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

Laundering money through the Washing(ton) Machine!!
Jul 2013

Table 1 demonstrates the nature and degree of the U.S. Government's USAPonzi scheme.  The table shows Tax Receipts (column A), Cash Outlays (column B), and the resulting Cash-Based Deficit (column II).   Column II (Cash-Based Deficit) reports how much more than the citizenry paid in taxes that the Government spent in cash each year to provide products, services, and social benefits.   Column V (GAAP-basis Defict) reports not only this excess cash based spending in the current fiscal year but also the increase in present value of future commitments that accrued during the fiscal year.  So according to GAAP accounting, total spending for the fiscal year is the sum of the amounts in column A and column V.  Column R ( (A+V)/A is the ratio of GAAP spending to Tax Receipts) therefore tells us that the Government is currently spending or promising to spend more than $3 for each $1 the taxpayers paid in, which in turn is causing both the Federal Debt and the Federal Obligation to increase rapidly.  This is a classic example of a Ponzi scheme as defined below since it would require an ever increasing (even dramatically increasing) flow of tax revenue from future taxpayers to keep USAPonzi going.  

A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation.  The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent.  Perpetuation of the high returns requires an ever increasing flow of money from new investors to keep the scheme going. 

   I        A         B          II          V           VI        VII        R
Fiscal                                     Formal                          Gross       Total
Year                                  Cash-Based GAAP-basis  Federal   Federal   (A+V)/A
Ended   Receipts  Outlays      Deficit       Deficit           Debt     Obligations
Sep 30 ($Billions) $Billions) ($Billions)  ($Trillions)  ($Trillions) ($Trillions)  (Ratio)  

2012    $2,450.2  $3,537.1  $1,089.4      $6.6           $16.2        $85.4        3.69 
2011      2,303.5    3,603.1    1,298.6        4.5             14.9          80.9        2.95
2010      2,162.7    3,456.2    1,294.1        5.3             13.6          76.3        3.45
2009      2,105.0    3,517.7    1,417.1        4.3             11.9          70.5        3.04
2008      2,524.0    2,982.5       454.8        5.1             10.0          65.6        3.02
2007      2,568.0    2,728.7       162.8        4.2               9.0          59.8        2.64
2006      2,406.9    2,655.1       248.2        4.6               8.5          58.2        2.91
2005      2,153.6    2,472.0       318.5        3.5               7.9          53.3        2.63
2004      1,880.1    2,292.9       412.3        3.4               7.4          49.5        2.81
2003      1,782.3    2,159.9       374.8        3.0               6.8          39.1        2.68

2002      1,853.1    2,010.9       157.8        1.5               6.2          35.4        1.81
2001      1,991.1    1,862.9      [127.0]       4.5               5.8          30.3        3.26
2000      2,025.2    1,789.0      [236.9]       3.9               5.7          25.9        2.93

Columns A,B: Source-Tax Policy Center Urban Institute and Brookings Institution
Columns II,V,VI,VII:  Source-Shadow Government Statistics No. 500 Special Commentary Feb 5, 2013
            Shadowstats.com
Column R: Ratio of GAAP-basis Spending to Tax Receipts
Note: Federal Obligations=Gross Federal Debt + Present Value of Future Liabilities
Note: Cash-Based Deficit(II) does not exactly equal Outlays(B)-Receipts(A) due to different data sources

Table 1: Federal Government Receipts, Outlays, Deficit, Debt, and Obligations

Washington is Spending $3+ for each $1 of Tax Receipts!

For 45 years (since 1968), every time we send a $1 to Washington they have been spending (or promising to spend) more than that $1 (now averaging over $3 and rising).  Table 1 above, shows what has been happening for the last 13 years and in particular during fiscal year 2012 the ratio of GAAP-basis Spending to Tax Receipts (column R) was 3.69.   And the way USAPonzi works this ratio will continue to trend upward.   According to Shadowstats.com (the source of the key data in this table) we had a GAAP-basis Deficit of $6.6 Trillion in fiscal year 2012 so Washington took in our $2.45 Trillion in Tax Receipts and magically turned it into $9.1 Trillion of spending and promises to spend.   This GAAP-basis Deficit of $6.6 Trillion means that if Washington had returned that money immediately and evenly to all of our citizens, each citizen would have received $21,019 ($6.6 Trillion / 314 Million = $21,019) during fiscal year 2012.    By running this GAAP-basis Deficit we have effectively been supplementing the income of the average citizen of the U.S. by the GAAP-basis Deficit divided by the U.S. population and we have been doing this each and every year since 1969Therefore much of the economic miracle of the United States of America has been created by the effects of USAPonzi. (see Living Beyond our Means)

Why is the GAAP-basis Deficit so big?
Why does the Federal Obligation grow so rapidly?

The short answer is compound interest over a long period of time.   But let's look at it in a little more detail starting with the definition of the Federal Obligation.  The Federal Obligation is the sum of our Gross Federal Debt and the Present Value of our Future Liabilities.   The following are the primary reasons that our Federal Obligation is increasing:

1) our Federal Debt is increasing due to our Cash-Based Deficit spending.  We consistantly spend more cash than we take in as revenues.
2) in general we are adding new participants to our exisiting entitlement programs each year therefore increasing our future liabilities.
3) from time to time we add new entitlement programs (i.e. the Prescription Drug Act in 2003 and the Affordable Care Act in 2010) therefore increasing our future liabilities.
4) we are incurring interest expense each year on our Federal Obligation; real interest on our debt held by the public (included in item (1) above), virtual interest on our intragovernmental borrowings, and virtual interest on the present value of our unfunded liablilities.

All of these items have a material impact on our GAAP-basis Deficit and the rate of increase in our Federal Obligation but it is item (4) that is the real killer. So why is that?   Well it goes back again to 1968 and the "Unified Budget" decision.   We began, at that time, to NOT fund our future entitlement liabilities sufficiently to be able to pay our entitlement benefits when they came due.  Actually we totally quit funding our future entitlement benefits.  The nature of present value means that you should have that amount of money in your trust fund so that it can earn enough income to allow the trust fund to continue to finance the future commitments when they come due.   Since we have no funds (hence the term Unfunded Liabilities) we have no income so each year the present value of our future liabilities grows by the assumed interest rate.   Since, by policy, these funds are to be invested in conservative federal securities, the discount rate for the present value computation would be nominally the rate on the long bond or about 3.5%.

So that means that the increase, this year, in our Federal Obligation will be about .035 x $85 Trillion or roughly $3 Trillion just for the real and virtual interest on our Federal Debt and the virtual interest on the present value of our Unfunded Liabilities.  This is just like what happens when you don't make your payment on your credit card or your home mortgage; the unpaid principal goes up.

There are at least three sobering thoughts in regard to this element of our GAAP-basis Deficit:

1) this Interest Expense ($3 Trillion) on our current Federal Obligation is 20% more than our total Tax Receipts ($2.45 Trillion) in fiscal year 2012!
2) if interest rates were to rise this Interest Expense will also rise.
3) this Interest Expense (unchecked) will continue to increase exponentially.

Laundering money through the Washing (ton) Machine.

As I hope this page shows, laundering our tax dollars thru the Federal Government appears to be a really good deal since the Government spends or promises to spend $3 (and actually going up from here) for every $1 we send to Washington.  But the sad news is that this, like Madoff and Enron, is not a sustainable model.   We are in for a huge disappointment when USAPonzi implodes.

Why do I say that the $3 in spending for each $1 of taxes is going up?

This is the nature of compound interest.   Since our Federal Obligation is going up every year by nominally the amount of our GAAP-basis deficit, and the dominant element of this GAAP-basis deficit is the interest on our Federal Obligation, our GAAP-basis deficit spending will (unchecked) also continue to rise, creating an exponential increase in both our GAAP-basis deficit spending and our Federal Obligation.   This is why The Department of the Treasury calls our fiscal policy unsustainable.  But yet Congress is not prepared to step up and say we must stop this runaway committing and spending  This is also why John Williams, author of Shadowstats.com, says: "hyperinflation is a virtual certainty".

If you look at the trend in column R of Table 1 you can detect the gradual increase already evident even though several other factors can cause year by year variations in this ratio of GAAP-basis spending to tax Receipts.

Next page: The Treasury Assessment