America’s balance sheet

October 9th, 2009

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Take a look at the September 2009 report from the hedge fund and investment company Sprott Asset Management:

US Government Financial Summary

Amount

US Revenue for 12 months ended August 31, 2009 $2,157,940,000,000

Obligations [1]

Total Outstanding US Debt (August 31, 2009)
Unfunded Social Security Trust Fund
Unfunded Medicare Trust Funds

Total Obligations

$11,812,870,150,873
$17,500,000,000,000
$89,300,000,000,000

$118,612,870,150,873

To make it easier for you to understand these colossal numbers, imagine owing $200,000 and earning $3640 per year on your job (that is, optimistically assuming that the economy can grow at 2% per year)! In other words, the earnings per year are only 1.82% of the total outstanding debt, which is far below the rate of price inflation. Based on market rate of interests (i.e. the long-term bond yield), the earnings will not be enough to even cover the interest payments.

No wonder the GFC is not the final crisis (see Is the GFC the final crisis?)!


[1]Richard Fisher, President and CEO of the Federal Reserve Bank of Dallas, is on record stating that unfunded liabilities from Medicare and Social Security totalled $99.2 trillion as of May 2008. The NCPA data above is the most recent estimate available. Fisher?s speech can be retrieved at: http://www.dallasfed.org/news/speeches/fisher/2008/fs080528.cfm

  • Anon

    geezus, time for higher taxes…ALOT higher ! They can use their revenue to install more printing presses.

    Investment Strategy Newsletter by Jeffrey D. Saut:

    http://www.raymondjames.com/inv_strat.htm

    Hey just a side issue ? above not advice, only for debating ? pls see a financial advisor for decision making and advice.

  • Anon

    geezus, time for higher taxes…ALOT higher ! They can use their revenue to install more printing presses.

    Investment Strategy Newsletter by Jeffrey D. Saut:

    http://www.raymondjames.com/inv_strat.htm

    Hey just a side issue ? above not advice, only for debating ? pls see a financial advisor for decision making and advice.

  • Pete

    Nice article, puts things in perspective quite simply.

    To make it easier for you to understand these colossal numbers, imagine owing $200,000 and earning $3640 per year on your job

    Even then Aussie banks would still lend the $200K! It is crazy but even someone on ten times that wage would have issues paying that back (because they have to pay to eat too).

    Anon:
    A nice quote from the article you linked:

    Mark Twain?s quote seems to put the month of October in perspective:

    ?October. This is one of the peculiarly dangerous months to speculate in stocks. Others are November, December, January, February, March, April, May, June, July, August, and September.?

    Haha 🙂

  • Pete

    Nice article, puts things in perspective quite simply.

    To make it easier for you to understand these colossal numbers, imagine owing $200,000 and earning $3640 per year on your job

    Even then Aussie banks would still lend the $200K! It is crazy but even someone on ten times that wage would have issues paying that back (because they have to pay to eat too).

    Anon:
    A nice quote from the article you linked:

    Mark Twain?s quote seems to put the month of October in perspective:

    ?October. This is one of the peculiarly dangerous months to speculate in stocks. Others are November, December, January, February, March, April, May, June, July, August, and September.?

    Haha 🙂

  • Pete

    Incidentally Anon, have you seen CIJ’s sister site?

    Contrarian Investors’ News

    It is a great place to post interesting articles and a good source of information.

  • Pete

    Incidentally Anon, have you seen CIJ’s sister site?

    Contrarian Investors’ News

    It is a great place to post interesting articles and a good source of information.

  • Pete

    While I am off the topic:

    “There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.”
    — Mark Twain

    How different we have become today where speculating is more the norm?

  • Pete

    While I am off the topic:

    “There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.”
    — Mark Twain

    How different we have become today where speculating is more the norm?

  • Anon

    Anon:
    A nice quote from the article you linked:

    Mark Twain?s quote seems to put the month of October in perspective:

    ?October. This is one of the peculiarly dangerous months to speculate in stocks. Others are November, December, January, February, March, April, May, June, July, August, and September.?

    Haha ! I know aye – i was laughing so hard when I read that.

  • Anon

    Anon:
    A nice quote from the article you linked:

    Mark Twain?s quote seems to put the month of October in perspective:

    ?October. This is one of the peculiarly dangerous months to speculate in stocks. Others are November, December, January, February, March, April, May, June, July, August, and September.?

    Haha ! I know aye – i was laughing so hard when I read that.

  • Anon

    Pete says:
    October 9, 2009 at 1:06 pm

    Incidentally Anon, have you seen CIJ?s sister site?

    Contrarian Investors? News

    It is a great place to post interesting articles and a good source of information.

    Hey I didn’t know about this – thanks pete.

  • Anon

    Pete says:
    October 9, 2009 at 1:06 pm

    Incidentally Anon, have you seen CIJ?s sister site?

    Contrarian Investors? News

    It is a great place to post interesting articles and a good source of information.

    Hey I didn’t know about this – thanks pete.

  • Anon

    Forgot to mention I altered my short positions. I am now short a very large position in base metals, short large position in utilities and short small possie in financials. I didn’t like my short position in US housing as I feel US housing has bottomed or is in a bottoming process.
    Short selling is going to be very difficult in this market so I am obviously watching my risk levels and staying nimble !

    Hey just a side issue ? above not advice, only for debating ? pls see a financial advisor for decision making and advice.

  • Anon

    Forgot to mention I altered my short positions. I am now short a very large position in base metals, short large position in utilities and short small possie in financials. I didn’t like my short position in US housing as I feel US housing has bottomed or is in a bottoming process.
    Short selling is going to be very difficult in this market so I am obviously watching my risk levels and staying nimble !

    Hey just a side issue ? above not advice, only for debating ? pls see a financial advisor for decision making and advice.

  • Pete

    Interesting position Anon.

    Personally I have ditched my two remaining gold juniors (one is going to do capital raising soon I believe) as a high AUD does not help gold sales prices (although costs will be reduced somewhat, but fuel prices in Australia are not exactly flexible on international prices).

    That said, I have increased my position on an oil and gas produced/explorer as they are ramping up exploration at this time and a high AUD looks like it would be very beneficial. That and the potential for an Oil shock due to middle-eastern tensions and/or protectionism seems substantial.

    But I wouldn’t say I am particularly gifted at trading.

  • Pete

    Interesting position Anon.

    Personally I have ditched my two remaining gold juniors (one is going to do capital raising soon I believe) as a high AUD does not help gold sales prices (although costs will be reduced somewhat, but fuel prices in Australia are not exactly flexible on international prices).

    That said, I have increased my position on an oil and gas produced/explorer as they are ramping up exploration at this time and a high AUD looks like it would be very beneficial. That and the potential for an Oil shock due to middle-eastern tensions and/or protectionism seems substantial.

    But I wouldn’t say I am particularly gifted at trading.

  • David

    HI CIJ
    The future is hard to predict, but you can’t squeeze water from a stone, so something has got to give. I suspect it will be the dollar (at first). In any case, the real value of Medicare and Social Security will not be paid out–because obviously a society can’t spend money it doesn’t have and can’t just print it up without it’s value dropping (at least not forever, 50 years may be the max in the current case, and we are about there….)–and I suspect that the US national debt won’t be paid back with anything close to the value of the money that was borrowed.

    The problem seems to be the world has finally figured this out, but can’t figure out what to do about it, or the problem the world economy finds itself in when the USA stops being the consumer for the world. Some people are debating inflation or deflation when they talk about what that problem is, but it seems to me it is a much deeper question, because it has debt based currency at the heart of it (and that is the currency everybody is using right now). And, while there may be some controversy about this, it appears as though we are close to “peak everything” or almost everything. While fresh water might end up being the most pressing issue for most people in Asia, the root of “peak everything” is that human population has past the ability of the Earth’s natural systems and resources to support civilization as we know it. It would help if the US stopped consuming the way it does, but that is just a blip in the fundamental problem we all face, and as much as we may liked to look to the past as a guide to the future I suspect we have entered the transition (but it may take another 10 or 20 years, who knows for sure) to the back side of the curve. We have only every known the front side of the curve where everything is growing: population, money supply, debt, capital in all its forms, even arable land for much of that front curve, technology of increased production, etc. If we are entering the other side of the curve we need to rely on a completely new way of thinking or we will be toast.

    We have only glimpsed the tip (ie US debt) of the iceberg (the downside of the curve) that we are running full speed ahead directly towards. What the consequences of hitting it will be are uncertain. All I can guess is that it will be a different world full of surprises we can’t predict. How do we invest in that future?

  • David

    HI CIJ
    The future is hard to predict, but you can’t squeeze water from a stone, so something has got to give. I suspect it will be the dollar (at first). In any case, the real value of Medicare and Social Security will not be paid out–because obviously a society can’t spend money it doesn’t have and can’t just print it up without it’s value dropping (at least not forever, 50 years may be the max in the current case, and we are about there….)–and I suspect that the US national debt won’t be paid back with anything close to the value of the money that was borrowed.

    The problem seems to be the world has finally figured this out, but can’t figure out what to do about it, or the problem the world economy finds itself in when the USA stops being the consumer for the world. Some people are debating inflation or deflation when they talk about what that problem is, but it seems to me it is a much deeper question, because it has debt based currency at the heart of it (and that is the currency everybody is using right now). And, while there may be some controversy about this, it appears as though we are close to “peak everything” or almost everything. While fresh water might end up being the most pressing issue for most people in Asia, the root of “peak everything” is that human population has past the ability of the Earth’s natural systems and resources to support civilization as we know it. It would help if the US stopped consuming the way it does, but that is just a blip in the fundamental problem we all face, and as much as we may liked to look to the past as a guide to the future I suspect we have entered the transition (but it may take another 10 or 20 years, who knows for sure) to the back side of the curve. We have only every known the front side of the curve where everything is growing: population, money supply, debt, capital in all its forms, even arable land for much of that front curve, technology of increased production, etc. If we are entering the other side of the curve we need to rely on a completely new way of thinking or we will be toast.

    We have only glimpsed the tip (ie US debt) of the iceberg (the downside of the curve) that we are running full speed ahead directly towards. What the consequences of hitting it will be are uncertain. All I can guess is that it will be a different world full of surprises we can’t predict. How do we invest in that future?

  • In a pessimistic world where we are all going to the backside of the curve, it will be back to the basics of self-sufficiency- localised food growing, rainwater collection, power generators at your home, minimal energy usage, etc. In such an environment, that’s why Marc Faber, during a Lateline interview, joked about buying a farm (half joking) and a shot gun followed by a machine gun (definitely joking).

    We like what you said,

    The problem seems to be the world has finally figured this out, but can?t figure out what to do about it, or the problem the world economy finds itself in when the USA stops being the consumer for the world.

    Maybe the next stop is to mine resources in the moon and ship is back to Earth? Or set up colonies on the moon?

  • In a pessimistic world where we are all going to the backside of the curve, it will be back to the basics of self-sufficiency- localised food growing, rainwater collection, power generators at your home, minimal energy usage, etc. In such an environment, that’s why Marc Faber, during a Lateline interview, joked about buying a farm (half joking) and a shot gun followed by a machine gun (definitely joking).

    We like what you said,

    The problem seems to be the world has finally figured this out, but can?t figure out what to do about it, or the problem the world economy finds itself in when the USA stops being the consumer for the world.

    Maybe the next stop is to mine resources in the moon and ship is back to Earth? Or set up colonies on the moon?

  • David

    Well, I try not to be pessimistic about change. I think the future will require us to return to strong human relationships and strong community ties. This is a good thing. I hope we will develop the ability to let go of the past paradigm and embrace the challenges that come with the new reality (whenever it arrives). I think if we can collectively face the facts without sugar coating them we will have a chance to make a better world for our kids, even if it is less wealthy materially than the current unsustainable world we’ve created over the last 100 years. I hope we can figure out a way to decrease our population to a sustainable level in ways that minimize suffering. If we don’t, I’m afraid the transition will be more painful than it needs to be, and the world we create will be worse for it. In the meantime, the better personally prepared we are, the better we will be able to help less prepared people.

  • David

    Well, I try not to be pessimistic about change. I think the future will require us to return to strong human relationships and strong community ties. This is a good thing. I hope we will develop the ability to let go of the past paradigm and embrace the challenges that come with the new reality (whenever it arrives). I think if we can collectively face the facts without sugar coating them we will have a chance to make a better world for our kids, even if it is less wealthy materially than the current unsustainable world we’ve created over the last 100 years. I hope we can figure out a way to decrease our population to a sustainable level in ways that minimize suffering. If we don’t, I’m afraid the transition will be more painful than it needs to be, and the world we create will be worse for it. In the meantime, the better personally prepared we are, the better we will be able to help less prepared people.

  • Pete

    David:

    human population has past the ability of the Earth?s natural systems and resources to support civilization as we know it.

    I tend to agree with your comments but they seem a bit too extreme for the present. Perhaps in the next 50 years they will be realised.

    It reminds me of Japan, where it was considered that there was no extra space for population and prices would rise forever…so, people had less children and the population didn’t grow.

    I think that populations will tend to grow or decline based on the following:
    – availability of birth control
    – welfare support from Gov’s for children (and for children who cannot be supported by family income, eg if a bogan family has 22 kids)
    – the standard of living
    – the cost of living (not including raising children)
    – the cost of raising children (including support during adulthood)
    – future living standards expectation (eg, will children be born into a horrible world where they will struggle to survive, or will they thrive)
    – Gov legislation (one child policy)
    – likelihood of war/conflict
    – whether children will be required to support parents (eg in some poorer countries today)
    – cultural factors (eg, perhaps a particular culture likes large families)
    – population density (are there any houses available? will they have to live on the street?)

    The point you have raised definitely has made me think that the seemingly endless population boom on earth could actually recede. However one major issue with this is:

    People are living longer

    Thanks to advances in medicine, food quality, etc. Perhaps a decline in the availability of those will reduce life expectancy (the back side of the curve as you say) and the decline could even be exponential in a sense.

    It does seem to counter the arguments of those who would suggest that property is the best long-term investment because populations are always growing. We can thank Japan for showing us that it is possible.

  • Pete

    David:

    human population has past the ability of the Earth?s natural systems and resources to support civilization as we know it.

    I tend to agree with your comments but they seem a bit too extreme for the present. Perhaps in the next 50 years they will be realised.

    It reminds me of Japan, where it was considered that there was no extra space for population and prices would rise forever…so, people had less children and the population didn’t grow.

    I think that populations will tend to grow or decline based on the following:
    – availability of birth control
    – welfare support from Gov’s for children (and for children who cannot be supported by family income, eg if a bogan family has 22 kids)
    – the standard of living
    – the cost of living (not including raising children)
    – the cost of raising children (including support during adulthood)
    – future living standards expectation (eg, will children be born into a horrible world where they will struggle to survive, or will they thrive)
    – Gov legislation (one child policy)
    – likelihood of war/conflict
    – whether children will be required to support parents (eg in some poorer countries today)
    – cultural factors (eg, perhaps a particular culture likes large families)
    – population density (are there any houses available? will they have to live on the street?)

    The point you have raised definitely has made me think that the seemingly endless population boom on earth could actually recede. However one major issue with this is:

    People are living longer

    Thanks to advances in medicine, food quality, etc. Perhaps a decline in the availability of those will reduce life expectancy (the back side of the curve as you say) and the decline could even be exponential in a sense.

    It does seem to counter the arguments of those who would suggest that property is the best long-term investment because populations are always growing. We can thank Japan for showing us that it is possible.

  • David

    HI Pete,
    Thanks, in a way the views may be too extreme for the present. My question really is, how will we know when things have begun to change? It is obvious that at some point things will change, they can’t continue at the same pace or in the same direction that they’ve been heading. Like you say, maybe it will take 50 years, I don’t know. The economy (and the systems in it that we depend on) seems a lot less robust in the United States (and the world in general) than in previous times. We are in some kind of change right now–perhaps just a minor correction, but perhaps something more significant. Will the systems we depend on make it through this change or will the systems have to adjust in substantial ways? I live in the US and the stealth weak dollar policy is succeeding at lowering our standard of living. In spite of the deflation threat, the CPI was only down for 4 months before it return to positive growth again. So while some asset classes (homes) are down, the cost of living continues to rise. So, as a small investor I have become quite conservative, perhaps I should just learn to react to trends quicker and not worry about the big picture as much!

  • David

    HI Pete,
    Thanks, in a way the views may be too extreme for the present. My question really is, how will we know when things have begun to change? It is obvious that at some point things will change, they can’t continue at the same pace or in the same direction that they’ve been heading. Like you say, maybe it will take 50 years, I don’t know. The economy (and the systems in it that we depend on) seems a lot less robust in the United States (and the world in general) than in previous times. We are in some kind of change right now–perhaps just a minor correction, but perhaps something more significant. Will the systems we depend on make it through this change or will the systems have to adjust in substantial ways? I live in the US and the stealth weak dollar policy is succeeding at lowering our standard of living. In spite of the deflation threat, the CPI was only down for 4 months before it return to positive growth again. So while some asset classes (homes) are down, the cost of living continues to rise. So, as a small investor I have become quite conservative, perhaps I should just learn to react to trends quicker and not worry about the big picture as much!

  • Tim Nichols

    Thanks for the post, as always, but I had to comment: Saying this is America’s balance sheet isn’t accurate. There is a total revenue number and total liabilities number. The balance sheet requires assets, which would enable us to calculate our net worth. And ultimately, how much of that $2T is fixed cost to run our government? The other way out of this is selling assets, (which is happening) but of course, that is likely to reduce long term revenue.

  • Tim Nichols

    Thanks for the post, as always, but I had to comment: Saying this is America’s balance sheet isn’t accurate. There is a total revenue number and total liabilities number. The balance sheet requires assets, which would enable us to calculate our net worth. And ultimately, how much of that $2T is fixed cost to run our government? The other way out of this is selling assets, (which is happening) but of course, that is likely to reduce long term revenue.

  • DrGPS

    Who actually unerwrites all that US debt or “finances” the debt of countries in a similar position? World Bank? IMF? Middle-eastern oil producers?
    I’d like to know who is providing these trillions to support countries. Any answers out there?

  • DrGPS

    Who actually unerwrites all that US debt or “finances” the debt of countries in a similar position? World Bank? IMF? Middle-eastern oil producers?
    I’d like to know who is providing these trillions to support countries. Any answers out there?