The world is drowning in debt, warns Goldman Sachs

[moda0306]

And the reason they're "off-balance sheet" isn't a treasury swap... it's because they are funded by specific taxes... FICA, Payroll, Self-Employment and Medicare Tax.  So they are essentially "funded" by the productivity of the working class.

That doesn't make any sense.  You can't have unmatched unfunded liabilities in double entry accounting.  The tax revenues directed to the trust accounts are swapped into Treasury securities to match the future unfunded liabilities.  Does it make sense to call the government's own asset-debt swap a "savings account" for the public sector???  If they don't count the Treasury securities as assets then they don't get to call the unfunded liabilities as liabilities either.

But assuming you meant income, and not cash flow, or something to that affect, it's hugely important in various measures.  To me, P/E ratios (or my preference... to inverse it into an earnings yield), is probably the most important fundamental of the stock market.  That is essentially comparing an income item (earnings) to a balance-sheet item (price).  The way income streams interact with stocks of assets (and liabilities) is perhaps the most important interplay in investing AND household economics to understand the nuances of, IMO.

Yeah, I meant an income flow.  But P/E has the same logical inconsistency which is why it's not a very reliable valuation metric.  The "Fed Model" of comparing earnings yields to bond yields is complete bullshit.  It doesn't hold up any time in history except as an artifact from 1980 to the late 1990's.  Does that give you an indication of how ignorant those at the top really are (i.e. Yellen)?  Or are they all just pandering whores to Congress and the public?  Inquiring minds want to know!

Anyway, "unfunded liabilities" really just means the liabilities that are not included in the yearly Federal budget.  I don't know the legal reason as to why or how they exclude it (not all countries do this).  But you can certainly read the actuarial reports on the trust funds to get the full picture.

MG,

I don't know what the "fed model" is, but understanding poorly valued P/E's, while perhaps one would miss out on some technically-driven market spikes, would leave a lot of investors in a much better value investing mode.  Of course, it takes a while for all that to play out, but if earnings are not what drive the stock market's performance long-term that allow me to be confident that I'm capturing the growth of the private economy, what the hell am I even doing investing in it?  I'm investing to capture earnings, pure and simple, at a fundamental level.  If we took away all the earnings expectations of the stock market in the future (that it was simply going to break even going forward and recognize no profits), we would have no reason to ever invest in that market.  And future earnings are constrained by growth, and growth implies a current state of earnings, which makes the 1-year and 10-year trailing p/e (or yield if flipped) abundantly relevant.... Just ask the Japanese investor who's been in the Nikkei since 1989.

And further, bonds are a great way to put a floor on opportunity cost.  In a world where 10 year bonds are yielding 15%, I have a VERY different opportunity cost on the valuation of future earnings of any sort of business interest (real estate, stocks, etc) than if the 10-year is yielding 2%.  Like I said, I don't know what the "fed's model" is, but the "moda model" is buy on fundamentals, not technicals... and the foundation of the fundamentals of the bond market is yield... the foundation of the fundamentals of the stock market is earnings.

If you have more sources or analysis on the failure of the "fed model" or using p/e as a good initial value indicator, I'd love to see it.


With regards to the potential causes of "off-balance-sheet" accounting like "unfunded liabilities..." I think there's a miscommunication happening here.

1) Normal liabilities are tracked normally.  Double entry accounting.

2) A future liability that is tracked into the future due to its "entitlement nature," but is "funded" by a specific income source, not an actual sinking fund that exists, perhaps deserves a "Present Value" put on it to the extent the obligation can NOT be met by future tax revenues as currently calculated.  Since we BOTH don't know really how "unfunded liabilities" are calculated, we really don't know whether they're counting the future tax inflows as an "anti-liability" in the equation.  I would hope so... but of course, break it out for all to see and analyze.

3) A future liability that has a current "trust fund" built up (asset), that is however invested in the type of liability instrument mentioned in #1 (liability) is a double-entry in the government's system.  It's an asset to the SSA, and a liability to the general account (I'm probably missing some nuance here but I'm pretty sure this is getting the broad strokes).  If the liability is COUNTED in the national debt (it is http://www.factcheck.org/2013/11/who-holds-our-debt/), you can't count it as an "unfunded liability" later on... at least not without mentioning that you're double-counting it when showing people what our TRUE debt is.  However, this goes both ways, so if the SSA wants to call its trust fund an asset, it HAS to factor in that this asset is not a liability of China, or Russia, or some diversified mutual fund, but of the federal government.

So to clarify on that 3rd point, debt to the SSA is NOT "off-balance-sheet."  So it has nothing to do with the treasury bond swap as far as I can tell.  What is "off balance sheet" is some present value measure (hopefully discounted) of future obligations that we've determined are "entitlements."  And to the degree that we're going to measure a liability like that, I would HOPE that we are offsetting it by some sort of tax revenue indicator, or at least that the financial media is making it clear that this is NOT how the accounting works for it.

If we took all likely government expenditures going forward the next 50 years that we feel are relatively necessary, and measured them as a liability in the absence of some sort of tax revenue estimate, our "unfunded liabilities" would probably be far more astronomical than they look now... but of course it'd be ridiculous to measure things that way... thus leading me to my ultimate point... is this all a bunch of bullsh!t?

[moda0306]

http://www.theatlantic.com/business/arc ... on/265644/


Here's an article that I tend to think puts some of those "unfunded liability" numbers in perspective.  I still want more analysis though.

Apparently, it's asserting that the "unfunded liability" amount is the shortfall AFTER tax revenues, but it appears it doesn't count the current "trust fund" as an asset to offset (but if the liability associate with said asset is counted in the 16 trillion #, it shouldn't be double-counted as an "unfunded liability" without at least a footnote).  And I can't tell if there's a discounting rate for those numbers happening or if they're gross (it's over 75 years).

[Pointedstick]

Frankly does the concept of accounting itself even make sense for a currency issuer? Food for thought.

The reason why I bring it up is because it seems like we're getting lost in a sea of bullshit here. All I know is what I see: more old people getting benefits that are financially and productively provided by fewer people, with the result being higher FICA taxes. However you want to spin it, this seems like an unfortunate development from my perspective.

[moda0306]

Frankly does the concept of accounting itself even make sense for a currency issuer? Food for thought.

The reason why I bring it up is because it seems like we're getting lost in a sea of bullshit here. All I know is what I see: more old people getting benefits that are financially and productively provided by fewer people, with the result being higher FICA taxes. However you want to spin it, this seems like an unfortunate development from my perspective.

PS,

To the degree that it represents SOME sort of fundamental economic reality, these numbers are probably relevant... but either way, considering how often these numbers are thrown out, I think it's still a good exercise to take off our "MR/HB" understanding hats for a bit and just do play the fiscal game a bit.  Also, considering that these liabilities, to the extent that they WILL be paid (not necessarily the case), ARE indexed to inflation (unlike most of our national debt), it might be important to do some stress-testing.

Also, I'd agree with your assessment that these are in ways "unfortunate developments," but that is different than fiscal disaster arguments... and I don't think trying to hide a moral consternation behind a veil of shoddy economic analysis is good form, even if one does have a good moral argument to make.

[MachineGhost]

I don't know what the "fed model" is, but understanding poorly valued P/E's, while perhaps one would miss out on some technically-driven market spikes, would leave a lot of investors in a much better value investing mode.  Of course, it takes a while for all that to play out, but if earnings are not what drive the stock market's performance long-term that allow me to be confident that I'm capturing the growth of the private economy, what the hell am I even doing investing in it?  I'm investing to capture earnings, pure and simple, at a fundamental level.  If we took away all the earnings expectations of the stock market in the future (that it was simply going to break even going forward and recognize no profits), we would have no reason to ever invest in that market.  And future earnings are constrained by growth, and growth implies a current state of earnings, which makes the 1-year and 10-year trailing p/e (or yield if flipped) abundantly relevant.... Just ask the Japanese investor who's been in the Nikkei since 1989.

I think the problem here is with the definition of earnings.  As an accountant, you surely must know how completely subjective reported earnings are!  One year or even a 10-year average of inflation-adjusted reported earnings is not a proper way to value a company.  The proper way is with discounted cash flow analysis.  No exceptions.  And all future growth can never ever be more than a nominal 6%/year in the long-term because that is all that the economy is (has been) capable of producing.

I'd argue that you should also ask a Japanese investor who's been in the market since the P/E went "undervalued" post-1989.  They haven't made any money either.

Also, P/E ratios in the USA have been chronically overvalued since the 1990 real estate recession/Gulf War which is why the straight-up Shiller P/E is useless.  There never would have been an opportunity to get onboard an undervalued market if you were relying on P/E, although I think it did briefly dip to around 10 in late 2008.  16 years to wait is a long time.  Thusly, P/E is useless to rely upon alone.

And further, bonds are a great way to put a floor on opportunity cost.  In a world where 10 year bonds are yielding 15%, I have a VERY different opportunity cost on the valuation of future earnings of any sort of business interest (real estate, stocks, etc) than if the 10-year is yielding 2%.  Like I said, I don't know what the "fed's model" is, but the "moda model" is buy on fundamentals, not technicals... and the foundation of the fundamentals of the bond market is yield... the foundation of the fundamentals of the stock market is earnings.

This is logically intuitive, but it doesn't work outside that narrow historical window I mentioned where it is a spurious concidence of both bonds declining and stocks rising.  Treasury debt and equity are completely different investment vehicles and have very little relation or correlation to each other.  They also have different "groupies" for lack of a better term.

If you have more sources or analysis on the failure of the "fed model" or using p/e as a good initial value indicator, I'd love to see it.

http://www.ritholtz.com/blog/2008/02/th ... ion-model/

If we took all likely government expenditures going forward the next 50 years that we feel are relatively necessary, and measured them as a liability in the absence of some sort of tax revenue estimate, our "unfunded liabilities" would probably be far more astronomical than they look now... but of course it'd be ridiculous to measure things that way... thus leading me to my ultimate point... is this all a bunch of bullsh!t?

Okay, it looks like you are right.  Unfunded liabities is the NPV of the future liabilities that is not covered by current funds.  So in the case of the government, it goes awry because they do not report earned Social Security and Medicare benefits payable to current retirees on the balance sheet.  I have no idea why when they do for just about everything else.  There are alternative measures that do take into account both these off-balance sheet accrued liabilities as well as their corresponding future revenue.  Obviously, there's a lot of room here for malarky since the growth rates are pulled out of thin air based on current law.  There's certainly no 6% cap on the currency issuing.

[MachineGhost]

Apparently, it's asserting that the "unfunded liability" amount is the shortfall AFTER tax revenues, but it appears it doesn't count the current "trust fund" as an asset to offset (but if the liability associate with said asset is counted in the 16 trillion #, it shouldn't be double-counted as an "unfunded liability" without at least a footnote).  And I can't tell if there's a discounting rate for those numbers happening or if they're gross (it's over 75 years).

What we really need is a GAAP treatment of the Federal government's budget not whatever cockameme accounting fiction any administration likes to present.  I'm sure someone has done it already.

It seems to me these "unfunded liabilities" are not strictly legal liabilities in the sense that a debt certificate is.  That's really unethical, if not unlawful.  But suppose the government is stuffing the trust fund with Treasury security debt against these "unfunded liabilities".  Doesn't that imply it is converting what is nebulous into tangible?  So maybe there is an impetus not to codify the "unfunded liabilities".

But I think PS is right...  this might all be mostly fixed exchange rate anarchronisms.  Whatever the damn liability is at any point in time will get paid.  Problem solved.  It just may not be worth much like the white guy from Zimbabwe who had his entire pension paid off because it cost more for the company to mail the monthly checks to him than the current value of his pension (US$12!!!).

[rickb]

What we really need is a GAAP treatment of the Federal government's budget not whatever cockameme accounting fiction any administration likes to present.  I'm sure someone has done it already.

John Williams presents this data in his hyperinflation summary, see http://www.shadowstats.com/article/spec ... y-2015.pdf (specifically starting at p. 42).  But I'm not exactly sure where he gets his numbers from.

[MachineGhost]

John Williams presents this data in his hyperinflation summary, see http://www.shadowstats.com/article/spec ... y-2015.pdf (specifically starting at p. 42).  But I'm not exactly sure where he gets his numbers from.

It seems to mesh up with the http://www.usdebtclock.org so now we know the GAAP Unfunded Liabilities is correct, i..e accounts for revenues as well as expenditures?

BTW, moda, your favorite politician is advocating a 99% marginal income tax rate: https://www.newsmax.com/Politics/Bernie ... id/647105/
What a truly useful idiot!  It's amazing someone that ignorant can manage to navigate the modern economy.

[Libertarian666]

John Williams presents this data in his hyperinflation summary, see http://www.shadowstats.com/article/spec ... y-2015.pdf (specifically starting at p. 42).  But I'm not exactly sure where he gets his numbers from.

It seems to mesh up with the http://www.usdebtclock.org so now we know the GAAP Unfunded Liabilities is correct, i..e accounts for revenues as well as expenditures?

BTW, moda, your favorite politician is advocating a 99% marginal income tax rate: https://www.newsmax.com/Politics/Bernie ... id/647105/
What a truly useful idiot!  It's amazing someone that ignorant can manage to navigate the modern economy.

Actually he was agreeing with a 90%, not 99%, tax rate for the 1%, but your point is still valid.

[moda0306]

He wasn't advocating a 99% tax rate. He was saying that the 90% tax rate of the 50's was not "obviously too high," as the reporter asked.

Personally, I don't know enough about the adherence to tax laws at that time, but as weird as it is too say, perhaps it isn't "obviously too high" based on economic performance at the time. Maybe there's more to macro than the Laffer-curvists want to see.

He's certainly extreme, but he's honest and usually consistent about his views. He's a socialist. He's come out and said it. Just by coming out and admitting what has been turned into a pajorative earns respect in my book.

Hell my other favorite candidate is Rand Paul, and if he gets a fed nomination I think it could grind our economy to a hault.

I know I'm playing with fire.

[MachineGhost]

So no one is buggered by the fact we have nearly $100 trillion in outstanding liabilities on a GAAP basis?  Tax revenues fully accounted for.  I don't know about you, but that must be a GARGANTUAN gap.  How do you grow your way out of that?

And how do robots help things as more and more people are unemployed and don't pay FICA and Medicare tax?  Are we going to start taxing robot labor?  Does that even make any sense?  I forsee a VAT tax in the future.

[Libertarian666]

So no one is buggered by the fact we have nearly $100 trillion in outstanding liabilities on a GAAP basis?  Tax revenues fully accounted for.  I don't know about you, but that must be a GARGANTUAN gap.  How do you grow your way out of that?

And how do robots help things as more and more people are unemployed and don't pay FICA and Medicare tax?  Are we going to start taxing robot labor?  Does that even make any sense?  I forsee a VAT tax in the future.

There is no solution other than national bankruptcy, whether de jure or de facto. Obligations that cannot be paid will not be paid, although there may be a pretense of payment, i.e., bales of paper "money".

[goodasgold]

Obligations that cannot be paid will not be paid, although there may be a pretense of payment, i.e., bales of paper "money".

Yes, the bales of Zimbabwe-style funny money to be issued by the U.S. Treasury will be known as a "soft bankruptcy." Guard your gold, folks, while ignoring the derision of the Krugmanian multitude. Gold will be our salvation, at least until the pitchfork-and-torch bearing masses besiege our modest castles in the name of "wealth equality."

[MachineGhost]

For those not worried about the public debt to GDP ratio in the U.S., is there any threshold above which you would start to worry? 

The ratio is greater than 1.0 now.  It was even higher in WWII, but the recent rapid rate of increase sure doesn't make me feel very comfortable.  What am I missing?  How does being a currency issuer make this level ok? 

https://research.stlouisfed.org/fred2/s ... FDEGDQ188S

Comparing one year of an income cash flow item to a long-term fixed balance sheet item (debt) doesn't make sense.  It would be like dividing your yearly income by the balance on a 30-year mortgage.  Of course its going to look ridiculous, but that doesn't mean it indicates insolvency.  OTOH, the GAAP of the unfunded liabilities should be indicating any gap between expected future revenues and expected future liabilities. 

Japan is like 220% of GDP now without an issue.  It's just another sloppy heuristic rule of thumb like P/E.  They do have serious productivity issues due to lack of immigration, women treated as second class citizens, not enough people having nooky and a huge retirement population.  I would actually like to see what the GAAP of their unfunded liabilities is.  Then again, they are way ahead of us in inventing automation and robots to solve their productivity problem.

[MachineGhost]

MG, comparing debt to annual income is done frequently, with perhaps the best example being a house loan qualification.  I think the MR folks will tell me that we never have to pay off the debt, and I agree with that.  But the U.S. does at least have to make interest payments on the debt.  Perhaps looking at the ratio of interest payments to GDP would be more interesting.  Given that we're at a ratio of about 1:1, and long term rates are less than 3%, we're only paying a couple percent of GDP to service the public debt.  But net profits on GDP are less than 10% (accountants can correct me if I'm wrong), so we might be spending more than 20% of net profits on debt interest. 

That was actually my original concern when I was debating with Gumby about MMR.  The interest payments would eventually consume all tax revenues.  Actually, we're at that point now I believe, at least in terms of we're borrowing just to pay just the interest on what we've already previously borrowed.  It feels like an exponential curve and we know how all those end...    I guess as long as we don't borrow more than the rate of inflation + productivity growth, the debt is being whittled down in real terms???

No, inflation is when there is an excess of money supply after productivity monetization that is chasing a limited amount of goods/services.  The excess money supply above productivity needs has to be available to chase with.  If it is just locked up as a balance sheet item on the books of central banks and their members (i.e. public money), its not circulating in the economy.  Actually, that public money doesn't ever circulate substantially in the economy anyway, but I digress.  Confidence is the sole driver for privately-created money.  Japan doesn't have it and I'm unsure if the USA does either.

I think the PP approach makes sense...  bet on both outcomes.

We don't need debt for the government to finance productivity monetization.  It can just create money out of thin air like Ithaca Hours.  But Wall Street and the FIRE sector wouldn't like that since it wants leverage and power.  I believe this is the way we are going to go after the next sovereign debt deflation.  Strict limits (or no power at all) on the ability of governments to "emit bills of credit".  "It's the debt, stupid!"