They Really do Believe We Won't Notice

Our natural defense mechanism as human beings is to deny reality. "These sorts of things happen to other people, not to us."

It’s this same defense mechanism that leads people to ignore the obvious fiscal realities of their home country despite overwhelming objective evidence. After all, debt-fueled collapse happens to other countries, not to us.

We go our entire lives being told that our country is different. We’re special.
We have televised ‘experts’ going on TV explaining why our debts and deficits don’t matter, and Nobel Prize-winning pseduoscientists (hello Paul Krugman) complaining that our debts and deficits aren’t big enough. But deep down you know the truth.

In the Land of the Free, the Government Accountability Office (GAO) recently released its 2013 Financial Report of the United States Government

This is the government’s best attempt at an honest accounting of its books, and even though they use a different accounting system that gives them special advantages, the picture is still remarkably bleak.

We all know that the US government has racked up a substantial debt; as of this morning, total outstanding public debt is $17.526 trillion.

But it’s not all about the debt. Debt is not necessarily evil… and it’s important to look at the situation qualitatively in addition to quantitatively. Let’s drop a few zeros and consider this in terms of personal finance.

Assume you had $1.75 million in total debt. That sounds like a lot to most people, but if you had $3 million in liquid assets to offset the debt, plus $500,000 in annual income to pay interest, living expenses, and just about any contingency that could come your way, you’d be in great shape. It would be even better if that $1.75 million in debt financed a lucrative real estate or business investment which was generating a 25% cash-on-cash return for you.

But that’s not the case for the US government.

Despite the Obama administration touting a budget deficit of “only” $680 billion in 2013, the GAO’s more accurate accounting shows a total government cost of $3.8 trillion on total revenue of $2.8 trillion.

In other words, the administration wasn’t exactly honest with the American people...the deficit was more like $1 trillion, not $680 billion. 

But it gets worse.

The GAO added up ALL the US government’s assets in 2013. Aircraft carriers. The highway system. Land. Cash and financial assets. The total is $2.97 trillion.
The liabilities, on the other hand, total $19.88 trillion. This includes the official public debt, plus all sorts of IOUs and loan guarantees.

This means the net EQUITY of the US government is minus $16.9 trillion.

Moreover, the US government’s cash position is a mere $206 billion… roughly 1.1% of its public debt. This isn’t enough to cover net interest payments for the next year.

Unlike a savvy investor who borrows cheap money to purchase productive assets, the US government borrows money to pay interest and fool the population into believing we can spend without consequences for literally everything because everything is too sacred to be cut.

We have been able to create this financial doomsday machine because the US is in the enviable position of being the world's reserve currency and the basis upon which almost all petroleum transactions are cleared.

Our actions over the past 40 years have put us in jeopardy of losing this position.

Quantitatively AND qualitatively, the data point to an inevitable conclusion: despite all the propaganda and "official" government falsehoods, this is NOT a risk free environment.

Understanding these trends and consequences is absolutely critical to your long-term financial survival.

UPDATE 3/21/14: It appears that Russia and China could be close to signing a natural gas supply deal as early as May. Add to this bilateral trade denominated in either Rubles, Renminbi or gold, include Iran, Iraq, India, and soon the Saudis (China's largest foreign source of crude), and we could be waving goodbye to the petrodollar much sooner than anyone is reporting in the mainstream news.

UPDATE 4/2/14: I was wrong. Russian and China didn't wait until May to sign this deal. It was done today. The U.S. Dollar is becomming more and more irrelevant each day at an accelerating pace. Our government is already scrambling to try to find ways to kill the deal.