In scientific notation, this would look like $1.23 x 10^14. If you can’t comprehend that, try 123 trillion dollars. And if you CAN comprehend that, well done! You probably have an IQ the size of the US government’s liabili ties, which of course is what this number represents.
To put that in just a bit of perspective, if the US government were lucky enough to keep collecting taxes at the 2007 rate of $2.67 billion per year, it would take just 46 years to collect this much tax. That also assumes a 46 year interest holiday and cutting government spending to a single office of 34 public servants who spend their entire time counting $100 bills.
Why 34? That’s how many people it would take counting $100 bills — at five bills a second, 8 hours a day, five days a week — to count $123 trillion in just 46 years. Again, assuming nothing goes wrong, such as carpel tun nel syndrome, death, or retirement.
This number is a bit shocking, especially as the outstanding US public debt as of yesterday was a mere $11,324 billion. (You’ll have to add $35 billion to make it current today by the way.)
The trouble is the bookkeeping.
The government has quite rightly chided banks and insurance companies (while doling out tax payer money to them) for not properly reporting and accounting for off-balance sheet liabilities such as guarantees. Even worse, some of them didn’t accurately report the losses on mark to market derivatives that represent future liabilities (and therefore a current year loss).
In essence, the government is saying, “Do as I say, not as I do.” Future liabilities don’t get counted in government because the US government operates strictly on a cash basis.
That’s why government guarantees are so popular. The Treasury can guarantee what it likes, write the contract, and let the next administration worry about the Great Big Bold Red Loss that is inevitable at a future date.
Case in point: The US government has spent or guaranteed private debt worth a total of $13 trillion since the beginning of the financial crisis in September. That’s a pretty big number for a country with a GDP of $14 trillion. It’s the equivalent of Exxon Mobil guaranteeing the national debts of Mexico and Brazil. You wouldn’t see investors lining up to buy Exxon bonds with that sort of overhang!
So, since September, indirect obligations have eclipsed direct obligations (outstanding US Treasuries) by $2 trillion.
But the best is yet to come:
The Dallas Federal Reserve calculates the US government has taken on unfunded liabilities for retirement and health-care obligations of more than $99 trillion.
Small wonder Obama wants to reform this area.
Law makers are crying foul because he’s earmarked $0.65 trillion to try to fix up healthcare. But in the context of $99 trillion, a 0.65% reform will be little more than an expensive band aid.
That $99 trillion brings the total to $123,324,445… you get the idea.
You’d think that with this much blood on the balance sheet investors would start asking questions. The Chinese, who hold the largest amount of US Treasuries ($700 billion and change), have been doing exactly that.
When Richard Fisher, the president of the Dallas US Federal Reserve Corporation (yup, the Federal Reserve is a privately owned business) went to China recently, he wasn’t asked once about mortgage backed securities or credit default swaps. “But I was asked at every single meeting about our purchase of Treasuries,” he told The Wall Street Journal.
According to Fisher, the Chinese grilled him about whether or not the Fed would monetize (i.e. create money out of thin air to pay for) US govern ment spending.
Clearly he didn’t give very convincing arguments because the Chinese are now noticeably thin on the ground at auctions of longer dated treasuries, but still happy to buy six month bills.
Maybe the Chinese sat down and did the math: if every family in the world donated $50,000 to the US government it still wouldn’t be enough to meet current and future obligations.
That’s not to say the US dollar will lose all value: 75% cotton and 25% linen has remarkable absorption qualities!
Cheers,
Peter.
