Do you need an unarguable reason to buy some gold and silver? This trumps all other reasons!

On March 20, 2007, a statement that deserved but did not get banner headlines was made by David M. Walker, the Comptroller General of the United States, in a poorly attended House sub-committee hearing.  He says that “…THE FEDERAL GOVERNMENT’S FINANCIAL CONDITION AND FISCAL OUTLOOK ARE WORSE THAN MANY MAY UNDERSTAND.”

In this political season, no one seems to even be interested in the real financial status of the U. S.

But how does this grab you! The U.S. government’s total reported liabilities, net social-insurance commitments and other exposure, are now “over $50 trillion” (that’s trillion with a “T”); representing approximately four times the nation’s total output (GDP) in fiscal year 2006, up from about $20 trillion in fiscal year 2000.

 “…these structural deficits, which are virtually certain given the design of our current programs and policies, will mean escalating and ultimately unsustainable deficits and debt levels … the federal government’s current fiscal policy is unsustainable! Continuing on this imprudent and unsustainable path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our domestic tranquility and national security.”

If you think that’s scary, you should read the entire report. This hearing, where the truth was boldly told, was poorly attended by members of the Committee. They just weren’t interested!

The most recent report, issued by the Department of Treasury on December 15, 2006, is available in full through the GAO (Government Accounting Offices) http://www.gao.gov/financial/fy2006financialreport.html and treasury’s internet site http://www.fms.treas.gov/fr/06frusg/06frusg.pdf .

Walker elaborates, “One way to think about it is: if we wanted to put aside today enough to cover these promises, it would take about $440,000 per American household, up from $190,000 in 2000! As these numbers indicate, the federal government faces large and growing structural deficits, primarily related to Medicare and other social insurance commitments. These structural deficits, which are virtually certain, will mean escalating and ultimately unsustainable deficits and debt levels.”

When Walker elaborated on the details, he told us that despite the reported increase in revenues in fiscal year 2006 ($255 billion); the federal government’s costs exceeded its revenues by $450 billion. As of September 30, 2006, the U.S. government reported that it owed (i.e., liabilities) more than it owned (i.e., assets) by almost $9 trillion. In addition, the statement of social insurance in the financial report disclosed an additional $39 trillion of the government’s social insurance responsibilities, including Medicare, Medicaid and Social Security.

“One would need approximately $39 trillion invested today to deliver on the currently promised benefits not covered by ear-marked revenues for the next 75 years.”

Uncle Sam doesn’t have the money. He has spent it all to buy votes. Remember when we used to think a billion was a huge number. Multiple trillions are beyond comprehension.

“Major reported long-term fiscal exposures in fiscal year 2006, with the present value totaling over $50 trillion, included about $1 trillion of other commitments and contingencies, and the $39 trillion of social insurance responsibilities.”

He then re-emphasized that this is up from $20 trillion in 2000.

He keeps coming back again and again to the cost of Social Security, Medicare and Medicaid. Some years ago, early in his second term, Bush attempted to reform Social Security, based on the assumption that it was unsustainable. He was viciously assaulted politically by the Democrats and senior citizens’ lobbying groups, like AARP, who assured us that there was “no problem” and that Bush was engaging in “scare tactics,” and he was shot down in flames! In my newly revised book (How to Prosper…), Chapter 5 on Social Security tells the whole truth.

Walker then sums it up by saying, “under either optimistic set of assumptions, the federal government’s current fiscal policy is unsustainable.”

I know this book will be attacked by calling me a “Prophet of Doom,” which, of course, is meant to make what I have to say politically incorrect. But, this is truth – real hard truth. Unless these problems are courageously addressed, and unless things change, the American Dream will die a bitter, prolonged death!!

If you are under 40, you had better plan your future without Medicare, Medicaid and Social Security. Begin paying off your debts now so you can start earning compound interest on your savings, and invest in inflation hedges. When Congress finally faces this, they won’t cut benefits, they won’t increase FICA taxes, but they will print the money. Your long-term future will be dictated by what you can scrape together and put into inflation hedges, starting now!

David Walker does not leave us without suggestions. He suggests that “closing the fiscal gap” would require spending cuts or tax increases equal to eight percent of the entire economy each year over the next 75 years, or a total of about $61 trillion in present-value terms.” To put this in perspective, closing the gap would require an immediate and permanent increase in federal tax revenues of more than 40%, or an equivalent reduction of federal-program spending (i.e., all spending, except for interest on the debt held by the public, which cannot be directly controlled).”

He then goes on to say, “There is a need to engage in a fundamental review, reprioritization and reengineering of the base of government. Allowing the government to meet the challenges and capitalize on the opportunities of the 21st Century will require a fundamental review of what the government does, how it does it, and how it is financed. We need to address the growing costs of the major entitlement programs, and also review and examine all other major programs, policies and activities on both the spending and the revenue side of the budget.”

He also says, “…the federal government needs to start making tough choices ….”

Walker recommends re-engineering and reprioritizing all the federal government’s existing programs, policies and activities to “adjust to 21st Century challenges and capitalize on related opportunities.” (I wonder where those related opportunities are. HJR)

He then concludes, “As a result, the time to start is now to help save our future.” It is amazing with such a pessimistic report that the man still retains his inherent optimism. I find that admirable, but I’m sorry Mr. Walker, there is one basic problem, and that is that the government has grown so big it defies the ingenuity of human leadership. No one can grasp the totality of what the government does and how the government spends money. No one can do what’s necessary without having everyone in America hate him (or her). Anyone who wants to be President of this mess must have something wrong with him. Ultimately, this dilemma will get us. We can only personally preserve our well being by protecting the American family, having our finances properly prioritized, getting rid of our debts and starting to live for the future, while no longer making promises we know we won’t be able to keep!

In another interview, drawing parallels with the end of the Roman Empire, Mr. Walker warned there were “striking similarities” between America’s current situation and “the factors that brought down Rome,” including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands, and fiscal irresponsibility by the central government.”

Mr. Walker says, “In my view, it’s time to learn from history and take steps to ensure the American Republic is the first to stand the test of time.”

Mr. Walker’s views carry weight, because he is a non-partisan figure in charge of the Government Accountability Office, often described as the investigative arm of the U.S. Congress. He was appointed by Bill Clinton.

In an interview with the Financial Times, Mr. Walker said he had mentioned some of these issues before but now wanted to “turn up the volume.” Some of them were too sensitive for others in government to “have their name associated with.”

“I’m trying to sound an alarm and issue a wake-up call,” he said. “As Comptroller General I … take on issues that others may be hesitant, and in many cases may not be in a position to take on.

“One of the concerns is … we face major sustainability challenges that we are not taking seriously enough,” said Mr. Walker. “With the looming retirement of baby boomers, spiraling healthcare costs, plummeting savings rates and increasing reliance on foreign lenders, we face unprecedented fiscal risks,” said Mr. Walker.

Current US policy on education, energy, the environment, immigration and Iraq also was on an “unsustainable path.”

“Our very prosperity is placing greater demands on our physical infrastructure. Billions of dollars will be needed to modernize everything from highways and airports to water and sewage systems. The recent bridge collapse in Minneapolis was a sobering wake-up call.

“They (the presidential candidates and the congress) need to make fiscal responsibility and inter-generational equity one of their top priorities. If they do, I think we have a chance to turn this around, but if they don’t, I think the risk of a serious crisis rises considerably.”

As Dick Russell says, “the country is mortgaged to the hilt. There is no unencumbered capital in America. The mountain of debt, public and private, including the Federal debt, is much greater than the total wealth. The Federal obligation alone is 20 times more than the total money supply. History records no example of any nation accumulating debts in anywhere near these relationships to the total national wealth without eventually bringing down the entire economy and being liquidated, or repudiated, either through admitted bankruptcy, or the preferred form of bankruptcy – inflation. My guess is that we will liquidate our debt through the inflation process as the Germans did in 1923.”

How can Uncle Sam accumulate $50 trillion in contingent liabilities and yet get away with telling us that the national debt is only $650 billion? Well, it relates to accounting methods.

The story is told of an Englishman, whose favorite hobby is ballooning, who decided to practice his favorite sport one Sunday afternoon. He miscalculated the wind and was blown across the English Channel and landed in a field somewhere in France. As he was lying there half-stunned in the basket, a Frenchman rushed up and says, “What happened?” The Englishman says, “Where am I?” The Frenchman replies, “Why you are in a basket in the middle of a field.” To which the Englishman asks, “Are you an accountant?” The Frenchman replies, “Yes I am, how you know?” “Because the information you have given me is completely accurate and totally useless.”

One of the arguments that has always been used in favor of public debt is, “We owe it to ourselves,” meaning it is quite harmless.

Surprise! That is no longer true. We owe it to future generations, and we don’t have the money.

 

By Howard Ruff
The Ruff Times

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You can get more information from Ruff’s latest book Ruff’s Little Book of Big Fortunes in Gold and Silver or from his newsletter The Ruff Times. You can learn more about these on Ruff’s website, www.rufftimes.com.

Howard J. Ruff, the legendary author and financial advisor, has remained in the public eye for more than a quarter of a century. He is founder and editor of The Ruff Times Financial Newsletter. This article appeared in the September 14, 2007 issue of The Ruff Times. The newsletter is much more comprehensive and deals with a broad spectrum of middle-class financial issues and includes an Investment Menu from which you can build your portfolio. (You can learn about it here). The Ruff Times has served more than 600,000 subscribers – more than any financial-advisory newsletter in the world.