The Mother of All Bankruptcies

John Ransom
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Posted: Apr 07, 2011 12:01 PM
The Mother of All Bankruptcies

The budget problem that the country faces isn’t merely big.

It isn’t even really, really big.

It’s much bigger, and more dangerous, in actual fact, than politicians are willing to acknowledge.

Think of the biggest number you can.

Yeah. It’s bigger than that.

The Congressional Budget Office says that if we continue at our current rate of spending, we’ll  “chalk up nearly $7 trillion in red ink over the next 10 years,” according to Reuters.

Yawn. Think bigger than that.

Because that number’s not even close to the size of the real problem we have. $7 trillion is just a fraction of the liabilities of the government as it doesn’t take into account all the “off-the-book” items.

You might remember “off-the-book” accounting. It made a stunning debut in the Enron scandal.

Oh.

You thought politicians fixed that problem?  They did. The “fix” doesn’t apply to government accounting; it just applies to the rest of us.    

While experts usually peg the unfunded portion of pension liabilities at around $1 trillion, that number is based on reports from public pension managers who are anxious to downplay the size of the gap in pension liabilities.

If real-world accounting methods are used to gauge the pension gap- you know, the methods that private pension managers have to use to stay out of prison- the states owe about $3 trillion to pension funds that they don’t have.

But, hey, what's $2 trillion more or less? 

Because, still, our problem is much bigger than that.

The IMF yesterday called upon the U.S. government to “make explicit its guarantees of the housing-finance market and bring them fully onto the government balance sheet.”

The IMF has this silly notion that the government should stand by loans it’s guaranteed and add the bill to the balance sheet.  

Forbes’ Bill Bonner reckons  the “total bailout bill…may exceed $20 trillion.”

The IMF stated the obvious by saying that government-guaranteed, easy credit helped drive prices up and create a real estate bubble in the first place.

So far that’s $7, plus $3, plus $20 trillion.

But wait. It gets worse.

Bill Gross, the manager of the world’s largest mutual fund, did calculations that includes all the liabilities of the government he could think of- Social Security, Medicaid, Medicare- and figured a deficit of around $75 trillion more or less.     

Gross “has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden,” he said, as reported in Bloomberg.

“This country appears to have an off- balance-sheet, unrecorded debt burden of close to 500 percent of GDP. We are out-Greeking the Greeks,” Gross concluded, referring to the debt crisis which has Greece teetering on bankruptcy.   

Fellow investor Warren Buffet agrees with Gross. He’s told investors to stay away from U.S. government securities.

"If you ask me if the U.S. Dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not," Buffet said to overseas investors in March.

It’s not clear if we’re supposed to add the $20 trillion in mortgage obligations that the IMF is counting on to Gross’ estimate of $75 trillion.

$75 trillion is a number that would stagger even the late Carl Sagan.  

Written out it's $75,000,000,000,000.00 if you are keeping box-score at home.

So, what’s a measly $2 or $3 trillion more or less, in a figure like that?

Just the pension problem, that’s what.

Our real problem, unfortunately, is much bigger than that.  

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