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

U.S. "Real" GDP
Apr 26, 2013

It is my contention that our economic activity is rather significantly enhanced by the impact of the input into our economy not just by the cash-basis deficit spending of nominally $1Trillion/year but really by our GAAP-basis deficit spending of nominally $5.3 Trillion/year.  The Comeback America Initiative estimates our annual change in our National Burden to be $5.3 Trillion a year which is a good proxy for our GAAP-basis annual deficit. reports that our GAAP-basis deficit was even higher at $6.6 Trillion for fiscal year 2012 that ended on September 30, 2012.  This is because the entitlement beneficiaries are living their lives assuming that they will receive many of their entitlement benefits at the current pace for their lifetime which clearly they cannot since the Federal Government does not have the money.  Many people are not saving appropriately for their retirement assuming that they will have Social Security and Medicare at current levels when they retire but the Government does not have the money.  Many people in the healthcare and defense industries are living their lives assuming that their invoices will continue to be paid at the current pace but again the Government does not have the money.  This $5.3 Trillion-$6.6 Trillion of GAAP-basis deficit spending is obviously not sustainable with current dollars.  Unless action is taken to dramatically reform our entitlement programs and reduce our Government spending, we will eventually be forced to print 2 dollars to go along with each tax revenue dollar to cover our cash outlays at these currently promised entitlement levels. 
(see Laundering Money)

When the Government tells people that they will get future benefit payments at these unrealistic levels the benefitting general populous transfers these promises into home mortgages, car payments, student loans, credit card bills, cell phone bills, substitutes for healthcare insurance, substitutes for retirement savings, etc. etc.   When the Government defaults on these commitments a whole cascade of commitment defaults and personal financial crises will result.

How much of our economy is artificial?  About one third!   

GAAP-basis deficit spending of $5.3 Trillion a year is absolutely unsustainable but we are doing it with our eyes wide open.  If you assess this at a macro level it means that we are artificially injecting $5.3T into our $15.7T GDP economy every year.  This means that we are injecting $14.5B into our economy every day.  One might infer then that as a first order approximation our real economy is running at about a $10.4T ($15.7T-$5.3T = $10.4T) GDP level since we have $5.3T of borrowed or implicitly borrowed money, propping up the real economic activity.   This could then be the level to which we might fall when we take the action to curb our Government spending and increase taxes to a sustainable level.  That would be a massive shock to our system but it is absolutely necessary if we are to get on a sustainable path and avoid significant devaluation of the dollar. 

While this level of contraction of our economy (33%) seems unlikely it is not that different (in fact it is less) than the contraction the economy realized during the Great Depression.

Year                                1929      1930      1931     1932     1933
U. S. GDP                     $103.6B  $91.2B  $76.5B  $58.7B  $56.4B
Total U.S. Debt%GDP    170%                                             300%

Note: Total U.S. Debt in this table is federal, state, local, consumer, corporate, and financial debt.

Table 1:  U.S. GDP and Total U.S.Debt%GDP during the Great Depression

Table 1 shows that the U.S. GDP contracted by 46% in the first 4 years of the Great Depression from $103.6B to $56.4B.   While there continues to be lively debate about what caused the Great Depression, one theory is that the country accumulated too much debt during the roaring twenties.  There was a dramatic spike in the debt ratio during the Great Depression with debt-to-GDP ratio growing to nearly 300% of GDP in 1933.   But the interesting thing is that the debt-to-GDP ratio in 1929 (the start of the Great Depression) was only 170% of GDP.   Debt actually dropped from $176B in 1929 to $169B in 1933, it was the GDP contraction of 46% that caused the debt-to-GDP ratio to spike to 300%.

As of April 26, 2013 we have the following financial commitments according to the U.S.DebtClock and the Burden Barometer:


U.S.GDP                                              $15.7T
Federal Debt                                        $16.8T        107%
Total U.S. Debt                                    $59.4T        378%
Total Burden                                        $72.2T        459%
Present Value of Unfunded Liabilities  $55.4T        353%

Note 1: Total U.S. Debt includes the Federal Debt
Note 2: Total Burden=Federal Debt + Present Value of Unfunded Liabilities

Table 2: U.S.Debt and Burden April 26, 2013

So as of April 26, 2013 our Total U.S. Debt as a per cent of GDP is more than twice (378% to 170%) what it was at the start of the Great Depression BUT now we also have unfunded liabilities that are also more than twice (353% to 170%) the level of debt in 1929.   So net-net we, as a country, have total financial commitments that are more than 4 times ((378%+353%)/170% = 4.3) what we had at the start of the Great Depression and we are spending 3 times (($2.5T+$5.3T)/$2.5T = 3.1) our tax revenues every year (see USA Ponzi or Laundering Money).   I would have to say that the United States, from a fiscal standpoint, is totally out of control!

Table 1 above shows that Total U.S. debt in 1933 was 300% of GDP after the economy contracted by 46%.   So what would be the corresponding ratio of Total Financial Commitments to GDP if our economy were to contract by the 33% that my "Real" GDP analysis suggests?

GDP (after contraction) = $10.4T
Total U.S. Debt= $59.4T
Present Value of Unfunded Liabilities= $55.4T

Financial Commitments/GDP= ( $59.4T + $55.4T) / $10.4T= $114.8T / $10.4T = 11.04 = 1104%

As we know, the debt crisis after the Great Depression got resolved by debt defaults and bank failures.  I predict that our current crisis which, on a financial commitment ratio basis, appears to be more than 3 times as acute (1104% to 300%) will have to be resolved by debt defaults, entitlement defaults/reforms, and possibly even bank failures.

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