jueves, 10 de octubre de 2013

AMERICA’S DEBT: THE TIP AND THE BULK OF THE ICEBERG



AMERICA’S DEBT: THE TIP AND THE BULK OF THE ICEBERG

By Valentin KATASONOV | 10.10.2013

[[Check one more Russian-American opinion on our main problems. Like the previous article:   SOVEREIGN DEFAULT & CIVIL WAR AT HOME: ANY PRETEXT WILL JUSTIFY A WAR IN SYRIA?, this one touch a delicate issue: The future of the young people –social liabilities- that is not been taken into account in current debates, is suggested  here that the United States is complete bankrupt.  Hugo Adan]]

Right now, America is going through an acute financial budgetary crisis. Reaching an agreement on the size and structure of the budget, meanwhile, is essential, but it is not enough to allow Americans to breathe a sigh of relief. Another must is raising the government’s debt ceiling before 17 October. If the ceiling is not raised, the tax revenue will not be enough to meet agreed and approved expenditures. The budget shortfall can only be covered by new government borrowing, which means a further build up of government debt. Thus the issue of the size of America’s debt, how it is calculated and how much official US statistics can be trusted on that score is very much in the spotlight. 

US GOVERNMENT DEBT: OFFICIAL STATISTICS

Today, every man on the street knows that the US government’s debt currently equals USD 17 trillion. Some have even memorized, meanwhile, that this exceeds America’s gross domestic product (106 percent of GDP according to recent figures). The US Treasury keeps track of the government’s debt, and information on its size can be found on the Treasury’s official website; the information is updated once a month (Public Debt Reports). The value of the US government’s debt can be seen in real time via the US Debt Clock, which is accessible on the internet

The US’ government debt currently talked about in the media refers to the debt of the federal government of the USA (the United States’ government debt). It is also referred to as the United States’ national debt. The debt of individual states, corporations or individuals, even those guaranteed by the government, as well as government’s financial commitments to social security recipients in the future, has nothing to do with the United States’ government debt. US government debt statistics have been more or less reliable over the last century. In 1910, it was equal to USD 2.65 billion (in 1910 dollars), or nearly 8 percent of GDP. On the eve of the last financial crisis in 2006, however, its size was already equal to USD 8.5 trillion, or 65% of GDP.

Over the last seven years, therefore, the US government’s debt has doubled in absolute terms, and in relative terms has increased by more than half as much again (from 65 percent to 104 percent of GDP). In other words, America is in a much sorrier state today in terms of the level of its public debt than it was on the eve of the financial crisis. The country did not learn any lessons from the crisis. 

The United States’ total debt: official statistics

The US government’s debt is only part of a more general debt, which is often referred to as the United States’ total debt. The media very rarely publishes figures on the United States’ total debt. This is partly because these debt figures are not so reliable. The main reason, however, is that for all their mistakes, they present a true picture of the economic situation of the world’s leading country. And it turns out that the picture is an extremely unpleasant one: it raises doubts over whether America really is the world’s leading economy.

The main components of the United States’ total debt are: 1) public debt; 2) the debt of state governments (state debt); 3) the debt of local authorities (local debt); 4) the debt of individuals (personal debt); 5) the debt of nonfinancial companies (business debt); and 6) the debt of the economy’s financial sectors (financial sectors debt). 

One of the official sources of the United States’ total debt is the quarterly publication of the US Federal Reserve System, ‘Financial Accounts of the United States. Flow of Funds, Balance Sheets and Integrated Macroeconomic Accounts». According to this source, in the middle of 2013 the total debt of the United States amounted to USD 41.04 trillion. Besides public debt, the largest components were (in trillions of dollars): household debt (which roughly corresponds to personal debt) – 12.97; business debt – 13.10; state and local debt – 3.01; and financial sectors debt – 13.91. According to FRS figures, the debt of the financial and nonfinancial sectors of the US economy amounted to USD 27 trillion, or two thirds of the United States’ total debt. The combined value of the United States’ total debt is 2.4 times greater than the size of the US’ public debt. The US’ total debt, as estimated by the Federal Reserve, is equal to approximately 250 percent of GDP. 

The United States’ total debt: alternative estimates

Unofficial estimates of the United States’ total debt are significantly higher than the FRS figures cited above. The majority of these estimates fall within the range of USD 60-70 trillion (as of this year). 

One may refer to the figures in the US Debt Clock mentioned above. It is not a toy, as some believe, but an intelligent product based on a serious calculation methodology. As of 6 October 2013, it determined the size of the United States’ total debt to be USD 60 trillion. Moreover, the clock’s display also highlighted the following components of the total debt (in trillions of dollars): public debt – 16.97; state debt – 1.19; local debt – 1.79; and personal debt – 15.87. 

The unallocated remainder totalled USD 24.18 trillion. It is possible to suppose that this includes the debts of the economy’s financial and nonfinancial sectors. The clock’s display also gives a more detailed picture of personal debt. The main components of this debt are (in trillions of dollars): mortgage debt – 12.92; student loan debt – 1.03; and credit card debt – 0.85. The clock also provides information on the relative level of the United States’ total debt: it equals 377 percent of GDP. 

Recent alternative estimates of total debt include a study carried out by the Department of Economics of the University of California (San Diego) under the supervision of Professor James Hamilton (published in August 2013). This study states that the overall amount of US debt is USD 70 trillion. This total debt estimate takes into account the so-called off-balance-sheet transactions and off-balance-sheet liabilities of governments at the federal, state, and local levels. An example of off-balance-sheet transactions could be expenses that were paid using special (extra-budgetary) funds and not reflected in the budgets at the federal, state, and local levels. Extra-budgetary funds like these can borrow money on the financial markets backed and secured by governments (local authorities) that are not reflected in the budget commitments of these governments. The study by the Californian economists also refers to the obligations included in various state programs, where the programmes’ financing is not stipulated in the budget, as off-balance-sheet obligations. The relative level of total debt calculated by the Californian economists is almost 440 percent of GDP. 

SOCIAL LIABILITIES

However, even the estimates of the Californian economists do not provide a full picture of the United States’ total debt. Economists and lawyers usually refer to all of the debt types listed above as “market debts”, “contract debts” and so on. These are the kinds of financial obligations that are recorded in agreements, contracts, laws and other acts. It is obvious that when it comes to these kinds of debts, scrupulous records are kept, contract debts are re-evaluated where necessary in view of the market situation (changes to interest rates on debt securities etc.), debt securities are restructured and so on. 

As well as these, there are debts that could be called “social liabilities”. These refer to a government’s commitments to their own citizens with regard to pension benefits, healthcare, and benefits to various categories of people (the unemployed, the disadvantaged, mothers with large families etc.) Moreover, it is not just and not so much present-day commitments (these can be reflected in budgets and the cost estimates of extra-budgetary funds) as future commitments. Perhaps even commitments to future generations that have not even been born yet. The fulfillment of these future obligations may involve the creation of special funds (budgetary and extra-budgetary) of a cumulative nature. 

Two years ago, a professor at Boston University, Laurence Kotlikoff, attempted to assess the total debt of the United States in view of the government’s social liabilities for future generations. The professor’s sphere of academic interests boils down to demographic economics. Kotlikoff has even developed his own method of economic analysis – a demographic calculation – that anticipates the planning of state budgets in light of future time periods and population dynamics.

It turned out that the government’s total debts exceed USD 220 trillion (as of 2011). It appears that Professor Kotlikoff estimated the debt taking account of the US health care reforms initiated by President Barack Obama that promise much. As well as social liabilities, Kotlikoff’s estimate also takes into consideration military obligations and certain other government programmes (public contracts and purchases).

If the American government is responsible to society and wishes to fulfil its financial obligations in the foreseeable future, it needs to adjust the US’ current budget in the strongest way possible. Such is the opinion of Laurence Kotlikoff. The adjustment should amount to 12 percent of GDP (about USD 1.8 trillion as of 2011). In practical terms, it means that the government will have to raise taxes for that kind of figure. Or else reduce the US’ budget expenditure by that same amount. However, a combination of both is possible. According to Professor Kotlikoff, no government is in a position to make such a sharp about turn in their fiscal policy.

Hence his brief verdict: from the point of view of its budgetary position, the United States is completely bankrupt.
In fairness, we should note that Laurence Kotlikoff’s methodology for calculating total debt is not unique; there are other researchers who bear the demographic factor and deferred social liabilities in mind. It is simply that the Boston professor’s estimate is more detailed and more drastic. As it happens, in addition to cumulative contract debt, the US Debt Clock mentioned above also provides estimates of social liabilities. As of 6 October 2013, America’s total social liabilities (of the American government) equalled USD 126 trillion. They consisted of the following main elements (in trillions of dollars): medicare liability – 87.41; prescription liability – 21.98; and social security liability – 16.61.

Apparently, the US debt clock also takes account of liabilities related to the US health care reforms. Thus the debt clock provides us with the size of the United States’ total contract debt, equal to USD 60 trillion, and the volume of its social liabilities, equal to USD 126 trillion. As a result, we have the size of the United States’ so-called consolidated debt, equal to USD 186 trillion. The relative level of consolidated debt exceeds the US’ current annual GDP by 11.6 times… 

In conclusion, it should be noted that the US Congress controls (or gives the impression that it controls) just a small part of America’s total debt, while more than 90 percent of the United States’ consolidated debt is not controlled by congressmen. Many of these “elected representatives of the people” are not even aware of the true scale of America’s debt.

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