I think you could make the argument that government deficits are actually larger than what is reported too as the government leverages cash accounting as opposed to accrual accounting when accounting for expenses.
I’d argue that for programs such as social security where I’m paying money into the program today, that this is actually creating an additional liability on the governments balance sheet as I’m now entitled to social security benefits once I hit the retirement age. Granted, the government can cut benefits or increase the retirement age, but effectively I tend to think of this as the government selling me an inflation indexed annuity.
I think the total government deficit is likely larger than reported once you start accounting for these types of liabilities that aren’t necessarily recognized with cash accounting.
Yes this is a great point, and one that I though of mentioning. For example, the actual accural accounting for 2022 showed a net loss of $4.2 (!) trillion, vs a cash deficit of $1.3 trillion, due in large parts to changes in assumptions for Veteran pension/benefit costs - i.e. higher cost of living adjustments.
Indeed, while many view inflation as a route to solving the deficits, many of the governments obligations including SS and VA benefits are explicitly inflation indexed.
When you factor in the acturarial and demographic adjustments to SS, healthcare, etc., primary deficits are expected to grow over the coming decades regardless of discretionary spending. This is a big issue.
To be fair, the treasury does consider these in their long-term assessment, which concludes that a 4.2% of GDP increase in net receipts is necessary to balance the budget. But that is an enormous change and unlikely to occur soon. This further exacerbates the problem
One of the areas I’m really interested in is the concept of increased privatization of government owned infrastructure assets such as airports, toll roads, and municipal water utilities as a way for the government to raise money and reduce spending.
This is more common outside of the United States in other developed countries such as New Zealand (the Auckland Airport is a publicly traded company) and in Australia (e.g. TransUrban) and Europe toll roads are much more common than in the United States.
I’m somewhat biased as an infrastructure focused investor though I tend to like owning those types of assets so of course I want more of them to come available for purchase :)
Outside of that it would be neat to seriously explore the idea of moving social security to a savings account/mandatory contribution plan model similar to what they have in Singapore.
I wouldn’t go so far as to say we should do those things it just makes me sad I don’t see them being more seriously discussed.
Interesting to hear that you are an infrastructure investor - I actually happen to have a lot of experience in that arena from a prior role. Yea we don't really do PPP type stuff as they do elsewhere. I hadn't thought about it as revenue source. It would have generated proceeds back in ZIPR though as "core" infra deals tended to go for ~5% equity returns... curious what they go for today.
It’s definitely an interesting space. It’s mind boggling to think about the amount of money required to support background infrastructure that powers society that most people don’t even think about. It spans so many different areas from transportation, energy, water, waste management, data infrastructure, etc.
I’m not really aware of any unfortunately. I think it partially depends on the area you are interested in as infrastructure is kind of an umbrella term for many different areas and the way you would evaluate a midstream natural gas investment is going to a bit different than another type of asset such as a cell phone tower portfolio, etc.
It's funny, I just happened to read a note from Neil Howe, an excerpt from his new book, that takes a bigger picture view of essentially these trends. combining the two set of ideas, I expect that political expediency will never result in elected officials choosing to raise taxes as they fear they will not be reelected. as such, the only set of solutions that seem likely are those that include ongoing inflation and potentially some tweaking of expenditures at the margin. alas, I believe it is far more likely that the most likely outcome will be a change in the definition of what a deficit is allowing the politicians to 'show' they have addressed the problem. I also fear that Howe's great conflagration is increasingly likely to occur before the decade ends, and we see a true reset.
thanks for a very good description of the situation.
Thanks Andy. The "flexibility" of fiat can be both an feature and a bug. The benefit is that you can paper over issues in a way that you can't with hard money. The bug is that you can paper over issues in a way that you can't with hard money.
But we should recognize that even papering over issues have a cost - in the fiat world, public sector debt costs materialize differently from a simplistic view of private credit, but are not costless. The US also benefits from its currency which allow it far more leeway to get away with monetization and public debt expansion
Isn’t it double counting to include financial debt in debt/GDP? To the extent that the financial firms lend to governments, corporates and individuals, then you will be counting the debt twice
This is measuring financial *liabilities* not assets. A bank loan to an company would be a bank asset. But to your point, all debt has a borrower and lender and so naturally nets to zero. Nevertheless, the gross number is relevant as well as it measures the cumulative amount of money lent and now owed
I mean, if the liabilities of the financial institutions are used to support its lending to government and corporates, then it you are counting both the borrowing by government, corporates and the FI, when ultimately only the government and corporates have borrowed to support their operations
Yes I think that's a relevant example. There, private credit has been even worse - outright contraction in nominal terms partially driven by poor demographics
The last dollar standing? If we make it to 2030, the deficit will easily be over $50 trillion not even counting the "off the books" debt. There might not be any bill to foot if the great reset becomes reality.
I suspect we will make it to 2030! The reality is these are slow moving megatrends that will take decades to play out. The decisions today still matter greatly because small changes in directions have large implications over longer terms. Thanks for reading
I think you could make the argument that government deficits are actually larger than what is reported too as the government leverages cash accounting as opposed to accrual accounting when accounting for expenses.
I’d argue that for programs such as social security where I’m paying money into the program today, that this is actually creating an additional liability on the governments balance sheet as I’m now entitled to social security benefits once I hit the retirement age. Granted, the government can cut benefits or increase the retirement age, but effectively I tend to think of this as the government selling me an inflation indexed annuity.
I think the total government deficit is likely larger than reported once you start accounting for these types of liabilities that aren’t necessarily recognized with cash accounting.
Yes this is a great point, and one that I though of mentioning. For example, the actual accural accounting for 2022 showed a net loss of $4.2 (!) trillion, vs a cash deficit of $1.3 trillion, due in large parts to changes in assumptions for Veteran pension/benefit costs - i.e. higher cost of living adjustments.
Indeed, while many view inflation as a route to solving the deficits, many of the governments obligations including SS and VA benefits are explicitly inflation indexed.
When you factor in the acturarial and demographic adjustments to SS, healthcare, etc., primary deficits are expected to grow over the coming decades regardless of discretionary spending. This is a big issue.
To be fair, the treasury does consider these in their long-term assessment, which concludes that a 4.2% of GDP increase in net receipts is necessary to balance the budget. But that is an enormous change and unlikely to occur soon. This further exacerbates the problem
One of the areas I’m really interested in is the concept of increased privatization of government owned infrastructure assets such as airports, toll roads, and municipal water utilities as a way for the government to raise money and reduce spending.
This is more common outside of the United States in other developed countries such as New Zealand (the Auckland Airport is a publicly traded company) and in Australia (e.g. TransUrban) and Europe toll roads are much more common than in the United States.
I’m somewhat biased as an infrastructure focused investor though I tend to like owning those types of assets so of course I want more of them to come available for purchase :)
Outside of that it would be neat to seriously explore the idea of moving social security to a savings account/mandatory contribution plan model similar to what they have in Singapore.
I wouldn’t go so far as to say we should do those things it just makes me sad I don’t see them being more seriously discussed.
Interesting to hear that you are an infrastructure investor - I actually happen to have a lot of experience in that arena from a prior role. Yea we don't really do PPP type stuff as they do elsewhere. I hadn't thought about it as revenue source. It would have generated proceeds back in ZIPR though as "core" infra deals tended to go for ~5% equity returns... curious what they go for today.
It’s definitely an interesting space. It’s mind boggling to think about the amount of money required to support background infrastructure that powers society that most people don’t even think about. It spans so many different areas from transportation, energy, water, waste management, data infrastructure, etc.
Hey Adam and TLBS, is there a good book you would recommend on this topic of infrastructure utilities business operation?
I haven't read one unfortunately
I’m not really aware of any unfortunately. I think it partially depends on the area you are interested in as infrastructure is kind of an umbrella term for many different areas and the way you would evaluate a midstream natural gas investment is going to a bit different than another type of asset such as a cell phone tower portfolio, etc.
It's funny, I just happened to read a note from Neil Howe, an excerpt from his new book, that takes a bigger picture view of essentially these trends. combining the two set of ideas, I expect that political expediency will never result in elected officials choosing to raise taxes as they fear they will not be reelected. as such, the only set of solutions that seem likely are those that include ongoing inflation and potentially some tweaking of expenditures at the margin. alas, I believe it is far more likely that the most likely outcome will be a change in the definition of what a deficit is allowing the politicians to 'show' they have addressed the problem. I also fear that Howe's great conflagration is increasingly likely to occur before the decade ends, and we see a true reset.
thanks for a very good description of the situation.
Thanks Andy. The "flexibility" of fiat can be both an feature and a bug. The benefit is that you can paper over issues in a way that you can't with hard money. The bug is that you can paper over issues in a way that you can't with hard money.
But we should recognize that even papering over issues have a cost - in the fiat world, public sector debt costs materialize differently from a simplistic view of private credit, but are not costless. The US also benefits from its currency which allow it far more leeway to get away with monetization and public debt expansion
Brilliant 💡✊🏼
Glad you enjoyed and thanks for reading
Solid work as always!
Thanks for reading!
Very evenhanded, rational discussion of American debt.
I will take that as a compliment. But its not evenhanded for the sake of evenhandedness. Its just my realistic view on the situation
What an article Mr. Bear! I loved reading it, thank you so much!
Isn’t it double counting to include financial debt in debt/GDP? To the extent that the financial firms lend to governments, corporates and individuals, then you will be counting the debt twice
This is measuring financial *liabilities* not assets. A bank loan to an company would be a bank asset. But to your point, all debt has a borrower and lender and so naturally nets to zero. Nevertheless, the gross number is relevant as well as it measures the cumulative amount of money lent and now owed
I mean, if the liabilities of the financial institutions are used to support its lending to government and corporates, then it you are counting both the borrowing by government, corporates and the FI, when ultimately only the government and corporates have borrowed to support their operations
This is what happened in Japan after the real estate bubble burst there in the 1990’s as well
Yes I think that's a relevant example. There, private credit has been even worse - outright contraction in nominal terms partially driven by poor demographics
Really enjoyed the article, great work! Thanks vm!
Thanks Sergei, glad you found it useful
The last dollar standing? If we make it to 2030, the deficit will easily be over $50 trillion not even counting the "off the books" debt. There might not be any bill to foot if the great reset becomes reality.
I suspect we will make it to 2030! The reality is these are slow moving megatrends that will take decades to play out. The decisions today still matter greatly because small changes in directions have large implications over longer terms. Thanks for reading