http://www.nakedcapitalism.com/2008/02/increasing-inflation-and-recession.html Mon, 23 Nov 2009 00:29:23 -0500 http://wordpress.org/?v=2.8.4 hourly 1 http://www.nakedcapitalism.com/2008/02/increasing-inflation-and-recession.html#comment-3826 Anonymous Fri, 08 Feb 2008 20:52:00 +0000 http://www.nakedcapitalism.com/2008/02/increasing-inflation-and-recession-pressures-weigh-on-the-fed/#comment-3826 The $54 Trillion Budget Bomb<br/>http://www.forbes.com/personalfinance/2008/02/08/budget-deficit-taxes-ii-in_aq_0208soapbox_inl.html<br/>Consider the past four years. The federal budget deficits on a cash basis for 2004, 2005, 2006 and 2007 were reported as $412 billion, $319 billion, $248 billion and $163 billion, respectively. Prepared on an accrual basis, however, which is the way all U.S. public companies report, the deficits for these same years were $616 billion, $760 billion, $450 billion and $276 billion.<br/>More worrisome, while the trend is quite good, the deficits would have been substantially greater if revenue from taxes had not increased more than 46% from $1.8 trillion in 2003 to $2.63 trillion in 2007, more than an average of $200 billion per year.<br/>Substantial negative cash flow can be acceptable if it is offset by a strong balance sheet. Here the news is quite sobering. The U.S. has $1.6 trillion in assets and $10.8 trillion in liabilities, resulting in a negative net worth of $9.2 trillion as of the end of its Sept. 30, 2007, fiscal year. Of those liabilities, $5.1 trillion is owed to the public. Another $4.8 trillion is owed for federal employees and veteran benefits. The killer item, however, is $45 trillion in off-balance-sheet debt, which is the present value of future benefits owed for Medicare and Social Security.<br/>As Citigroup (nyse: C - news - people ), Merrill Lynch (nyse: MER - news - people ), UBS (nyse: UBS - news - people ), HSBC (nyse: HBC - news - people ) and others recently discovered with their structured investment vehicles, these liabilities should be treated as real balance sheet liabilities. For the U.S., that would mean a net debt of $54 trillion, a figure 3.9 times our revenues, if we consider our $14 trillion economy as our figure for "sales."<br/>If home prices decline 20% over the next several years, a reasonable scenario, then American households will see a $4.2 trillion loss in their net worth and have significant difficulty adjusting to this decline. The $54 Trillion Budget Bomb
http://www.forbes.com/personalfinance/2008/02/08/budget-deficit-taxes-ii-in_aq_0208soapbox_inl.html
Consider the past four years. The federal budget deficits on a cash basis for 2004, 2005, 2006 and 2007 were reported as $412 billion, $319 billion, $248 billion and $163 billion, respectively. Prepared on an accrual basis, however, which is the way all U.S. public companies report, the deficits for these same years were $616 billion, $760 billion, $450 billion and $276 billion.
More worrisome, while the trend is quite good, the deficits would have been substantially greater if revenue from taxes had not increased more than 46% from $1.8 trillion in 2003 to $2.63 trillion in 2007, more than an average of $200 billion per year.
Substantial negative cash flow can be acceptable if it is offset by a strong balance sheet. Here the news is quite sobering. The U.S. has $1.6 trillion in assets and $10.8 trillion in liabilities, resulting in a negative net worth of $9.2 trillion as of the end of its Sept. 30, 2007, fiscal year. Of those liabilities, $5.1 trillion is owed to the public. Another $4.8 trillion is owed for federal employees and veteran benefits. The killer item, however, is $45 trillion in off-balance-sheet debt, which is the present value of future benefits owed for Medicare and Social Security.
As Citigroup (nyse: C – news – people ), Merrill Lynch (nyse: MER – news – people ), UBS (nyse: UBS – news – people ), HSBC (nyse: HBC – news – people ) and others recently discovered with their structured investment vehicles, these liabilities should be treated as real balance sheet liabilities. For the U.S., that would mean a net debt of $54 trillion, a figure 3.9 times our revenues, if we consider our $14 trillion economy as our figure for “sales.”
If home prices decline 20% over the next several years, a reasonable scenario, then American households will see a $4.2 trillion loss in their net worth and have significant difficulty adjusting to this decline.

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