US is Bankrupt: $89.5 Trillion in US Liabilities vs. $82 Trillion in Household Net Worth & The Gap is Growing. We Now Await the Nature of the Cramdown.

Aug
04

By Chris Hamilton

There are many ways to look at the United States government debt, obligations, and assets.  Liabilities include Treasury debt held by the public or more broadly total Treasury debt outstanding.  There’s unfunded liabilities like Medicare and Social Security.  And then the assets of all the real estate, all the equities, all the bonds, all the deposits…all at today’s valuations.  But let’s cut straight to the bottom line and add it all up…$89.5 trillion in liabilities and $82 trillion in assets.  There.  It’s not a secret anymore…and although these are all government numbers, for some strange reason the government never adds them all together or explains them…but we will.

The $89.5 trillion in liabilities include:

  • $20.69 trillion
    • $12.65 trillion public Treasury debt (interest rate sensitive bonds sold to finance government spending)
      • Fyi – $5.35 trillion of “intra-governmental” Treasury debt are not included as they are considered an asset of the particular programs (SS, etc.) and simultaneously a liability of the Treasury
  • $6.54 trillion civilian and Military Pensions and Benefits payable
  • $1.5 trillion in “other” liabilities http://www.fms.treas.gov/finrep13/note_finstmts/fr_notes_fin_stmts_note13.html.
  • $69 trillion (present value terms what should be saved now to make up the present and future anticipated tax shortfalls vs. present and future payouts).
    • $3.7 trillion SMI (Supplemental Medical Insurance)
    • $39.5 trillion Medicare or HI (Hospital Insurance) Part B / D
    • $25.8 trillion Social Security or OASDI (Old Age Survivors Disability Insurance)
      • Fyi – $5+ trillion of additional unfunded state liabilities not included.

Source: 2013 OASDI and Medicare Trustees’ Reports. (pg. 183), http://www.gao.gov/assets/670/661234.p

These needs can be satisfied only through increased borrowing, higher taxes, reduced program spending, or some combination.  But since 1969 Treasury debt has been sold with the intention of paying only the interest (but never repaying the principal) and also in ’69 LBJ instituted the “Unified Budget” putting all social spending into the general budget reaping the gains in the present year absent calculating for the future liabilities. If you don’t know the story of how unfunded liabilities came to be and want to understand how this took place, please stop and read as USA Ponzi explains nicely… http://usaponzi.com/cooking-the-books.html

$81.8 trillion in US Household “net worth”

According to the Federal’s Z.1 balance sheet http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf, the US has a net worth of $81.8 trillion – significantly up from the ’09 low of $55.5 trillion…a $23 trillion increase in five years.  Fascinatingly, “household” liabilities are still $500 billion lower now than the peak in ’08 but asset “valuations” are up $22.5 trillion.  All while wages have been declining.  A cursory glance at the Federal Reserve’s $4 trillion in balance sheet growth in the same time period shows how the lack of growth in “household” liabilities (currently @ $13.7 trillion) has been co-opted by the Fed.

I believe it’s clear when incomes no longer supported credit and debt growth in ’08, consumers tapped out and in stepped the Federal Reserve to bridge the slowdown.  But what the Fed may or may not have realized is once they stepped in, there was no stepping out.

(Charles, would be great if you could export this chart from FRED to be included…or if you have a better idea to show this relationship, would be great???)

http://research.stlouisfed.org/fred2/graph/?g=GVF

How We Got Here – Growth of Debt vs. GDP

45 years of ever increasing debt loads, social safety net growth, corporate welfare.  45 years of Rep’s and Dem’s in the White House and Congress bought by special interests and politicians buying citizens votes with laws enacted absent the revenue to pay for them.   We have a Treasury and Federal Reserve willing to “innovate” and wordsmith to avoid the national recognition of the true difficulties and implications of our present situation.  45 years of intentionally avoiding an honest accounting of our national obligations, mislabeling, and misdirecting to pretend these obligations can and will be honored.  45 years of cornice like debt and promise accumulation simply awaiting the avalanche of claimant redemptions and debt repayments.

First, an historical snapshot for perspective of the last time US Treasury debt was larger than our economy (debt/GDP in excess of 100% in 1946) and subsequent progress of debt vs. GDP…and why anyone suggesting there is a parallel from post WWII to now is simply ill informed.

Post-WWII:

  • ’46-’59 (13yrs)
    • Debt grew 1.06x’s ($269 B to $285 B)
    • GDP grew 2.2x’s ($228 B to $525 B)
    • ’60-’75 (15yrs)
      • Debt grew 2x’s ($285 B to $533 B)
      • GDP grew 3.3x’s ($525 to $1.7 T) Income grew 3.3x’s ($403 B to $1.37 T)
        • ’65 Great Society initiated, ’69 unfunded liabilities begin under a “Unified Budget”

Post-Vietnam War:

  • ’76 -’04 (28yrs)
    • Debt grew 15x’s ($533 B à $7.4 T) Unfunded liability 15x’s ($3 T to $45 T)
    • GDP grew 7.3x’s ($1.7 T à $12.4 T) Income grew 7.4x’s ($1.37 T to $10.1 T)
    • ’05 -’14 (9yrs)
      • Debt grew 2.4x’s or 240% ($7.4 T à $17.5 T) Unfunded liability 1.5x’s ($45 T to $69 T)
      • GDP grew 1.4x’s or 140% ($12.4 T à $17 T) Income grew 1.4x’s ($10.1 T to $14.2 T)
        • Z1 Household net worth grew 1.25x’s from $65 T to $82 T…

http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi0614_hist.pdf

If the trends continue as they have since ’75, Treasury debt will grow 2x’s to 3x’s faster than GDP and income to service it…and the results would look as follows in 10 years:

  • ’15 – ‘24
    • Treasury debt will grow est. ($17.5 T à $34 T to $44 T)
    • GDP* will grow est. ($17 T à $22 T to $24 T)…income growth likely similar to GDP.

* = I won’t even get into the overstatement of economic activity within the GDP #’s…just noting there is an overstatement of activity.

So, while the Treasury debt growth rate skyrocketed from ’05 onward and the GDP growth slumped to its lowest since WWII, the unfunded liabilities grew even faster.

Drumroll Please – Total Debt/Obligation growth vs. Debt

Let’s go back to our ’75-’14 numbers and recalculate based on total Federal Government debt and liabilities:

  • ’75-’14
    • debt (total government obligations) grew 33x’s 168x’s ($533 B à $17.5 T $89.5 T*)
    • GDP grew 10x’s ($1.7 T to 17 T)
      • Household net worth grew 15x’s ($5.4 to $82 T) while median household income grew 3x’s (est. $17k to $51k) while Real median household income grew 1.13x’s ($45k to $51k)

*$89.5 T is the 2012 fiscal year end budget number, the 2013 fiscal year end # is likely to be approx. $5+ T higher, or debt grew 180x’s in 40 years vs. 10x’s for GDP / income….but seriously, does it really matter if debt grew at 10x’s, 16x’s, or 18x’s the pace of the underlying economy…all are uncollectable in taxes and unpayable except for QE or like programs.

Why Can’t We Pay Off the Debt or Even Pay it Down?

Take 2013 Federal Government tax revenue and spending as an illustration:

  • $16.8 Trillion US economy (gross domestic product)
    • $2.8 Trillion Federal tax revenue (taxes in)
    • $3.5 Trillion Federal budget (spending out)
      • -$680 Billion budget deficit (bridged by sale of Treasury debt spent now and counted as a portion of GDP)
      • = $550 Billion economic growth?!?
        • PLEASE NOTE – The ’13 GDP “growth” is less than the new debt (although the new debt spent is counted as new GDP) and the interest on the debt will need be serviced indefinitely.

Why Cutting Benefits or Raising Taxes Lead to the Same Outcome

While many try to dismiss these liabilities assuming we will continue to only service the debt rather than repay principal and interest; assuming we turn down the SS benefits via means testing, delaying benefits, reducing benefits; assuming we will bend the curve regarding Medicaid, Medicare, and Welfare benefits; assuming we will avoid further far flung wars and military obligations and stop feeding the military industrial complex; assuming no future economic slowdowns or recessions or worse; assuming a cheap and plentiful energy source is found to transition away from oil.  But all these debts and liabilities are someone else’s future income they are now reliant upon; someone’s future addition to GDP.  If these debts or obligations are curtailed or cancelled to reduce the debt or future liability, the future GDP slows in kind and tax revenues lag and budget deficits grow.  Of course I do advocate these debts and liabilities cannot be maintained, but austerity (real austerity) is painful and would set the stage for a likely depression where the nation (world) proceeds with a bankruptcy determining what and how much of the promises made can be honored until wants, needs, and means are all brought back in alignment.

So What’s it All Mean?

Let’s get real, austerity is not going to happen and we aren’t going to balance the budget.  We’re never going to pay off our debt or even pay it down.  We’re rapidly moving from 4 taxpayers for every social program recipient to 2 per recipient.  And ultimately, now we aren’t even really paying the interest on the debt…the Federal Reserve is just printing money (QE1, 2, 3) to buy the bonds and push the interest payments ever lower masking the true cost of these programs.  Of course, interest rates (Federal Funds Rates) have edged lower since 1980’s 20% to todays 0% to make the massive increases in debt serviceable.

Politicians and central bankers have shown they are going to print money to fulfill the obligations despite the declining purchasing power of the money.  It’s not so much science as religion.  A belief that infinite growth will be reality through unknown technologies, innovations, and solutions that in four decades have gone unsolved but somehow in the next decade will not only be solved but implemented.  Because it is credit that is undertaken with a belief that the obligation will ultimately allow for future repayment of principal, interest, and a profit.  But without the growth, the debt cannot be repaid nor liabilities honored.  Without the ability to repay the principal, the debts just grow and must have ever lower rates to avoid interest Armageddon.  This knowledge creates moral hazard that ever more debt will be rewarded with ever lower rates and thus ever greater system leverage.  The politicians and central bankers will continue stepping in to avoid over indebted individuals, corporations, crony capitalists, cities, states, federal government from failing.  It is a fait accompli that a hyper-monetization has/is/will take place…and now it is simply a matter of time until the globe either becomes saturated with dollars and/or reject the currency (so much to discuss here on likely demotion or replacement of the Petro-dollar and more…).  Because the earthquake (unpayable debt and obligations) has already taken place, now we are simply waiting for the tsunami.  Forget debt repayment or debt reduction…forget means testing or “bending cost curves”…we’re approaching the moment where even at historically low rates we will not be able to pay the interest and maintain government spending…without printing currency as this generation of American’s have never seen.  Bad governance and bad policy coupled with disinterested citizens will demand it.

Epilogue – So Where Do you put your Money?

No one can really know what will have value in this politicized crony capitalistic system as the hyper-monetization ramps up…all I can suggest is to hedge your bets with some physical precious metals, some minimal leveraged real estate, but also stocks and bonds and even some cash…because although there are natural forces in favor of the tangible, finite goods…there are also equally determined forces bound to push bond yields down, real estate and particularly stock prices up.  Unfortunately, the more you know, the more you know you don’t know…invest and live accordingly.

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46 Responses to US is Bankrupt: $89.5 Trillion in US Liabilities vs. $82 Trillion in Household Net Worth & The Gap is Growing. We Now Await the Nature of the Cramdown.

  1. Michael on August 4, 2014 at 10:17 pm

    Chris,

    Thanks for your writings. When do you think the citizens will recognize and demand correction?

    • Mongoose on August 5, 2014 at 2:59 pm

      The fact that they have accept the premise of government debt being measured against GDP instead of revenues (income) like their debt is shows how clueless they are as to what was being done to them.
      They have accepted for generations that an unaccountable corporation (a bought and paid for government) can take on an exploding debt load that they have to pay. And they have done nothing to stop it.
      .
      They will wake up when they find their 401′s and IRA’s are now a government promissory note.

  2. RedTrack.ME on August 5, 2014 at 1:40 am

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  5. Dave on August 5, 2014 at 3:05 am

    The only way out they have is inflation. Serious inflation.

  6. Analog Kid on August 5, 2014 at 3:24 am

    Thank you for breaking it down for us in the cheap seats.

  7. [...] Submitted by Chris Hamilton via Charles Biderman TrimTabs' blog, [...]

  8. [...] Submitted by Chris Hamilton via Charles Biderman TrimTabs’ blog, [...]

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  12. USA sind bankrott | Analyse + Aktion on August 5, 2014 at 7:25 am

    [...] US is Bankrupt: $89.5 Trillion in US Liabilities vs. $82 Trillion in Household Net Worth & The G… [...]

  13. joel on August 5, 2014 at 8:46 am

    The Citizens know. First, IMHO, they will think their vote matters and change politicians like a person changes socks. Once this laziness subsides, once citizens realize we Westerners live in Republics and not freedom democracies, that citizens have given their liberities to unelected third parties, I can only wish all western nation’s citizens rise to the occasion and fight to survive–I unfortunately will not see this in my lifetime, but maybe others will?

    • Stephen Ross on August 5, 2014 at 10:31 pm

      Joel,
      Benjamin Franklin, after the Constitution was ratified, was asked what type of government was given to the United States of America. “A republic, if you can keep it”, was his reply. Thomas Jefferson said that the United States ought to have a revolution once every 25 years. Both men knew from reading history, and observing the ways of man, that men in power were given over very easily to corruption, and that a housecleaning was regularly needed. Perhaps the more so because the electorate was so easily bamboozled by the political class, their lies, and penchant for sticky fingers into the public monies. I guess I must first ask, just what do the citizens know? Voting in the US and the EU are at all or almost all time lows because they know that their votes DO NOT MATTER. When will they think their vote matters…when the sun rises in the west? The laziness of the electorate will not subside, slack off, or stop–ever. “We Westerners” as you described the world (more than just “Westerners” read these blogs I do believe) do not all live in the type of republic that used to characterize the constitutionally limited republic of the United States of America. That became an Athenian democracy a long time ago…long, long, long time ago. Those unfortunate “Westerners” who live in dictatorships and give their lives because they are Christians, or are Hindus and live where Sharia is the law, or live in lands where the tribe or clan they are born into is not the correct one, and they are facing the business end of the gun; I am sure that they wish they could vote, and I am sure that they are not lazy one iota. As far as people trying to get out and change things in the United States, the Tea Party and the 9.12 Movement have been doing yeoman’s work, with nothing but jeers from the “average voter”, of whom Winston Churchill once quipped, “The best argument against democracy is a five minute conversation with the average voter.” Please note that Mr. Churchill used the word “democracy instead of constitutionally limited republican form of government, and “average voter”. The United States, unlike the “other Westerners” (whatever that term may or may not mean) does not really recognize 3rd parties in the governance of the nation. While there may be “third parties”, they do not amount to a hill of beans, so to speak, whereas in the rest of the “Western” world, these unknown citizens whom have given their liberties to unelected 3rd parties to which you refer, does not make one bit of sense. Ask that of those in the UK who voted for UKIP, Labour, or any of the other parties that comprise Parliament. The British would be somewhat irritated to think that you would have said so. The French, Italians, Greeks, Poles, and any other country that recognizes multiple parties would find your statement ‘odd’. Will the masses storm “The Bastille” again. Maybe, but don’t hold your breath just yet. But if you only wish to see other “Western” nation’s citizens rise to the occasion and fight to survive…why not start a trend…start your own cause. Good luck. It ain’t easy; I know because I have run departments of companies, owned companies, and run non-profits.

  14. [...] US is Bankrupt: $89.5 Trillion in US Liabilities vs. $82 Trillion in Household Net Worth & The G…. [...]

  15. [...] – US is Bankrupt: $89.5 Trillion in US Liabilities vs. $82 Trillion in Household Net Worth & The … (Biderman’s Money, Aug 4, 2014): [...]

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  17. black dog on August 5, 2014 at 2:33 pm

    Good work … but i would GSE debt to the pile.

    about $1 trillion between fannie and freddie

    http://www.fanniemae.com/resources/file/debt/pdf/debt-activity/fundingsummary.pdf
    http://www.freddiemac.com/debt/data/cgi-bin/debtoutstanding.cgi

    Fair game since “implicit” fedgov guarantee was replaced with “explicit” the moment Federal Reserve chose to purchase their mbs ( “Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to the principal and interest may be bought and sold without regard to maturities but only in the open market.” http://www.federalreserve.gov/aboutthefed/section14.htm ) … and not a peep out of legislative/executive branch stating otherwise.

  18. Chris Mullen on August 5, 2014 at 8:21 pm

    Hi Chris,

    Is this piece available for republishing at GoldSeek.com?

    Best,

    Chris

  19. boeye77@hotmail.com on August 6, 2014 at 3:34 am

    Cash or non-leveraged purchase prices are generally at market value levels. The NOI is the same as the property cash flow, EDR or equity divided rate. There is no mortgage constant to subtract from the cap rate (NOI/sales price)to calculate the EDR.
    Leveraged or non-cash equivalent acquisitions are subject to the cash flow risk from inflation from higher ownership expenses (real estate taxes, insurance, management, maintenance, etc.),and from higher interest rates and lender fees upon loan renewal (if available). One result: No reserves for replacements sinking fund to extend the remaining economic life of the improvements. Strategy: avoid impact of negative leverage and utilize a low LTV ratio reduces risk.

  20. King on August 6, 2014 at 5:55 am

    Read these eye-opening ones too (if you haven’t yet) ;-)

    (1) The Unregulated Global Casino for Banks!
    http://demonocracy.info/infographics/usa/derivatives/bank_exposure.html

    (2) The Government-Corporate Complex Takes Complete Control Of The USA!
    http://cosmicconvergence.org/?p=6321

    (3) Who’s in Control & How!
    http://humansarefree.com/search/label/Control

  21. JR Wms on August 6, 2014 at 7:37 am

    The US will never go broke. There are those who would present such a false lie to you . There are reserves of natural resources that can never be counted in any currency -

  22. john on August 6, 2014 at 9:53 am

    Thanks for all the good work in writing this piece!

    Any type of stocks or specific ones that you foresee gaining value should a currency crisis happen?

    thanks!

    • Chris on August 19, 2014 at 4:14 am

      Hey John,

      thanks for reading – I’m honestly not qualified or specialized or Machiavellian enough to suggest specific stocks. I do know Charles float shrink ETF is pretty logical but that’s about all I’ll say bout that. My focus is far more academic than geared toward generating alpha investments. All the best…Chris

  23. [...] The US Is Bankrupt [...]

  24. Frank on August 6, 2014 at 7:48 pm

    I was under the impression the derivatives the U.S. banks hold is over 200 trillion?

  25. Frank Provasek on August 7, 2014 at 12:45 am

    Comparing the liabilities of the government with the net worth of households is about the craziest misuse of financial statistics I have ever seen. The government is not the same as the privately held assets of American households. Net Worth is Assets minus liabilities — so not only is this guy trying to make some point by comparing the balance sheets of two completely separate things, he is not even comparing the same items!

    The government has ASSETS of at least $100 trillion, so the government has a net worth in the trillions even using these numbers. He claims social security and medicare are UNFUNDED when they are SELF FUNDED. Most Americans pay more into those two programs than they pay in income taxes. Both also currently run a small surplus and Congress through the years has made adjustments in payroll taxes and the retirement age to keep the programs solvent. And the future liabilities of those programs are not a fixed liability since Congress could change the retirement age to 85 if they choose (and it would be reasonable — the 65 year old retirement age when social security started in 1935 was when the average man only lived to be 59! Today people die at 80 on average. )

    • Charles Biderman on August 7, 2014 at 1:15 pm

      What US assets are being pledged against US government debt?
      If the US cannot pay its debts via tax collections from the household sector, which assets will be sold to pay interest and debt service?
      None. Could you imagine Congress authorizing sale of the national parks? Timberlands, grazing land?
      The only source of government debt service is tax collections. And tax collections come from the household sector.
      Math is math, saying that the US government could raise the retirement age and redo its entire give away program is of course possible. However, I am will to offer 10 to 1 odds against that happening anytime soon.
      As to giveaways being funded, all government receipts are treated the same. There is no social security fund nor pension guaranty or deposit guaranty funds.
      Present value of future benefits is math, not a social program. A public company has to disclose to shareholders all future liabilities to the extent known by management.
      Why does the US government not have to tell taxpayers and bond buyers its own future liabilities? Why are social security, medicare and government pension data hidden in the footnotes of never read reports?
      A CEO would go to jail for hiding the truth from shareholders.
      A US president gets reelected instead.

    • black dog on August 7, 2014 at 2:59 pm

      He claims social security and medicare are UNFUNDED when they are SELF FUNDED. Most Americans pay more into those two programs than they pay in income taxes.

      no, he made no such claim:

      present value terms what should be saved now to make up the present and future anticipated tax shortfalls vs. present and future payouts

      Furthermore, as for the $trillions “saved” (above $$s needed for current payout) in trust fund for social security / medicare … a myth. Those $$s all along have co-mingled with general revenue $$s and spent … replaced with NONMARKETABLE (government account series) IOUs debt.

      http://www.treasurydirect.gov/govt/reports/pd/mspd/2014/opds072014.pdf

      In reality, as soon as ss/medicare hit a shortfall … congress will need to step in and … 1) cut benefits 2) raise taxes 3) have treasury borrow more in open market (deficit spending) … or some combination.

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  36. Public opinion is dominated by an egregore on August 21, 2014 at 5:48 pm

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  38. Anitra on August 28, 2014 at 12:51 pm

    Thank you for your work! I don’t see how the GDP can increase from here. Forecasting over the next 10 years when biology-demands result in baby boomers vacating productivity (and wealth) by way of retirement, declines in health, and death, I suspect that’s when the asset bubble bursts. But the weakness of the dollar at that time based on your comments should temper this. Few people with money & assets = decrease in GDP. The U.S. is clearly getting it wrong. Can you think of a country that has it right? We denigrate ourselves, but there’s a lot here that works.

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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