRILLION.

How much is $6 trillion? How about 6 million people each having $1 million. Six million millionaires. So, everyone who lives in all 5 boroughs of New York City would have to have $1 million IN CASH. Contrary to popular belief, as someone who lived in Manhattan for 5 years, this is not the reality.

As we know, the debt limit will be raised any day now. A little tidbit from page 275: "The statutory debt limit has been changed many times. Since 1960, Congress has passed 68 separate acts to raise the limit,"

68 times in 42 years. More than 3 times every 2 years. It should be obvious that the US government, regardless of Republican or Democratic administrations or control of Congress, is OUT OF CONTROL.

This is why I warn people about 401Ks, IRAs, etc., THEY WILL CHANGE THE RULES ON YOU!

So, who has a claim on all this debt? From page 277:

"During most of American history, the Federal debt was held almost entirely by individuals and institutions within the United States. In the late 1960s, as shown in table 13-6, foreign holdings were just over $10.0 billion, less than 5 percent of the total Federal debt held by the public.

Foreign holdings began to grow significantly starting in 1970. This increase has been almost entirely due to decisions by foreign central banks, corporations, and individuals, rather than the direct marketing of these securities to foreign residents. At the end of fiscal year 2001 foreign holdings of Treasury debt were $1,170 billion, which was 35 percent of the total debt held by the public. 14 Foreign central banks owned 49 percent of the Federal debt held by foreign residents; private investors owned nearly all the rest. All the Federal debt held by foreign residents is denominated in dollars."

So the financing of America by foreigners started in 1970. What a coincidence. Just before Nixon took the world off the gold standard and forced everyone to hold dollars. The US is bankrupt. The US has declared bankruptcy twice in the 20th century, 1933 and 1970, when she defaulted on her obligations to exchange dollars for gold. Thanks to the marvels of public school education, the population was never told about these very important events.

Who is going to pay back all this debt? We only need $6 trillion for this one. If we get the Forbes 400 to ante up $15 billion each we can have it repaid tomorrow. Right.

How fast is the debt expected to grow? In "Enron - What's Next" I quoted the budget again: "It is estimated to be $7.780 Trillion in fiscal year 2007. So in 6 years the debt is estimated to increase by $2.037 Trillion. This is a 35.5% increase. This year's budget is only $2.13 Trillion. The entire federal budget for this year will be added to the federal debt in just 6 years. "

This came from Table 13-2. FEDERAL GOVERNMENT FINANCING AND DEBT, Page 269, and is titled "Debt Subject to Statutory Limitation, End of Year: Debt issued by Treasury"

A 35% increase over 6 years is roughly 4.35% per year compounded monthly.

On page 23 they show the estimated GDP from 2001 through 2012. This is expected to increase from $10.2 trillion to $17.4 trillion in 2012. This is a 70.7% increase over 12 years or roughly 4.45% per year compounded monthly. To sustain 4.5% per year GDP growth for 12 years would be unheard of, especially considering we just passed the peak of the longest expansion on record.

My assumption would be 1% GDP growth per year. And this is optimistic.

At 1% GDP growth and 4.4% debt growth, THE DEBT WILL EQUAL THE GDP in less than 16 years. I think this is optimistic. The system will collapse before this happens.

Why do I use 1% instead of 5%? Because the government is cooking the books. According to Richard Freeman in The Quality Adjustment Method: How Statistical Fakery Wipes Out Inflation⁵, the Department of Labor, Department of Commerce, and the U.S. Federal Reserve Board of Governors each use an accounting gimmick called the "Quality Adjustment Method (formerly called the Quality Adjustment Factor), which covers up and hides inflation, and also distorts U.S. Gross Domestic Product and industrial production."

Mr. Freeman describes the gimmick this way "The successful functioning of the U.S. economy is incompatible with the continued application of the QAM. Introduced in 1967 by the financier oligarchy during Arthur Burns's regime at the Federal Reserve, and spread by statisticians, it is set up to exclude anywhere from one-quarter to three-quarters of true inflation. It works from the continuous assumption that the quality of goods is improving: therefore, if the price of a product rose 10%, and the statisticians of the BLS claim two-thirds of the price increase was due to improved quality (the veracity of that statement will be explored below), the inflation of that product's price is reported as only 3.3%" (underlines mine)

Why does the federal government lie like this? Three reasons:

"First, it is being used to loot the American population. More than 100 million Americans are covered by cost-of-living adjustments in their wage contracts, and programs such as Social Security, Medicare, Unemployment Insurance, etc., which are supposed to protect them against inflation. EIR has calculated that BLS lying about the rate of inflation, in which the QAM plays a great role, has this year stolen between $278 and $328 billion from these Americans.

"Second, the QAM is being applied to cover up the hideous consequences of the policy adopted by Federal Reserve Board Chairman Alan Greenspan. In the third quarter 1998, acting on behalf of the financier oligarchy, Greenspan desperately revved up the printing presses, in order to hold up the bloated mass of speculative financial property titles, which were at the point of disintegration following the September 1998 Long Term Capital Management hedge-fund failure. That policy put the world on the path toward a hyperinflationary spiral, which will have the same devastating consequences as the hyperinflation which ravaged Weimar Germany from March through November 1923. Even though the prices of basic commodities, such as oil and polyvinylchloride, and consumer products, such as housing, are rising in the range of 15% to 180% per year, the BLS insists that inflation is only 3.4%.

"Third, the QAM is a vital element in the fake claim of a U.S. "noninflationary economic expansion." The QAM underreports inflation, and helps overstate GDP and industrial production. The lie of economic growth has a strategic implication: it is being employed to draw foreign funds into the United States, to cover over a projected $430 billion annual current account deficit in 2000. This foreign funds inflow helps the United States to hold up the value of the dollar and to import a large volume of goods. Were the myth about the U.S. economy shattered, it would precipitate a dollar crisis and the withdrawal of foreign funds, which would puncture the U.S. financial system.

This withdrawal of foreign funds and dollar crisis will happen soon. It is an unsustainable system.

The Math Does Not Work.

Does Government Have More Money Than It Is Telling Us?
According to Walter J. Burien, Jr.⁶, our government at all levels have not been telling us the whole truth. I know that this is hard to accept given America's deep faith in the honesty of its institutions, but lets examine what he has to say.

"Every city, county, state, and the federal government openly talks about the "budget" but keeps a virtually hidden, SECOND SET OF BOOKS which track the investments and Enterprise ventures worth TRILLIONS of dollars in tangible wealth they have built up in these virtually hidden portfolios as a result of investing YOUR skimmed money for over 50 years in everything from real estate to the stock market."

According to Mr. Burien:
"Estimate of the standing liquid, fixed, and equity investments, both Federal and Local Governments is a conservative: 60 Trillion dollars"

Mr. Burien is focusing on what are known as CAFRs, or Comprehensive Annual Financial Reports. Here is what he said in an article from 2000⁷:

"Calling it "risky" to allow taxpayers to invest a tiny 2% of their social security in the stock market is laughable when our governments ALREADY have 32 Trillion dollars invested in the same "risky" domestic and international stock markets!

• The Six Trillion plus "estimated surplus" going into the year 2004 announced by Clinton is also laughable compared to the additional trillions of "surplus" earnings being added yearly to government composite CAFRs.
• If those hidden assets are revealed and used, the Social Security and Medicare Trust Funds will never run out.
• When Orange County lost a little over $1 billion in derivatives investments, they were crying "poverty" and threatening to shut down schools, police would have to be laid off etc. However someone dug into the Orange County CAFR and found out that the county had about $16 billion in profitable investments! The county, from their profitable liquid investment funds / cash position could have continued performing the same services, without collecting one dime in taxes, and could have done so for another 11.9 years from the existing funds prior to running out of money! The crying stopped.
• While he was a Mayor, Jesse Ventura's city council wanted to raise $360,000 in taxes to cover a short fall on their "city budget for schools." Ventura objected when he discovered the city owned $48,000,000 in idle investments funds from which the $360,000 could be drawn from without raising taxes! "

For those people interested in saving Social Security and Medicare, here is something to sink your teeth into.

Summary
As I discussed in "Enron - What's Next" corporate America is not the only institution which is keeping money "off budget". The federal government has been lying about its financial position for decades. If what Mr. Burien says is true, and I have no reason to doubt it, then we may have an answer to our little social welfare programs problem.

But it will take a revolution by the people of America to get control of their government back so that they can open up these books and see just what is inside.

We are in many ways a very rich society. But by our current monetary standards, fiat credit-based money, we are bankrupt. Over our heads in debt. This goes for all the developed nations of the world.

Now no one, including me, wants to see grandma thrown out onto the street. To believe that someone actually does is not logical. But what we have allowed government to do is to replace the family. We have allowed government to replace charity. Americans are very giving people when allowed to give. But when the middle class has over one-half of their hard-earned wages confiscated from them by a bigger and bigger government they will do what is natural; they will look out for number one. They will stop giving.

Government has replaced the father in many homes. Government has replaced the family for the elderly. Government has replaced friends, charity and religion. Government tax policy says I can only write-off a certain percentage of my earnings for charitable donations. All these government welfare programs and tax policies are nothing more than a failing social experiment. Failing right in front of us. We are social creatures I am told. Then why do we continue to rely on a nameless, faceless bureaucracy to take care of our loved ones? Do we not trust ourselves?

The Republicans, Democrats and mainstream media are not going to assist in this. They are the "axis of evil". They are perpetuating a lie that government can protect us and take care of us from cradle to grave while they rob us blind. At the same time this "axis of evil" robs our senior citizens by falsifying the inflation rate. How much more proof do you need before you realize that the entrenched political class must be thrown out?

It will take a revolution, non-violent if possible, to untangle this mess before it completely collapses.

But it will collapse. The Math Does Not Work.

David Champeau
champeaudavid@yahoo.com

22 February 2002

1 - Budget of the United States Government, Analytical Perspectives, Fiscal Year 2003
www.whitehouse.gov/omb/budget/fy2003/pdf/spec.pdf

2 - The Forbes Four Hundred
www.forbes.com/2001/09/27/400.html

3 - YahooFinance - Insider: GATES, WILLIAM H III
http://biz.yahoo.com/t/16/2711.html

4 - The Bureau of the Public Debt Online
www.publicdebt.treas.gov/opd/opdfaq.htm#opdfaq33

5 - The Quality Adjustment Method: How Statistical Fakery Wipes Out Inflation
www.larouchepub.com/other/2000/ref_quality_adj_2742.html

6 - The Biggest Shell Game For Theft In The World's History
http://hometown.aol.com/cafr1/CAFR.html

7 - CAFRs: The BIGGEST Secret - $60 Trillion Invested By Fed, State, & Local Governments!
www.rense.com/general2/bigsecret.htm

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