The Biggest Ponzi Scheme on the Planet-The U.S. Government
"American Economic Exceptionalism Explained"                     USAPonzi                                      by John W. White   Mar 29, 2013

Asset Prices to Infinity
Jun 5, 2014
Updated Jul 2, 2014 to include zero GDP growth rate Scenario

It should not be surprising that the stock market is going up quite rapidly.  It should not be surprising that house prices are going up rapidly and skyrocketing in Silicon Valley.  As long as the U.S. Government allows USAPonzi to operate AND the investment community stays committed to "The Biggest Ponzi Scheme on the Planet" asset prices (stocks, real estate, art, trinkets, etc.) will go up exponentially. 

This is why the stock market indexes make frequent new highs.  Stock prices, real estate prices, and other asset prices are being pushed upward by a massive Ponzi scheme (USAPonzi) that has created $95.9 Trillion of new money (our GAAP Obligation) out of thin air over the last 46 years.  But as this commentary will demonstrate; we ain't seen nothin' yet.

As is shown in "U.S. Total Assets Bubble", our U.S. private assets are overstated by the amount of our GAAP Obligation, so as long as USAPonzi continues to operate our GAAP Obligation will increase dramatically and exponentially and the perceived value of our private assets will go up by a similar amount.

A Classic Ponzi Scheme

USAPonzi is a classic Ponzi scheme because the U.S. Government promises to pay returns (social benefits) to the U.S. Citizenry that far exceed the Government's ability to pay these benefits.  The U.S. Government conceals this inability to pay these benefits by using fraudulent accounting.  This fraudulent accounting only identifies the taxes necessary to meet the current year spending requirements and ignores the future year spending commitments by using Cash Accounting versus the appropriate GAAP Accounting.

By doing this, the Government avoids taxing the U.S. Citizenry as required to adequately fund the trust funds that would in theory earn interest sufficient to meet these future social benefit spending requirements.  Also the Government for the last 46 years has not been taxing the U.S. Citizenry enough to even pay the current year spending requirements.  When we do not have enough cash income to meet our cash outlays, this adds to the Federal Debt.  When the Government does not collect enough tax to fund the social benefit trust funds, this adds to what is called Unfunded Liabilities.

Our GAAP Deficits Create our GAAP Obligation

The difference between our cash income and the "spending" that is required to meet our current year bills plus the collection of funds to adequately finance the annual change in these social benefit trust funds is referred to as the GAAP (Generally Accepted Accounting Principles) deficit.  The cumulative effect of these annual GAAP deficits is referred to as our GAAP Obligation just like the cumulative effect of the annual Cash deficit is our Cash Debt.  Our GAAP Obligation is the sum of our Cash Debt and the Unfunded Liabilities for our promised social benefits.

By undertaxing the U.S. Citizenry for the last 46 years, we have created a GAAP Obligation of $95.9 Trillion (as of June 1, 2014).  What this fraudulent accounting does is allow the Government to effectively "spend" this Unfunded Liability money twice since the beneficiaries of these social benefits are expecting to get these benefits even though the Government has not collected that money and therefore does not have it, while at the same time the taxpayers that should have paid taxes to finance these social benefits get to keep that money.  This is what creates USAPonzi.  The Government has made promises it cannot possibly keep to the tune of $78.5 Trillion which is the current measure of our Unfunded Liabilities.  Our GAAP Obligation (largely our Unfunded Liabilities) is increasing every day by $17.6 Billion or $6.4 Trillion a year.

When will USAPonzi Implode?

As Dr. Kaushik Basu says in his article "The Ponzi Economy", you never know exactly when a Ponzi scheme is going to implode.  If you knew when it would implode, you would get out of the scheme one month before implosion.  But if you knew that most people would get our one month before implosion you would get out one month before that and so on and so on.  Which, by reverse induction, means that you should never invest in a Ponzi scheme.

But millions of people around the planet have over $300 Trillion invested in a global economy that is surfing on USAPonzi and when USAPonzi implodes there is going to be a huge mob of investors heading for the exits at the same time.

People Worldwide are Impacted by USAPonzi

It is amazing to me that now several hundred million Americans and many people all over the planet continue to be fooled by a simple little accounting trick instigated by President Lyndon B. Johnson nearly five decades ago.  And even when the problem is well known and broadly exposed, people continue to invest their money with the belief that the U.S. Government will in some way be able to continue this Ponzi scheme.

United States Economic Success is largely an Illusion

People all over the planet are in awe of the economic success and productivity of the United States of America.  However most of that success can be attributed to this massive Ponzi scheme that has created $95.9 Trillion of phantom money over the last 46 years and is therefore an illusion that will vanish mysteriously and quickly when USAPonzi implodes.   When you dig down into USAPonzi, you find that this inverted pyramid stack of financial assets ($115.3 Trillion of U.S. Assets and over $300 Trillion of Global Assets) is highly dependent on what is a relative trickle ($3 Trillion in FY2014) of tax revenue income from the U.S. Taxpayer.  This $3 Trillion of tax revenue is magnified 3X by USAPonzi (see Laundering Money) since the U.S. Government, each year, "spends" three dollars for every dollar of income.  When this USAPonzi stimulus goes away, our U.S. GDP could be reduced by one third to one half or more (see U.S. "Real" GDP June 2014) and as a result Government income could also be reduced by a similar ratio to $1.5-2 Trillion a year.  

This $3 Trillion income is the only revenue stream that we have to pay this now $95.9 Trillion GAAP  Obligation.

This GAAP Obligation is increasing each year by our GAAP deficit which is expected to be $6.4 Trillion in FY2014.

This GAAP deficit is more than 2X our income ($6.4T/$3T=2.13).

This GAAP deficit is increasing exponentially.

This $3 Trillion income stream is already over committed on a Cash basis by $500 Billion in FY2014.

And this income stream could be reduced significantly when USAPonzi implodes. 

That is why I say that we are heading toward a financial catastrophe of epic proportions. 

40 Year Projections of the U.S. Fiscal Model
(My Projections not those of the Government)

Let's now look at the numbers over the next few years to see how the U.S. Fiscal situation might play out.  The following charts show projections for the U.S. Fiscal Model over the next 40 years and demonstrate just how much phantom money (GAAP Obligation shown by the blue line) is being created under three different growth rate scenarios; 0.0%, 2.5% and 5.0%.  All of these scenarios assume that the effective tax rate stays the same as is projected for FY2014 (17.6% of GDP) and that the various department spending rates will follow current trends.  Chart 0 assumes a GDP growth rate of 0.0%, Chart 1 assumes a GDP growth rate of 2.5%, and Chart 2 assumes a GDP growth rate of 5.0%. 

I chose the 2.5% rate of Growth of GDP as my baseline since this is the current projection by the Congressional Budget Office (CBO) for the next 10 years.  I show the no growth plan to demonstrate just how important it is to see growth in the economy.  I chose the 5% growth rate to demonstrate the sensitivity of the Fiscal Model to a healthy increase in the GDP growth rate.  As one would expect increasing the GDP growth rate minimizes the problem but in all three scenarios the GAAP Obligation continues to increase dramatically and exponentially.

                      Chart 0:  United States Fiscal Model 0.0% CAGR GDP

Chart 0 (above) shows, with no growth for U.S. GDP, that both our Obligation and our Debt will continue to increase dramatically throughout this 40 year projection period unless the Government takes action to reduce our spending, reduce our social benefit commitments, and/or increase taxes.  Our Debt would increase from the current level of $17.4 Trillion to a projected $349.9 Trillion in FY2054.  Our Obligation (phantom new money) would increase from the current $95.9 Trillion to a projected $960.2 Trillion in FY2054.

               Chart 1:  United States Fiscal Model 2.5% CAGR GDP

Chart 1 (above) shows, with a 2.5% growth rate for U.S. GDP, that both our Obligation and our Debt will continue to increase dramatically throughout this 40 year projection period unless the Government takes action to reduce our spending, reduce our social benefit commitments, and/or increase taxes.  Our GDP would increase from a current $17.6 Trillion to a projected $45.7 Trillion in FY2054.  Our Debt would increase from the current level of $17.4 Trillion to a projected $243.8 Trillion in FY2054.  Our Obligation (phantom new money) would increase from the current $95.9 Trillion to a projected $854.1 Trillion in FY2054.

                  Chart 2:  United States Fiscal Model 5.0% CAGR GDP

Chart 2 (above) shows that by increasing our GDP growth rate to 5.0% our Federal Debt will not grow nearly as fast as GDP but that our Obligation will continue to increase dramatically and exponentially throughout this 40 year projection period unless the Government takes action to reduce our spending, reduce our social benefit commitments, and/or increase taxes.  Our GDP would increase from $17.6 Trillion to a projected $119.8 Trillion in FY2054.  Our Debt would increase from the current level of $17.4 Trillion to a projected $45.7 Trillion in FY2054 which would dramatically reduce our Debt to GDP ratio.  Our Obligation (phantom new money) would increase from the current $95.9 Trillion to a projected $656.1 Trillion in FY2054.  

Phantom Money Creation will continue as long as USAPonzi continues 

                                               FY2014       FY2054       FY2054       FY2054
Long term CAGR of GDP                               0.0%         2.5%            5.0%
                                 GDP        $17.0T        $17.0T       $45.7T       $119.8T
                     Cash Deficit          $0.5T         $23.4T      $16.0T          -$1.2T
                   GAAP Deficit           $6.4T        $49.2T       $41.8T         $24.6T
                      
Cash Debt         $17.6T      $349.9T     $243.8T         $45.7T
             GAAP Obligation         $98.1T      $960.2T     $854.1T       $656.1T
                        Debt/GDP              1.0            20.6           13.9                0.4
                Obligation/GDP              5.5           56.5            18.7               5.5

                    Chart 3:  Key Parameters From United States Fiscal Models

Chart 3 (above) summarizes the Key Parameters for these three scenarios of U.S. Fiscal Policy.  This summary shows that the extreme GAAP deficit in FY2014 of $6.4 Trillion will continue and expand throughout the next 40 years in all three scenarios with current spending, committing, and taxing policy.  This of course means that our GAAP Obligation will continue to increase, creating more phantom dollars in the U.S. and Global Economy.  The U.S. Government just cannot continue to spend and commit dramatically more than it's income.  The Congress of the United States of America seems to feel that they can spend whatever they want to without consideration for how they are going to pay for this spending.

                 Chart 4: United States Debt at various GDP Growth Rates

Chart 4 (above) shows the trend for the U.S. Federal Debt with current fiscal policy and with various assumptions (0.0%, 2.5%, and 5.0%) as to the rate of growth for GDP.  This shows that with compound growth rate of 5% over the next 40 years that our debt will tend to level out but with the lower growth rates our debt will spiral out of control.  

           

             Chart 5: United States Obligation at various GDP Growth Rates

Chart 5 (above) shows the trend for the U.S. Federal Obligation with current fiscal policy and with various assumptions as to the rate of growth for GDP.  This shows that with compound growth rate at any of these levels (0.0%, 2.5%, and 5.0%) our Obligation will spiral out of control. 

As long as USAPonzi continues, this phantom new money will be created and asset (especially stocks and real estate) prices will continue to move upward on a trajectory that would in theory approach vertical i.e. to infinity.   

But since these escalated prices are being produced by USAPonzi, most of the increase in these prices will evaporate when USAPonzi implodes. 

The Fed is a Piker! 

The Fed is taking the heat for causing the stock market to go up and even to start looking like a bubble because of their QE (money printing) of $1 Trillion a year (this is now being "tapered)".  However, the real culprit is the U.S. Government's USAPonzi and it's GAAP basis deficit spending of $6.4 Trillion a year .  "The Fed is a Piker" compared to the U.S. Government (see The Fed is NOT the Problem).  


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