Every couple years I re-forecast US Gov cashflows and calc NPV, just for thrills. This year, using their 2013 financial statements, I calculated base case as --> *negative* $133 trillion USD. Used assumtions from the below analysis by G&S for comparability. It’s a 75yr model, forced into that decision since that is the way the financials calc PV of liabilities. Assumed revenue grows at 2%. Actually they have grown revenue at 7% for the last five years, but that’s because they managed to *double* corporate taxes collected. Obviously that’s not sustainable, since corporations will leave and you get zero. Assumed costs grow at 2.5%, if they try to inflate their way out, obviously those go up. Used the 30yr gov as a discount rate. This all seems fair? As always played with every scenario I could think of, even unrealistically optimistic ones, but couldn’t get it lower than 80T (assuming an 8% discount rate). We could assume revenue goes up magically, but historically their spending increases when revenue is up, hell it increases when revenue is down, and the gap just keeps widening. In 2002 Gokhale and Smetters calculated it at (44)T, and in 2005 at (63)T. To me (133)T eight years later seems reasonable, given what has happened. I’m going to say $(200)T by 2020!
How did you handle debt/GDP trends? Did you maintain the same levels of debt, decrease them, or increase them?
Well for debt I didn’t specifically touch that; the way the model works the gap between income and spending must be closed with debt, or whatever, we don’t have to specifically model it. For income, which would be releated to GDP, just assumed 2% growth. Played with other numbers too.
How many assumptions are in the model in total?
Well, it’s not a very complicated business. They have income, expenses, no assets, and a lot of liabilities. As such there really aren’t that many knobs to turn in the model…the main assumption is that operations continue, and do so in a manner similar to the past.
I’m not sure I agree that the government has no assets. I think this blog post gives an interesting perspective on the financial position of the US government:
http://pragcap.com/the-us-government-is-not-16-trillion-in-the-hole
“…the IER estimatesthat total fossil fuel resources owned by the Federal government are valued at over $150 trillion alone. These assets alone are FIFTY FIVE times the amount stated in the CNBC report. But that only scratches the surface. I haven’t even looked into the huge amount of federally owned land and buildings that would surely amount into the hundreds of billions if not trillions of dollars.”
While I won’t try to argue with the math (which may or may not be right), you forgot to value all of the US’ intangible assets, namely that we could pwn anyone at any time if we choose too. So keep in mind we can acquire valuable assets at a significant discount, e.g., all of the oil in the Middle East. That “strategic takeout value” is significant in a zero sum, scarce resource game. Also, we have the reserve currency, so we can just rig the game indefinitely and there is no market force stronger than United States pwnage to force us into bk.
Disclosure: Long the US
Good point that there are assets not listed on the balance sheet, such as the value of their natural resources. However they can’t sell their own natural resources to close this financial gap, because they need them.
The main game seems to be using military strength to acquire other people’s assets (aquired at a discount), and sell them back to them, and others. This is unethical of course, but it’s what they are doing, and will continue to do. But the financial results of this are already seen in the model from 2001-2013. The results are a widening gap, not narrowing.
It does bring up an interesting point though, because I could specifically model continued/increased military spending, assets acquired, ignore the cost to life (externality), and add revenue brought in over time from selling these assets. That would be a fun exercise.
But I think Bromion’s theory that “we can just rig the game indefinitely” is unrealistic. It may seem like that now, but things change over time. It seems to me this widening gap has to resolve at some point.
Indefinitely is a long time and I was being facetious. I don’t think anyone would be thrilled about using the Euro as a reserve currency because the EU is in even worse shape than the US. China is too unstable and has an even less trustworthy govt than the US. Japan is a mess.
Yeah, I think the world would want to wait until there is an ideal alternative, then leap to that alternative. But in reality we don’t usually get our ideal situation, and are forced into action by some event. So one possible outcome is that some unknown event forces the world onto the next best currency, RMB (aren’t they accumulating gold?) or whatever. Or multiple reserve currencies exist simutaniously.
Frankly currencies confuse the hell out of me so I tend to stay out of this area…
RMB is the next best currency? China is a disaster. It’s a manipulated economy of a 3rd world country with a largely illiterate population. The currency is pegged to the USD. Unpegging and floating an independent reserve currency would be a farce. The best bet would be some kind of spinout of the non-crappy countries from the EU into a EU 2.0 and then peg to that. That’s not going to happen though.
LatAm? Most of the countries in LatAm are not real countries. They have high governtment turn over and lots of fiscal and monetary problems (here’s looking at you, Argentina). Africa is totally out obviously. Most of Asia is far too small except Japan, which makes the US look ideal by comparison.
Ehhh, USD is looking pretty good for the reserve currency for the next several decades unless the Europeans can get their sh-t together, but when has that ever been the case at any point in history? Yeah, never.
I do agree with you though that the likely outcome in the event of a change would be two reserve currencies which would probably result in a really fun cold war type of scenario between the US and the other country.
Sure, that mostly makes sense. Europe seems irrelevant in this century, they were the future in 500BC. And there is zero point in talking about South America or Africa. Australia isn’t even a real continent. Which just leaves one continent… China isn’t so bad really. When you talk about “manipulated economy” and “farce” these things also describe the American situation. It’s not ideal, but the Chinese are level-headed, tend to stay out of the world BS, have money, have gold. If they group together as the Euro countries did (Sing, HK, China, JP/KR) they form a super-economy of awesomeness. Russia fits in there somewhere too. Hmm, there is your cold war scenario actually…
Sarcasm, or straight up? Can never tell with the internet…
Probably sarcastic. My post was sarcastic too, although I think it’s basically true. I don’t agree with a lot of US foreign policy but given the choice, it’s nice to be on the winning team.
I am a “being on the winning team” guy too.
As analysts, ending up on the losing team would imply a wrong analysis.
Are you a 15 year old who just discovered the word “analysis” and thinks it’s cool?
He’s not a bi-analyst. He’s bi-winning!!!
Do you have two goddesses that cater to your every whim?
Just one. But your post seems off topic.
Let’s talk pot for fun…
What if the govt could somehow filter the pot revenue up to the national level? Why give that revenue to the drug dealers?? The US Gov could deal drugs!! Take the whole thing, no middle man. Seems reasonable.
But then let’s play this out…20yrs later everyone is even fatter, even more paranoid, hasn’t left their house in a year, has no job, on govt assistance --> tax revenues are in the toilet, and spending is up to support these stoners. Current state, but more so.
If the revenues go to states and/or businesses it’s same damage, but much smaller positive offset.
My forecast on pot legalization --> accellerated widening of the gap.