The Anatomy of USAPonzi
Jul 10, 2014
USAPonzi is a classic Ponzi scheme that is created by the U.S. Government overspending, overcommitting, undertaxing, and lying to the U.S. Citizenry by using fraudulent accounting. In this commentary I will explain how USAPonzi got started and identify the perpetrators of USAPonzi and the co-conspirators in USAPonzi. I will also explain the internal workings of USAPonzi and the consequences of USAPonzi now that it has been operating for 46 years. I will then conclude with my prediction as to what will happen when USAPonzi implodes and my recommendations for the actions we should take to establish a sustainable fiscal plan for the United States of America.
Ponzi Scheme definition
I will start with the definition of a Ponzi scheme to frame the context of this commentary.
A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operator by new investors, rather than from profit earned by the operator.
USAPonzi is "The Biggest Ponzi Scheme on the Planet"
The Operator: The United States Government
The Investors: The U.S. Citizens and U.S. Businesses/Taxpayers
The Scheme: The U.S. Government consistently spends and commits to spend much more than the Government's income, creating what is called "deficit spending". This "deficit spending" in turn provides a stimulus to the U.S. (and global) economy. However, because the U.S. Government is using fraudulent accounting, the magnitude of this "deficit spending" is dramatically understated due to the Government's use of Cash Accounting when it should be using GAAP Accounting. As a result the Government is only reporting the current year Cash Deficit spending and is ignoring/concealing the financial impact of future year social benefit commitments.
For FY2014, the Cash Deficit is projected to be $514 Billion (Congressional Budget Office estimate) while the GAAP Deficit is projected to be $6.4 Trillion (see USAPonzi Fiscal Model). The Government has been using this fraudulent accounting since FY1969 and as a result the Government's Financial Liabilities are much greater than the Cash Debt the Government routinely reports to the U.S. Citizenry. The major difference between the Cash Deficit and the GAAP Deficit is the increase in social benefits commitments that occur during the year. Since the Government does not collect the tax revenue required to fulfill these new social benefit commitments, these future commitments get added to our running total of Unfunded Liabilities.
The cumulative effect of our Cash Deficit is our Cash Debt and the cumulative effect of our GAAP Deficit is our GAAP Obligation (our Cash Debt plus our Unfunded Liabilities). Our GAAP Obligation therefore is the total amount of promises to pay that the U.S. Government currently has outstanding. As of July 1, 2014, the U.S. Government has promises to pay back $17.6 Trillion of Cash Debt to the people that have loaned the U.S. Government money, has outstanding promises to pay $78.9 Trillion in social benefits to U.S. residents, has undertaxed the U.S. citiizens and businesses by $96.5 Trillion (making some U.S. citizens and businesses look very rich and some U.S. businesses look very profitable), and has left this $96.5 Trillion GAAP Obligation to be paid by the future investors in the Ponzi scheme.
So the early investors in USAPonzi, the current and previous U.S. citizens and U.S. businesses, have already been paid returns of $96.5 Trillion (in the form of unpaid taxes) and are currently getting paid $17.6 Billion every day. On the other side of the ledger, the future investors (U.S. citizens and U.S. businesses) now must pay this $96.5 Trillion GAAP Obligation and this Obligation is increasing by $17.6 Billion every day.
Now let's look at the future investors' ability to pay this $96.5 Trillion Obligation. In the current fiscal year (FY2014) the U.S. Government's income is projected to be $3.0 Trillion. But Cash expenditures are expected to be $3.68 Trillion so they will not be able to pay back any of this $96.5 Trillion in FY2014. But the GAAP Deficit in FY2014 is projected to be $6.4 Trillion which means that the future investor's Obligation will increase by more than twice what the current investors are paying in this year ($6.4T/$3.0T=2.13). The longer the U.S. Government let's USAPonzi run, the behinder these future investors get. That is the nature of a Ponzi scheme.
The further bad news is that, because of the $6.4 Trillion of GAAP basis Deficit spending in FY2014, our economic activity in FY2014 is significantly stimulated and overstated (see U.S. "Real" GDP June 2014); therefore our $3.0 Trillion income is overstated. Our projected GDP in FY2014 is $17.0 Trillion with income of $3.0 Trillion while my estimation of "Real" GDP (our GDP without the Government stimulus introduced by GAAP basis deficit spending) is $9.3 Trillion implying a "Real" income of about $1.6 Trillion (assuming that Government income is linear with GDP).
Obviously the future investors have no possibility of paying back this exponentially increasing GAAP Obligation.
That is why USAPonzi is in fact a Ponzi scheme.
That is why I say we are heading toward a financial catastrophe of epic proportions.
That is why I say that the $96.5 Trillion of returns that have been paid to the early investors in USAPonzi is Phantom Money that will vanish quickly when USAPonzi implodes.
The Origin of USAPonzi: The enactment of "The Unified Budget" for FY1969 in 1968.
The Size of USAPonzi: $96.5 Trillion GAAP Obligation as of July 1, 2014
The Rate of Growth of USAPonzi in FY2014: $6.4 Trillion per year (our GAAP Deficit), $535 Billion per month, and $17.6 Billion per day.
The Original Perpetrators of USAPonzi: Lyndon B. Johnson and the 90th Congress in 1968. The original perpetrators set up this plan with a little sleight of hand by consolidating all U.S. Government receipts and expenditures into one budget and one financial statement without adopting an appropriate accounting system that would reflect the future financial impact of the social benefit plans that were being integrated into the "Unified Budget". The Cash Accounting system that was used prior to FY1969 was not inappropriate for the general operating budget of the Government since at that time most tax receipts were collected for general operating expenditures made during the fiscal year. That changed dramatically when the social benefit plans were integrated in with the general operating expenses since for these social benefit plans, some tax receipts during the current fiscal year are for expenditures in future years and these tax receipts should be retained in social benefit trust funds to earn income. Managing the accounting for this change requires the use of GAAP (Generally Accepted Accounting Principles) Accounting also refered to as "accrual accounting" meaning that you must recognize (accrue for) the social benefit commitments as they are incurred.
The Continuing Perpetrators of USAPonzi: Every President and every Congress since 1969. The continuing perpetrators have each chosen to continue USAPonzi since the precedent was already set (continued) by their predecessor President/Congress so it seemed acceptable to continue existing practice. Also because of the way USAPonzi works, each year the current period impact of switching to an appropriate accounting methodology would expose a larger GAAP Deficit and a larger GAAP Obligation. The only way to avoid a financial crisis occuring during your term in office is to continue to make the problem (GAAP Deficit and GAAP Obligation) bigger. Some members of Congress have attempted to push back on this Ponzi scheme but the majority in Congress continue to support USAPonzi (see Liars and Cheaters in Washington). The following are the Presidents that chose to continue operating USAPonzi:
George H.W. Bush
George W. Bush
The Active Co-Conspirators in USAPonzi: Every Secretary of the Treasury since 1969. Every Director of the Congressional Budget Office since 1969. Nearly every Director of the Office of Management and Budget since 1969. One former OMB Director, David Stockman, left the Reagan Administration basically because of this problem. Nearly every Comptroller General of the United States since 1969. One former Comptroller General, David Walker, has been actively working to expose this problem for many years. Every Chairman of the Securities and Exchange Commission since 1969.
The Active Co-Conspirators listed here are so named because they are either directly involved in executing the financial operations for the perpetrators or are charged with the responsibility of assuring the integrity of the financial markets. I have sent 5 whistle blower letters to the Securities and Exchange Commission voicing my contention that the U.S. Government is using corrupt and fraudulent accounting (see my most recent letter SEC Letter April 14, 2014). By failing to expose USAPonzi as a Ponzi scheme, these individuals have become "Active Co-Conspirators".
The Silent Co-Conspirators in USAPonzi: Every Federal Reserve Chairman since 1969 (see Fed Chairman Co-Conspirators in USAPonzi). The following is taken directly from the Federal Reserve System Mission Statement as one of the charges of the Federal Reserve System:
"maintaining the stability of the financial system and containing systemic risk that may arise in the financial markets"
It is my contention that USAPonzi poses the single biggest risk to the U.S. and global financial system since the turmoil of "The Great Depression". In fact, because the U.S. Total Financial Liabilities (U.S. Total Debt plus Unfunded Liabilities) to GDP ratio is 4.6 times higher today than it was at the start of "The Great Depression" the systemic risk is much greater today than it was in 1929. Therefore the Federal Reserve System cannot continue to stay silent on the subject.
The Passive Co-Conspirators in USAPonzi: Members of the media, business leaders, bankers, investors, hedge fund managers, financial advisors, economists, etc that are aware of USAPonzi but choose to not expose it. These knowledgeable but Passive Co-Conspirators while they may understand the Ponzi scheme seem to choose to stay silent, at least in part, because it is appearing to make them rich and/or powerful.
While this group of individuals may not have a legal or fiduciary responsiblity to expose USAPonzi, I feel that they have an ethical responsiblity to expose it. USAPonzi is misleading many citizens that would likely be making different financial decisions if they knew the truth about the Government's financial condition.
Proponents for the use of proper accounting by the U.S. Government: Sponsors and endorsers of "The Inform Act" (see www.theinformact.org); over 1000 economists including 17 Nobel Laureates in Economics. The INFORM ACT is a proposed bipartisan bill that would essentially require that the Federal Government prepare GAAP-basis financial statements annually but actually would take our financial assessment and reporting to full disclosure of all of our future liabilities and commitments with Fiscal Gap accounting. Dr. Laurence Kotlikoff Professor of Economics at Boston University is the Champion of "The Inform Act".
Proponents of a sustainable fiscal plan: David Walker, Former Comptroller General of the United States. David Stockman, former OBM Director in the Reagan Administration. H. Ross Perot businessman who tried to expose the fiscal issues of the deficit and the debt when he ran for President in 1992 and 1996. Tom Coburn retiring Senator from Oklahoma. Jeb Hensarling Congressman from Texas. The National Commission on Fiscal Responsibility and Reform (often called Bowles-Simpson/Simpson-Bowles from the names of co-chairs Alan Simpson and Erskine Bowles; or NCFRR) is a Presidential Commission created in 2010 by President Barack Obama to identify "policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run. Alan Simpson and Erskine Bowles continue to work toward a sustainable fiscal plan with their "Fix The Debt" campaign. (www.fixthedebt.org)
Many members of Congress know that we have a fiscal crisis and openly state that we must resolve this crisis by getting to a sustainable fiscal plan. But most of these same members of Congress will not support the actions that are required to get to a sustainable fiscal plan because they know full well that by doing so it will cause USAPonzi to implode and plunge us into a financial crisis of epic proportions. They are between a rock and a hard place since doing the right thing would likely prevent them from getting re-elected and getting re-elected is the most important objective of elected Government officials especially since Government officials themselves are among the major beneficiaries of USAPonzi.
I know that there are many other people that know about this fiscal crisis and are encouraging the people in Washington to take action to resolve it. Therefore this is only a representative sample list of the proponents of a sustainable fiscal plan.
How is USAPonzi concealed from the Investors?
By using Cash Accounting rather than the appropriate GAAP Accounting. A portion of the Government's shortfall in tax revenue is disclosed to the investors by reporting a cash deficit. The total amount of the budget shortfall would be reported to the investors if the Government was using GAAP Accounting.
Authors Note: Every Ponzi Scheme must have some form of fraudulent accounting to conceal the fundamental nature of the scheme from the investors.
How does this overspending, overcommiting, and undertaxing stimulate the U.S. and global economy?
Most of us can recognize that if we spend more cash than we earn we are doing what is called deficit spending and we are stimulating the economy but as a result we end up with debt. This is true for individuals, for businesses, and for the U.S. Government. This is what the U.S. Government nominally reports with their current Cash Accounting. However by making commitments to pay social benefits in the future, the U.S. Government is creating future financial liabilities and this also provides a stimulus to our economy. Since the U.S. Government is not collecting enough tax revenues to prepare for these future commitments, we are creating what is called "Unfunded Liabilities" which is what causes our GAAP Obligation to be so large. So why does the U.S. Government ignore these future liabilities? You will have to ask the Presidents and the Congresses that question. They have two choices for the answer; ignorance or dishonesty.
But since these are future financial commitments, how can this GAAP deficit spending impact our current economic activity to create the stimulus that I analyze in U.S. "Real" GDP June 2014. This GAAP deficit spending stimulates the U.S. and global economy in the following ways:
1) The Government is spending more cash than the Government takes in during the current period. This of course is the impact of the Cash basis deficit spending that the Government reports.
2) The Government is not taxing U.S. citizens and businesses enough to fund these future commitments and some of the citizens and businesses will spend that "untaxed" cash in the current period. Other citizens and businesses may choose to invest this "untaxed" cash in assets (stocks, real estate, etc.) which is what is causing asset price inflation (see Inflation-A Byproduct of USAPonzi).
3) Since the Government is promising to pay Social Security and pay for healthcare for many U.S. Citizens, some of these citizens will not adequately save for their retirement expenses and instead spend some of that "unsaved" cash in the current period.
4) The Government is not taxing U.S. businesses enough to fund these future commitments so these businesses can pay more compensation to employees and more dividends to shareholders so these employees and shareholders can spend more cash in the current period.
5) The Government is not taxing U.S. businesses enough to fund these future commitments so these businesses look more profitable so these businesses look more valuable so the shareholders look more wealthy so the shareholders may spend more cash in the current period (this is sometimes called the "wealth effect").
6) By understating the Government's deficit spending the Government can feel justified in paying higher than affordable compensation to Government employees thereby increasing disposable income for these Government employees.
7) By understating the Government's deficit spending the Government can feel justified in employing more employees than are affordable thereby increasing the disposable income for the economy.
The Consequences of USAPonzi
Now that USAPonzi has been operating for 46 years, we have the following conditions in our economy and our financial system that exist as a consequence of this massive Ponzi scheme.
We have Federal Debt of $17.6 Trillion.
We have Unfunded Liabilities for our social benefit promises of $78.9 Trillion.
We have a GAAP Obligation (Federal Debt plus Unfunded Liabilities) of $96.5 Trillion.
USAPonzi has created $96.5 Trillion of Phantom money (our GAAP Obligation) by undertaxing the U.S. citizens and businesses. (see Phantom Money)
Asset Price Inflation is nominally 5% per year. (see Inflation-A Byproduct of USAPonzi)
Consumer Price Inflation is nominally 5% per year. (see Inflation-A Byproduct of USAPonzi)
The value of the dollar is declining by nominally 5% per year. (see Devaluing the Dollar!)
The value of capital is distorted. (see Robbing the Saver!)
Economic Activity is overstated by 1.8X. (see U.S. "Real" GDP June 2014)
USAPonzi is encouraging Joblessness. (see Joblessness-A Byproduct of USAPonzi)
USAPonzi is encouraging Illegal Immigration. (see Illegal Immigration-A Byproduct of USAPonzi)
The rich are getting richer. (see Rich get Richer/Poor get Poorer)
The poor are getting poorer. (see Rich get Richer/Poor get Poorer)
We are living beyond our means. (see Living beyond our means)
USAPonzi is causing escalation in CEO and management pay. (see USAPonzi-A CEO pay Bonanza)
Pay disparity is wider between management and worker. (see USAPonzi-A CEO pay Bonanza)
The wealthy appear seven times as rich as they really are. (see U.S. Total Assets Bubble)
We have more government workers than we can afford. (see Washington DC-A coming Ghost Town?)
Government pay is higher than we can afford. (see Washington DC-A coming Ghost Town?)
Fraud and Corruption is rampant in social benefit payments. (Cheating the Government is a common scam. That's where the free money is and the Government is an easy mark.)
Athletes and entertainment stars are grossly over compensated. (USAPonzi phantom dollars largely collect at the "1%Club".)
The Stock Market is in a bubble of nominally 7X. (see U.S. Total Assets Bubble)
Real Estate is in a bubble of nominally 7X. (see U.S. Total Assets Bubble)
We have built a lot of real estate that we cannot afford. (government buildings, sports venues, office buildings, corporate headquarters, malls, houses, and apartments)
U.S. Total Debt (Federal, state, local, consumer, business and finance) as a % of GDP is twice what is was at the start of "The Great Depression".
Our social benefit Unfunded Liabilities are greater than the U.S. Total Debt.
Therefore U.S. Total Financial Liabilities (U.S. Total Debt plus Unfunded Liabilities) as a % of GDP are 4.6X what they were at the start of "The Great Depression". (see U.S. Total Financial Liabilities)
USAPonzi has created $96.5 Trillion out of "thin air".
USAPonzi has appeared to create 1,426 billionaires.
USAPonzi has appeared to create millions of millionaires.
USAPonzi has appeared to create hundreds of billion dollar corporations.
USAPonzi has appeared to create 287 billion dollar hedge funds. (see Hedge Fund Ponzi)
$96.5 Trillion of Phantom Money will buy a lot of stuff and appear to make a lot of people look very rich just because U.S citizens and businesses did not pay the taxes required to finance the Government's spending and committing.
The U.S. Government is creating $17.6 Billion more Phantom Money every day!!!
The Implosion of USAPonzi
When USAPonzi implodes I predict that the following will occur:
Social benefit promises will have to be dramatically reduced.
Government spending will have to be significantly reduced.
Tax rates will have to be increased.
Economic activity (GDP) will be reduced by one third to one half or even more.
Many direct and indirect Government employees will lose their jobs or have their pay reduced.
Many individuals will suffer personal financial crises.
Many businesses will fail.
Many banks will fail.
The stock market will crash.
The real estate market will crash.
Much of the U.S. Total Debt (all types) will fall into default.
Since our U.S. Total Financial leverage is 4.6X what it was in 1929, the resulting Depression could be even more severe than "The Great Depression"
Recommedations for a sustainable Fiscal Plan
I would propose following actions for how we should develop a long term sustainable fiscal plan for the U.S. Government:
The first rule of a sustainable budget process is that you only spend and commit to spend what you have the ability to pay for. Sounds simple but we have obviously been ignoring this basic rule for at least the last 46 years.
The second rule is that you must have an accurate assessment of what you are spending AND what you are committing to spend. Sounds simple but we have obviously been ignoring this basic rule for the last 46 years.
The third rule is that you do not commit to picking up the tab for other people's financial problems however large they might be. Sounds reasonable but we have obviously been ignoring this basic rule for the last 46 years.
The fourth rule is that you cannot make unlimited defined benefit commitments to the U.S. citizenry when they meet fuzzy eligibility criteria. Schemers and scammers will always find a way to find beneficiaries that can meet this fuzzy criteria. We must do what most private entity businesses have done and switch from defined benefit to defined contribution for most of our social benefits.
Now this is the hard part. Because we cannot predict accurately what our economy will produce in the way of economic activity (aka GDP), we cannot predict accurately what our income will be and therefore we cannot predict what social benefits will be affordable. As a result, many of our social benefit payments will need to be variable based on our ability to pay for them.
One issue that has gotten us into the fiscal crisis we have today is that we have said we will pay a fixed amount of social security to each person that meets certain age and other criteria but we have not funded the trust funds sufficiently (in fact we have not funded them at all) to meet these payments. Now we have only so much money coming in (not nearly enough) so we can only pay so much.
Another issue that has gotten us into the fiscal crisis we have today is the we have said we will pay most, if not all, of your medical bills if you meet certain criteria but we have not funded the trust funds sufficiently (in fact we have not funded them at all) to meet these payments. Now we have only so much money coming in (not nearly enough) so we can only pay so much.
So my recommendations are as follows:
0) Use GAAP accounting for the Federal Government.
1) Change the Fed to a single mandate: stable money policy. Drop the full employment mandate.
2) Formally set the Fed inflation rate target at 2%.
3) Do not let the Fed lower the Fed Funds Rate to less than this inflation rate target of 2% without the approval of Congress.
4) Require that the U.S. Government makes a GAAP-basis budget that is approved by Congress.
5) Balance the GAAP-basis budget. This will likely require an Ammendment to the Constitution. Require that the GAAP-basis budget deficit be no more than 2% percent (the Fed target inflation rate) of GDP. Basically requiring a balanced budget but with a little wiggle room. Even with this wiggle room this should keep the debt-to-GDP ratio from growing.
6) Set the target Federal Government spending level at 21% of GDP.
Author's note: This 21% spending target will need to be tweaked somewhat as we get a few years experience with a "Balanced Budget". I base this proposed 21% target on the recent average spending level of 20.5%.
7) Modify and simplify the current tax code to yield this 21% tax revenue. Flat tax sounds nice but is too hard and potentially too dangerous to make such a massive change and it shifts too much of the tax burden to those least capable of paying.
8) Dramatically reform/reduce social benefits so that they are actuarially achievable within the 21% spending limit. Everything should be on the table but repealing "The Affordable Care Act" and dramatically cutting the "Prescription Drug Program" should be the first targets.
9) Simpson-Bowles should be the model for these spending reforms. Some really smart and relatively independent folks did the best they could to address the big picture problem. If their solution does not fit into the 21% budget box then pro rata it down until it fits.
10) Stop Government backing of Home loans and phase out Fannie and Freddie. These entities were a major part of the Housing Bubble and have inappropriately enriched a lot of folks in and out of Washington either directly or indirectly.
11) Stop Government backing of Student loans.
12) Stop Government backing of private company pension plans.
13) Open ended Government guarantees induce fraud and lead to privatizing profits and socializing losses. Schemers and scammers will always find a way to siphon off money from "the biggest piggy bank on the planet".
14) Institute a voucher system for healthcare. We are almost surely in a "Healthcare Spending Bubble" induced in large part by the explicit backing of the Federal Government.
Our economy and indeed our financial system is being propped up by the totally unrealistic promises that have been made by the U.S. Government.
Making these unrealistic promises is the fundamental reason the U.S. Government is running a Ponzi scheme. Going back to the Ponzi scheme definition I introduced at the start of this commentary; current U.S. citizens and businesses are being paid returns today (unpaid taxes) that will have to be paid for by future U.S. citizens and businesses and they will not have the money.
Next Page: U.S. Total Assets Bubble