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

April 14, 2014

To: Mary Jo White Chairwoman
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549

From: John W. White
2804 Fenwick Lane
Plano, TX 75093
jwwhite38@outlook.com
214-762-1678 cell
972-758-7302 office

I am a Whistleblower!

I contend that the fiscal policy of the Government of the United States of America is corrupt and fraudulent!  By using Cash Accounting to assess and report our financial condition the Federal Government has been able to conceal from most people in the U.S. and the rest of the world just how much in debt we truly are.  We must begin using an accounting system that reflects our true financial health.

I contend that every Member of Congress and every senior member of the Administration should be indicted on fraud and corruption charges if they vote for or support any financial budget that is based on our current Cash Accounting methodology. 

I contend that the U.S. Government has been using this fraudulent accounting since Fiscal Year 1969 to assess and report the financial condition of the U.S. Government.  By using simple Cash Accounting to report our annual deficit and our financial liabilities the U.S. Government is misleading anyone that chooses to invest in U.S. financial assets.  Further, this fraudulent accounting is misleading the U.S. citizenry that is counting on receiving the social benefits and pension payments that the Federal Government is promising.  Further, this fraudulent accounting is misleading the individuals and businesses that are engaged in providing products and services paid for by the U.S. Government.  Further, many individuals and corporate entities are making their own financial commitments based on the assumption that the United States Government will be able to meet these currently promised or implied financial commitments.

This is my fifth letter to the Securities and Exchange Commission presenting my rationale for why I contend that the U.S. Government has been using fraudulent accounting since converting to the "Unified Budget” for Fiscal Year 1969 and made the choice to continue to use Cash Accounting.  As a result of this fraudulent accounting the U.S. Government has been operating a massive Ponzi scheme (USAPonzi www.usaponzi.com) that has, as of April 1, 2014 created Unfunded Liabilities (based on GAAP Accounting) of $77.3 Trillion in addition to our Cash Debt of $17.5 Trillion.  This represents a GAAP Obligation of $94.8 Trillion as of April 1, 2014.

Let me enumerate the reasons why I feel that the U.S. Government must stop using this fraudulent accounting that is misleading the U.S. citizens that are depending on the Government being able meet the social benefit promises, misleading the U.S. citizens and businesses that are depending on the Government being able to pay their salaries and their invoices, and misleading the financial investors that are investing in U.S. financial instruments.

Reason #1: The U.S. Government itself requires that corporations utililize GAAP accounting so that investors have a clear understanding of the future financial obligations for these corporations.  These rules were included in the Sarbanes-Oxley Act that was was enacted as a reaction to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals cost investors billions of dollars when the share prices of affected companies collapsed, and shook public confidence in the US securities markets.  Several of the senior executives of these entities were convicted and imprisoned for their part in this use of fraudulent accounting.

This is why I contend that anyone in the U.S. Government that votes for or supports a budget that is based on Cash Accounting should be indicted on fraud and corruption charges just as were some of the senior executives of these corporations.

Reason #2: Because the U.S. Government is making unsustainable financial commitments, an effort (www.theinformact.org) is underway to introduce legislation that would require that the U.S. Government use fiscal gap and generational accounting to assess the financial obligations that the Congress is incurring with their budget and social benefit promises.  This act would require that fiscal gap and generational accounting assessments be made annually and could also be called for whenever a major change in the Government budget is being considered.  The Inform Act has been endorsed by more than 1000 economists including 16 Nobel Laureates in Economics.  This fiscal gap accounting is even more stringent than the GAAP accounting that I am promoting.

I contend that the Congress should call a joint hearing of the House and Senate Budget Committees inviting a panel of Nobel Laureates in Economics to explain the issues that are being caused by this use of fraudulent accounting.

Reason #3: On January 14, 2014, the State Budget Crisis Task Force released its final report, calling for an end to the longstanding practice of using one-offs and opaque accounting methods that make budgets appear balanced even when fiscal problems are worsening. The task force was led by a former chairman of the Federal Reserve Board, Paul A. Volcker, and a former New York lieutenant governor, Richard Ravitch, who have warned that states and cities have deep structural problems that will not go away just because the country is coming out of the recession that started in 2008.  Task Force Report Urges Municipalities to Stop Hiding Fiscal Troubles 

The fiscal crisis for the U.S. Government is dramatically more dire than the sum of the crises for all state and local governments.  

Reason #4: The Government Accounting Standards Board (GASB www.gasb.org) which sets financial standards for state and local governments has been developing guidelines that are intended to provide improved clarity to the forwarding looking obligations that these governments have for their pension plans.  On March 24, 2014 the GASB issued a news release stating that they would not delay the implementation of GASB Statement 68 that requires that state and local governments begin using the newly prescribed standards for reporting their pension plan obligations for reporting periods that begin after June 15, 2014.  These pension plans for state and local governments introduce forwarding looking obligations that are the essentially the same as the U.S. Government commitments for Social Security, Medicare, Medicaid and other social benefit promises.  The key difference being that most state and local governments have at least some money in their pension plan trust funds and these rules assess the magnitude of the short fall in the funding of these liabilities.  The U.S. Government has no money in their social benefit trust funds and therefore these future U.S. Government social benefit commitments are totally unfunded ($82.3 Trillion as of April 1, 2014).  The current fiscal planning and budgeting process for the U.S. Government is content to ignore this $82.3 Trillion problem.

These constructive actions by the Government Accounting Standards Board (GASB) are of course responding to the concerns expressed in Reason#3 by the State Budget Crisis Task Force.

Reason #5: In the Berkshire Hathaway letter to shareholders dated Feb 28, 2014, Warren Buffett included the following commentary regarding the "pitfalls of pension promises".   

Start of excerpt from Buffett Letter (page 21)

Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remain a mystery to most Americans. 

Investment policies, as well, play an important role in these problems. In 1975, I wrote a memo to Katharine Graham, then chairman of The Washington Post Company, about the pitfalls of pension promises and the importance of investment policy. That memo is reproduced on pages 118 - 136. 

During the next decade, you will read a lot of news – bad news – about public pension plans. I hope my memo is helpful to you in understanding the necessity for prompt remedial action where problems exist.

End of excerpt from Buffett Letter

As is evident in this disclosure in the Berkshire Hathaway shareholder letter, Mr Buffett is acknowledging that he knew exactly what was happening with these pension plan commitments in 1975.  He is now predicting that we will see a lot of bad news over the next decade about public pension plans.  He also states that prompt remedial action should be taken where problems exist.  I certainly think that the $82.3 Trillion shortfall in the U.S. Government social benefit trust funds qualifies as needing prompt remedial action.  

Business managers, financial managers, wealthy investors, politicians, media pundits, and others have up until now been willing to ignore the fact that the U.S. Government is running a Ponzi scheme since it is providing massive stimulus to our economy and to our asset prices and as a result is enhancing the wealth, profitability, and/or political power of these individuals and organizations.  USAPonzi is polishing their apple so they make the choice to keep quiet and let the Ponzi scheme run. (see Buffett on Pensions)

Reason #6:  USAPonzi is, through the ongoing GAAP basis deficit spending ($6.4 Trillion in FY2014), introducing a massive but artificial (i.e. unsustainable) stimulus to our U.S. and global economy.  I estimate that our U.S. GDP will drop by one third to one half or more when USAPonzi implodes and the U.S. Government begins to use proper accounting (see U.S. 'Real" GDP).

Reason #7:  USAPonzi is creating asset price and consumer price inflation of nominally 5% per year again due to this GAAP basis deficit spending.  By not sufficiently taxing (Cash Accounting does not report this need for taxation) the wealthy individuals and businesses, the U.S. Government is introducing new money into the U.S. and global economy every year ($6.4 Trillion in FY2014 and a total of $94.8 Trillion since 1969).  And this annual amount of new money is growing exponentially.  (see Inflation-A Byproduct of USAPonzi)

Reason #8:  USAPonzi is creating joblessness due to the fact that many people view the social benefit promises of USAPonzi as more valuable to their personal financial situation than working.  People retire early because the promised Social Security and healthcare benefits appear to be sufficient to support their retirement needs.  People drop out of the workforce because even the pre-retirement social benefit promises exceed the income that would come from the jobs for which many of these people are qualified. But these promises are totally unfunded so with current fiscal policy there is no way the Government can meet these promises. (see Joblessness-A Byproduct of USAPonzi)

Reason #9:  USAPonzi is appearing to make the rich even richer.  These rich folks (and businesses) are getting a massive tax break every year ($6.4 Trillion in FY2014 and rising exponentially) so their net worth is appearing to grow quite rapidly. (see Rich get Richer/Poor get Poorer)

Reason #10:  USAPonzi is making the poor even poorer.  The 5% inflation that is introduced by USAPonzi is reducing the buying power of the dollar and the social benefit promises that are today clearly unaffordable cannot rationally be increased to keep pace with this 5% consumer price inflation that we have experienced since FY1969.  (see Rich get Richer/Poor get Poorer)

Reason #11:  USAPonzi is dramatically overstating the value of household and business assets.  By not taxing the wealthy individuals and profitable businesses (for the last 46 years) as much as GAAP Accounting would assess, U.S. Private Asset values are overstated nominally by the amount of our GAAP Obligation ($94.8 Trillion).  Therefore I estimate that U.S. private financial assets are only worth about 14 cents on the dollar solely because of this fraudulent accounting. (see U.S. Total Assets Bubble)

These dramatic distortions in our economy and our financial system will continue as long as we continue to use this fraudulent accounting for arguably the most important financial entity on the planet; the Government of the United States of America.

By converting to GAAP Accounting for the U.S. Government's financial assessment and reporting processes, the Congress can have a budgeting process that reflects much more accurately the affordability and sustainablity of their financial commitments.  i.e. the Government can then have a true "pay as you go" budgeting process.  The current Cash Accounting in no way reflects the impact of future financial commitments.  And yes we do need to have the Fiscal Gap assessments called for by The Inform Act (www.theinformact.org) made periodically to address the even longer term implications of these social benefit commitments.

I realize that this transition to appropriate accounting will be traumatic, even devastating, to many people among the U.S. citizenry.  The distortions presented in Reasons#6-11 above will be reversed/corrected and therefore will be unfavorable for some parties:

Reason#6: Economic activity will drop by one third to one half or more and that will be bad for everybody.

Reason#7: Asset and consumer price inflation will be dramatically reduced which I view as a good thing.

Reason#8: Joblessness will be reduced, i.e. more people will need to work to earn a living wage which will not be viewed as a good thing but is a fact of life.  There is no free lunch in the long term.  Someone eventually has to pay to the bill.

Reason#9: The rich will not get richer exponentially since the low tax gravy train caused by USAPonzi will stop so the rich will not be happy about that.

Reason#10:  The poor will not be poorer because of USAPonzi induced devalution of the dollar.  A dollar earned by everyone will be worth more for a longer time.  I think that will be good for everyone.

Reason#11:  The rich will not be nearly as rich and businesses will not be nearly as profitable.

The two big problems will be that the wealthy individuals and businesses will have to pay a lot more taxes and the underprivileged and retirees will not get nearly as many social benefits.  I have made an attempt to assess the magnitude of this reconciliation in Scoping a Grand Bargain.  But even the level of cuts that I propose there (cutting the wealth of the wealthy by 56% and cutting social benefits by 40%) will not be sufficient to get to a sustainable fiscal plan for the United States of America.

But in any case we must get to a sustainable fiscal model for the U.S. Government and this is the price that we must pay.  Changing to a more informative and appropriate accounting methodology is the only way to get to that end objective.

I feel that it is incumbent on the Securities and Exchange Commission to treat the U.S. Government just as it would any other entity and require that the U.S. Government use an appropriate accounting methodology.

Do you agree?

Will you support The INFORM Act?

Will you take the appropriate action in your role as Chairperson of the U.S. Securities and Exchange Commission to seek the necessary changes in our Government's accounting to accurately reflect our financial condition?   

 

John W. White
Retired Information Technology Executive
214-762-1678 cell
972-758-7302 office
jwwhite38@outlook.com
www.usaponzi.com
2804 Fenwick Lane
Plano, TX 75093