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Archive for July, 2011

Nervous?

“We’re not going to default”.

Just a lot of drama, of no real consequence. Just a lot of noise in the system.

Bull.

The only way that the federal government will get to and remain solvent, is if they orient their discussions over the accrual basis financial statements of the government, and frankly almost ignore the cash basis ones. And, further, oriented to cumulative surpluses and deficits over the relevant business cycles, not only over a single year.

What is an accrual basis financial statement?

In a nutshell, it describes income and expenses as the consequence of promises to the federal government and promises by the federal government, based on economic activity that has occurred during the year in question.

That contrasts with the cash basis financial statements which record the cash income and expenses. If as a result of events this year, I realized $50,000 in income, but I incurred pension and health care obligations into the future of $100,000 that I will eventually have to pay for, I’ve lost money in fact (even if it didn’t come out of my checkbook this year).

The cash basis income includes actual individual tax receipts, corporate tax receipts, social security taxes, medicare taxes, medicare co-payments, duties, estate tax, licensing, sales of federal assets, etc. It is the actual money that is received.

Similarly, the cash basis expenses include actual payments to military, veterans benefits,  federal contractors, Congress and staff, Presidency and staff, judiciary and staff, agencies and staff, social security payments, medicare payments, aid to states, etc.

If tax receipts based on current year activity is deferred, then that is not an item of cash basis income. If commitments based on current year activity is deferred, then that is not an item of cash basis expense.

The deferred expenses enormously exceed the deferred income.

Deferred expenses include future social security payments (based on the expected payout over the life of individuals that work now and contribute to the theoretical social security trust fund now), future medicare, future veterans benefits (nearly as large an expense as a result of the Iraqi and Afghanistan wars, as the actual expenses incurred), pension expenses for federal employees.

The computation of deferred income and deferred expense is a very complex determination. I doubt that any living individual can even conceive of it (though the treasury secretary is responsible to, and someone is responsible to sign off on the audit of the financial statements of the US government).

No corporation runs on the cash basis. Any that publicly presented their results of operations on the cash basis only would be sued for violation of SEC requirements and gross misrepresentation.

During the Clinton administration, although the government operated at (my guess) approximately an average of $100 billion cash deficit, (the best of any administration in the last 50 years), the average accrual basis deficit was closer to double that much, that severe. (The accrual basis financial statements were only required to be prepared from 1997 on, so the data below doesn’t reflect the first four years of his presidency. The last two years were in accrual basis surplus, not only cash basis.)

During the Bush administration, although the government operated at an average of $400+ billion cash deficit, (3.2 trillion) the cumulative accrual basis deficit was literally 1.8 trillion worse ($5 trillion real deficit) as a result of government legislation, policy and external events.

The overwhelming debt occurred grossly over that time period, literally nearly bankrupting the nation.

I don’t know how professional accountants lived with it, how Big 4 consultants accepted in good faith the recommendations to reduce taxes and spend on military adventures, at the same time.

I don’t know how the Congressional Budget Office and a gamut of think tanks IGNORED the reality in front of them, willingly shutting up.

These results are from the Financial Reports of the US Government.

Net operating cost is the accrual basis annual results give or take. The deficit is the cash basis result give or take.

A positive number is a surplus, a negative number a deficit.

Net operating cost Deficit Administration
1997 -2.6 Clinton
1998 -109.9 Clinton
1999 101.3 Clinton
2000 46 Clinton
2001 -514.8 127 Clinton/Bush
2002 -364.9 -157.7 Bush
2003 -665 -374.8 Bush
2004 -615.6 -412.3 Bush
2005 -760 -318.5 Bush
2006 -449.5 -247.7 Bush
2007 -275.5 -162.8 Bush
2008 -1009.1 -454.8 Bush
2009 -1253.7 -1417.1 Bush/Obama
2010 -2080.3 -1294.1 Obama

http://www.gao.gov/financial.html

During the period reported during the Clinton administration, the government operated at a net accrual surplus. In other words, the federal government adequately funded its operations over that business cycle. Immediately after Bush became president, that changed. A recession began at the beginning of his administration, 911 occurred greatly precipitating the recession.

BUT, Bush entered two expensive and remote wars only incidentally relating to direct threats to the US. (Al Quaida was a threat, but the 911 event was a lucky fluke for them, that could have been prevented with an increase in national security spending of perhaps $20 billion/year, not the $80 billion/year spent). The Iraq War was utterly unnecessary.

AND, rather than funding those wars by increasing taxes, he did not fund the wars at all, and instead reduced taxes. Although the economy came to do well as measured by the stock market, the gains in the stock market realized were barely taxable.

So, we saw large cash deficits and much higher accrual deficits during the best of economic times, with a clearly predicted bulge in obligation coming.

This was Joseph in reverse. Rather than preparing for anticipated famine during the best of times, Bush opened the stores of seeds to the vermin. (Sorry for the gross polemic language).

In 2008 and 2009, the best of times ended, and we saw enormous cash and accrual deficits.

Obama inherited the idiotic war policies, the idiotic tax policies, the idiotic fiscal policies.

Its now a 100-year fix. The cash deficit cannot decline significantly without breaking all promises, rendering all legislative enactment (our democracy) void. So, there is a 20 year tide to swim against.

Or, the federal government can devolve to my credit rating.

But, “no new taxes”.

Among the Congress, out of 550 members, I’ll bet that maybe 50 of them even know that the federal government issues accrual basis financial statements. That is our “leadership”, our “stewardship”, our “governance”.

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The democrats big assertion, rational to expect, is that stock markets will become very volatile and even collapse as the US gets close to delaying paying their bills.

It hasn’t happened, at least not yet. You’d think that a week away from the stated precipice would be close enough to start affecting investments.

Part of the softness of the reaction is due to the fact that its not that the US will stop paying its bills (the shutdown was more of stopping of things), but that it will start picking which 2/3 of its obligations it will pay.

Every business deals with, and most accept, payments a few days late, or even a month in bad times. Its a gradual increase in burden, but not a cliff.

It will affect contractors with the federal government and then will gradually trickle down into the economy.

So, most obliviously assume that a debt-limit will be extended, with some terms and drama and are just ignoring the drama.

Also apparently, mutual funds apparently aren’t getting marching orders to divest of holdings from individual investors, cashing out.

The republican expectation of higher interest rates on US treasury securities resulting from the increase in the deficit and debt, also did NOT happen.

For some of the same reasons. The risks of default are still perceived as very low.

Similarly, many predicted behaviorial changes on the part of sprawlites with the rising cost of gas. That hasn’t happened.

These were all giant predictions. The markets haven’t responded.

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Most Americans don’t have the social networks in place to take care of old, sick, disabled. We won’t take care of others, and noone will take care of us.

We don’t have the time to return phone calls to friends. How can we be expected to be there, and skilled, to take care of someone that needs a great deal of care, time, maybe money.

How about skilled for an actual life? Most of us are skilled for bureaucracy.

We don’t live real whole lives. We don’t live through phases of real dependence. From an early age, we don’t have much contact with our parents. We don’t learn either principles, behavior or skills from them. We don’t work with our neighbors, mutually dependent for our very lives. Our marriages are sentimental as much as tangibly interdependent marriages. Our cousins, aunts, uncles, parents, brothers, sisters live far away. We don’t rely on them for anything, and they don’t rely on us. We don’t spend our leisure time together, and we definitely do not care for our family members that are struggling, unemployed, lonely,  infirm, elderly. And, we don’t see  anyone die really.

We don’t really know how to be old and relate well and appropriately to kids. And kids don’t know how to take care of elders.

How did that happen? How did we get so divorced from real life? How did the rituals of life that our grandparents knew as important, become just shadows rather than real? How did we let anyone convince us to move for careers rather than keep communities economically vibrant? How did we let anyone convince us to invest our life savings in retirement accounts investing far far from home, rather than in our own communities?

How did we come to accept our employers demands that we perform at top level, rising to every challenge, but willingly and repeatedly dropping the ball on our communities?

How did we get so anonymous?

Its been a long time coming, obviously.

We became anonymous partially because we could.

We live longer with less disease. Less of our children and wives die at childbirth. Our homes are warmer and more solid. We survive through out employment or our enterprises, and not through self-reliance or cooperation even. We drive far to get to employment, and we live in anonymous communities, of shared class, but not of shared interdependence.

The cost of living has increased, so that we need to drive further for higher paying jobs. We are in the rat race.

How did anonymity get comfortable, desired at all?

Its the sea that we live in, is how. We can’t imagine any other option.

We were trained in anonymity by going to public schools. (Those that went to private schools were trained in privilege). We were socialized into anonymity at work, in health insurance, and in anonymous government provided social benefits.

We were prohibited from intentionally living with chosen neighbors by law and by the greed of the market. A seller of a house only wants the most money for it. They are leaving the community after all. Most communities are unable, legally prohibited, and unwilling to control what their communities become.

There are a few community associations, but they are the exception.

Anonymity historically has happened frequently in society, especially during commercially successful society. One secondary characteristic of most successful empire is cultural anonymity.

Then some local or general catastrophe upsets what we take for granted, and we need to link with either random or associated people to take care of each other.

We now need social security, medicare, medicaid, and without the threat of change. We were promised.

But, we also need non-anonymous community. We need small towns that don’t aspire to be cities.

The conservative and conservative religious approach is one attempt to answer the alienation of anonymous culture. They declare that the reason that people are so anonymous is that we’ve abandoned codes of what is right and wrong. One theme of the religious conservative movements around are of the importance of family, of deciding to keep close and good relationships with family.

Ironically, many of the religious conservative movements are as anonymous as modern liberal and commercial society, some even moreso. The classic sociological analysis on Christian references to society, are that individualism is pre-eminent. Families are/were important, but the fundamental relationship of person to God is individual, not familial, not collective. That then extends into economic relations.

The new progressive spiritual ideologies of Buddhism, new age, and Marxist/anarchist radical thinking, are also based on the preeminence of individualism and the hatred of tribal orientation (socially exclusive and conflicting with individualism).

In the 60’s and 70’s, a large basis of the questions that many of us asked were about how to address the alienation that we felt, especially in suburbia, which is much larger and much more an American norm now.

We deconstructed, but we didn’t reconstruct. To state a cliche, we made holes, not wholes.

We need to get back to the task of constructing a sustainable society, that accomplishes the very multiple needs and expectations that we now demand of a society.

I’m not sure we’ll get there. There are just too many of us is too small a space, and too much power concentrated in the hands of those that seek more money from their money/power rather than any functional social restoration.

We have to deliver a complex supply chain of essential materials. So much is imported. (Food, energy, materials). We have to deliver full employment, as we have such high fixed costs of living.

All, while we don’t talk with each other very much.

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I hate it when my clients undertake a decision process of who they can pay last. I hate it when I’m put into that position.

In the name of promise-keepers, the republicans are going to compel the taxpayers of the United States to be promise-breakers, all stated in the name of “values”.

There are four weeks until the federal government reportedly must begin choosing which bills to pay and which not to pay, and only be able to pay 2/3 of current obligations, with no prospect of catching up.

What would the priorities be?

1. Interest on the debt (otherwise the US will go into default on sovereign debt and quickly cause a global financial meltdown)

2. Current military salaries and operations including CIA and other intelligence gathering

3. Courts

4. Congress and White House officials (staff no)

5. Operational accounts payable

6. Contracted government pensions

7. Less essential military staff – incuding strategic

8. VA and military pensions

9. Social security

10. Medicare payments to doctors/hospitals

11. Grants to states

12. Tax refunds

13. Non-defense Governmental agencies

The federal government would find a way to pay up to line 9. Line 10 and above, the feds would simply state that the payments will be delayed, probably thirty days to sixty.

With a balanced budget amendment, it would get to non-current payment of social security, also thirty to sixty days late.

I guess that’s not too bad? The worry is probably all exagerated (that was a joke).

There are two great tragedies of this (many more than two):

1. That the federal “leadership” failed in the past, failed to be prepared. That in the long-term, deficits driven by age bulges are cyclical, and predictable. If the “sea level” is stable then there will be a period of high tide in surplus currently, followed by a period of low tide in deficit, in ten years. And, within that grand tidal predictability, there are business cycle oscillations, that we’re in.

So, in the 90’s and 00’s, rather than save for the federal rainy day, the federal government kept taxes unnecessarily low and spent. In the 00’s, when the federal government should have rationally been operating in a strong cash surplus, we went into deep deficit (due to tax cuts and unfunded wars over a decade), and structural crash and then uncertainty.

The fiscal discipline of the Bush republican administration was a cruel joke, a century’s worth of negligence ( because it will take a century to restore, that severe.)

2. That the federal government has and is neglecting the future, making it impossible for there to be sufficient economic activity to EVER function in balance for the long term, beyond the predictable tidal deficit from the baby boom.

Negligently inadequate funding for education, research, infrastructure.

The consequences are a positive feedback loop (thats NOT a good thing). That is that the only rational response to the prospect of the loss of social security, medicare, federally funded public services, is to prepare to take care of one’s own. (Its a very good thing to get to status of confident net worth.) But, the short-term effect will be a withdrawal of net worth from the middle class and a permanent divestment of public features of social risk-aversion (military, social security, etc.) The long-term effect would be a permanent decline in America’s freedom to and freedom from.

But, at least we would have a restored aristocracy, with no delusions of a “king in every castle”, only a few castles and only a few kings.

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