The national debt is around $10 trillion. However, the government has made promises in the forms of pension, retirement, drug benefits etc. totaling $46 trillion more. The two numbers are added together for $55 trillion. Foreign countries like China do not own the debt. It is to our citizens.
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Cash accounting is what individuals use and most people are familiar with. It counts the difference between cash in and cash out during a given time period. The difference is net income or loss. Done.
That’s fine for the simple finances of most individuals, but in even moderately more complicated situations it can be highly misleading and is easily manipulated. This is because it ignores accruing legal rights to receive income, and legal obligations to make payments, in the future.
As a simple example, say a firm makes a deal in which it receives $1 million from another party today, in exchange for making a legally binding promise to pay $10 million to the other party five years from now. Obviously that’s a loser. Accrual accounting — which recognizes accruing future liabilities and rights to income — reports this truth: $1 million receivable today minus the current value of $10 million to be paid five years from now (at a 5% discount rate, about $7.7 million) shows this transaction to have a net cost of about $6.7 million.
But under cash accounting it is a winner, for only the $1 million of income is counted. The attached $10 million liability is ignored. Sure it’ll have to be paid someday (or the firm will go bankrupt due to it) — but that will be somebody else’s problem. In the meantime you’ve boosted the firm’s profits by making this deal, so you get a raise and a bonus!
Well, that wouldn’t be good. So to prevent such situations the government prohibits cash accounting and requires accrual accounting for all but the very smallest businesses and organizations.
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I close with words from GAO as quoted in the Treasury report:
The federal government’s gross debt in the consolidated financial statements … excludes such items as the gap between the present value of future promised and funded Social Security and Medicare benefits, veterans’ health care, and a range of other liabilities (e.g., federal employee and veteran benefits payable), commitments, and contingencies that the federal government has pledged to support.
Including these items, the federal government’s fiscal exposures now total more than $46 trillion, up from about $20 trillion in 2000. This translates into a burden of about $156,000 per American or approximately $375,000 per full-time worker, up from $72,000 and $165,000 respectively, in 2000…
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I close with Stephen Colbert’s words
President Bush. Great President or greatest President?