US Government 2012 Annual Financial Report

US Government 2012 Annual Financial Report

I have written about this overlooked report for about ten years now.  I feel like a lonely warrior defending a tough location, with little assistance. If I could give a subtitle here, I would call it “Lies of the Past, Present, and Future.”  If I were more poetic, I would call it, “The end of a once Great Nation, Bedeviled with Corruption.”

This report is so despised by the US Government, that they always release it at a time where it will be buried by the news cycle.  This year is no different; they released it near the inauguration.  As an aside, I have talked with a representative from the group that puts this together, and they like me because I publicize it.  They called me to ask for advice on how they can make it better.

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I may not be much, but I get 2-3 calls per year from government agencies asking for advice.  I block out at least an hour for them; it’s the least I can do for my country.  The last one from the GAO thanked me profusely.  They said they talked to many other people, but few that made the issues so clear.

Let me give you the first graph:

Excluding the times when new social entitlements were added, or added to the report, the unfunded liability of the US Government tended to increase at a rate of 9%, because less was being contributed to the social insurance programs than was necessary to keep up with the liability.  We have cheated these programs since the beginning, as a political ruse to gain favor for them, and giving a huuge subsidy to all who came before the baby boomers… now the price tag is coming due, and it ain’t pretty.

In the graph above, I attempt to explain two scams of the US government.  They stem from the same source — PPACA (Obamacare).  First, the true cost of PPACA was a lie.  Taxes were front-ended.  Benefits were back-ended.  The net benefit is gone now, and we face the black hole of insufficient taxes to meet benefits.  Second, Medicare was raided by reducing reimbursements, which C0ngress then undoes. There is no true savings, and there can’t be; government almost never produces anything as efficiently as the private sector.  It is normal for government to downplay the initial cost so that the program will be approved.  Once approved, cost overruns are the norm.

As such I expect the liability to grow until it is broken, or until it breaks us.  I am not trying to be a Scrooge, I am just trying to point at what may break the system, and produce a greater heartache.  A broken government is worse than one that does less, but survives.  One who is heartless continues to add liabilities to a system that can’t afford them, e.g., Bush 43 and Obama, rather than doing the tough work of scaling back entitlements so the past promises and the system survives.

In the above graph, what I call alternative Medicare Scenario, is the alternative scenario in the report which is the more likely scenario, which assumes that Congress does not enforce lowered medicare reimbursement that PPACA required (a dishonest aspect of the bill).  The portion called “Obamacare and Redefinitions” is my estimate of assumption changes that reflect an effort to make things cost less that will be undone as the true costs emerge.  No one is trying to be honest here — those writing the report, and the actuaries at the Social Security Administration are doing their best, but the politicians that passed PPACA twisted the math to make it look like a win for the American people, and bit-by-bit, it will be revealed to be a loss.

One more note: I have added into my estimates the “Infinite Horizon Increment,” which adds in the present value of the net value of entitlements beyond 75 years from now.

Here’s my second graph:

Here is where the past gets cheated: as I did this graph, I noted that GDP figures had been revised down from past estimates.  This makes recent growth look better than before, which people care about today, and past growth look worse, which few care about much.  (Note: the adjusted ratio takes out the wishful thinking of the Obama Administration.)

Regardless, watch the upward march of liabilities versus GDP… this is the march of rising promises that will eventually be broken.  Maybe we need a Constitutional Convention to sort this out, because the politicians just keep adding to the problems, and we keep re-electing them.  The US was originally based on a concept of limited government, with most domestic powers granted to the states.  That has been overturned, and over the last 100 years, big government as the protector of little people who cannot fend for themselves has been the policy.

Maybe I should go back to my saying, “Bubbles are predominantly phenomena of finance.  They continue to exist until the asset in question yields less than the liability that carries it.”  We await the moment where the majority of assets no longer trust the US Dollar, which would have been sooner than this, but most major nations have compromised their currencies to satisfy politically important exporters, in this “beggar thy neighbor” world, importing asset bubbles in their wake.

Unsustainable policies are the rule of the day.  I don’t what what will come of them, whether it will inflation or deflation, higher taxes or reduction in spending.  But a day is coming where we will be forced to choose, and under conditions less favorable than if the choices were made now.

By David Merkel, CFA of Aleph Blog

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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.