Who Ultimately Bails Out U.S. Government?

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The Treasury Department and the Office of Management and Budget has now released the Fiscal Year 2008 Financial Report of the United States Government.  As you’d guess, there are deficits, shortfalls, warnings, and maybe even old fashioned omens for what lies ahead whether the economic woes of today are solved or whether they go on. 

Treasury Secretary Hank Paulson outlined some of the long-term issuesthat the country faces by noting, "The projected costs for Medicare,Medicaid and other social programs are much greater than the resourcesthat will be available to pay for them. Changes are needed to ensurethese programs are fiscally sustainable." 

It has been no secret that we are running huge deficits.  The US runsat a huge deficit whether you have an economic boom, a financialcrisis, an auto bailout, or a banking and credit bailout.

OMB Director Jim Nussle said, "It is without question that we faceextraordinary challenges in our financial markets and the largereconomy…."

Revenue results in this year’s Financial Report were $2.7 trillion, again of $34 billion or just over 1% when compared to 2007. Total costswere $3.6 trillion, up $0.7 trillion or 25% when compared to lastyear.  The government’s net operating cost increased to $1 trillion, upfrom last year’s net operating cost of $275.5 billion.

The report notes that huge increase in net operating cost was theresult from the economic slowdown, the government’s response to theslowdown, and significant re-estimates of the government’s long-termliabilities for veterans’ disability compensation benefits.

If you think we have a crisis today, wait until the future generationsstart fully exercising their retirement benefits.  Treasury projectedan estimated present value of future social insurance programexpenditures for all current and future program participants to be $43trillion.

Social Security and Medicare expenditures are projected over the nexttwo decades to increase from their current 8% percent of GDP to about11%.  It is also estimates that without any reform, these programs areprojected to approach 18% of GDP by 2080. Medicare, Medicaid, andSocial Security accounted for 16% of total government expenditures 40years ago and they take up 40% of all expenditures today.

The report also noted that certain accounting and internal controlchallenges continue to prevent the Government Accountability Officefrom rendering an unqualified opinion on the government’s consolidatedfinancial statements.  But 20 of the major federal government agenciesreceived clean opinions compared to 19 last year.  The number ofmaterial weaknesses government-wide declined to 32 from 39, a decreaseof almost 50% in weaknesses since 2001.

When you start to tally up some of these numbers, the math will startto remind you that the problems of today are going to be followed bymany larger problems in the years ahead.  The only good news is that weare not at all alone as most Western governments are swimming deep inthe red as well.  Maybe the Treasury can just start operating on a non-GAAP basis just like a technology company.

Now you know why the US Treasury debt markets are so large.  Who willultimately bail out the US government and Western governments down theroad?

Johannes Gutenberg would be so proud.  Printing presses are going to be needed in mass down the road.

Jon C. Ogg
December 15, 2008