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    2011 Financial Report of the US Government

    By DavidMerkel

    There is little to no fanfare for the release of this report, (why do they release at such a distracted time of year, where people will ignore it?) which strips away a lot of the malarkey that the US Government delivers by providing data on an accrual basis, rather than on a cash basis, which is what the politicians argue about.  As a result, the politicians take actions that hurt the future in order to benefit the present.  If we viewed the national budget the way this report does, we would have had very different policies over the last 25 years.

    As it is the report gives credit to Obamacare for lowering the costs of Medicare, as if a stroke of the law could reduce the medical needs of the elderly.  If it does decrease actual demands on Medicare, unlikely but good.  If not, we need to revise estimates up, as the alternative scenario on page 134 does. (PDF pg 156)  And perhaps more than that.

    Here are the figures for the last three years:

    The big shift was the passage of Obamacare, which was funded by a large cut to Medicare Parts A & B.  It’s not as if that law repealed the health care needs of the elderly, but only the rates at which doctors would be paid.  If the ultimate amounts to be paid by the government don’t shift, because we adjust the law & payments to meet undiminished need later, the 2011 Adjusted figures would be low by around $5 trillion.

    The 2010 Adjusted figures attempt to strip out the distortions created by Obamacare.  The 2011 figures leave in the adjments from Obamacare, but reflect the Illustrative Alternative Scenario on page 133:

    The Medicare Board of Trustees, in their annual report to Congress, references an alternative scenario to
    illustrate the potential understatement of costs under current law. This alternative scenario assumes that the
    productivity adjustments are gradually phased out over the 16 years starting in 2020 and that the physician fee
    reductions are overridden. These examples were developed by management for illustrative purposes only; the
    calculations have not been audited; and the examples do not attempt to portray likely or recommended future
    outcomes. Thus, the illustrations are useful only as general indicators of the substantial impacts that could result from future legislation affecting the productivity adjustments and physician payments under Medicare and of the broad range of uncertainty associated with such impacts. The table below contains a comparison of the Medicare 75-year present values of income and expenditures under current law with those under the alternative scenario illustration.

    Another factor in holding down the 2011 deficit was that measured inflation was low, there were no cost of living adjustments [COLAs], when assumptions expected 2.5% or so.  To the extent that COLAs remain low in future years, there will be further positive adjustments.

    In closing, here are two graphs that display the net liabilities  of the US Government and the ratio of that to GDP:

    next graph

    To pay down liabilities like these would require the permanent allocation of an additional 8% of GDP.  Where would we find the will to do that?  I suspect as a result that we will see real decreases in Medicare benefits — things that won’t be eligible for payment.  Hospice care will be indicated at higher frequency when healing an old person would be costly.

    So just be aware that something has to change, either taxes have to rise, or Medicare benefit levels have to fall.

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    David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.