Creative Accounting

Weekly Blog #7 

“I’d gladly pay you Tuesday for a hamburger today.” Wimpy

Washington bureaucrats would like the rest of us to believe that government accounting is somehow different—and more complicated—than personal or corporate accounting. They suggest that managing the federal coffers requires the knowledge and expertise of the managerial class. Nothing could be further from the truth.

While the federal government doesn’t publish a complete balance sheet, it does issue an annual Statement of Financial Position, which provides explicit values for federal assets such as student and other government loans, tax and trade receivables, deposits and currency, and official reserve assets. The government also has non-financial assets, such as real estate (buildings and land), mineral and energy resources, military equipment, infrastructure, and intangible assets. However, it doesn’t assign a market value to these assets. As a result, there is no “Net Position” or clear picture of Uncle Sam’s net worth.

That said, the Congressional Budget Office does provide regular accounting of the government’s income statement. Below is an excerpt from the CBO’s projections issued this January:

Virtually all reports and publications addressing fiscal policy tend to focus on several key metrics: the federal deficit, the national debt, and debt-to-GDP. Policy wonks who follow discussions regarding the national budget debate may hear conflicting metrics at time. For example, debt-to-GDP (federal outstanding debt divided by gross domestic product) is often cited as 100%. Similarly, the federal deficit (federal tax revenues minus expenditures) is said to be approximately $1.9 trillion. Both of those numbers are wrong.

Remarkably, Washington’s bean counters quietly omit intragovernmental obligations—held by agencies such as the Social Security and Medicare Trust Funds. The rationale? Since the government doesn’t remit interest payments on these bonds, they claim it’s not technically “debt”—just an accounting obligation.

The total amount of intragovernmental debt is currently $7 trillion—no small sum. This explains the oft-told narrative that Social Security is insolvent because “the government is stealing from it,” which is patently false. However, what the federal government is doing is more akin to borrowing money from a family member—and then conveniently omitting that loan from his financial statements when applying for a mortgage. In this case, the lender would be future Treasury bond investors. That’s not creative accounting; it’s borderline fraud.

I uploaded the CBO’s data into Chat GPT and asked it a simple question: if the US government was applying for a mortgage, would you approve or decline the loan? Here’s the response:

Underwriter Decision: DECLINE. 

Reason: The borrower exhibits insufficient debt service coverage, negative free cash flow, and an unsustainable debt trajectory—this is a high-risk borrower already deep in debt, spending beyond their means, with no clear repayment plan. Even with appreciating “assets” (i.e., economic output), they’re structurally overleveraged.

From a private lender’s perspective, no prudent underwriter would approve a mortgage (or even a home equity line) for a borrower whose financials mirror the U.S. government’s adjusted balance sheet.

Proper underwriting focuses on the Four Cs of Credit: character, capacity, capital, and collateral. When we fail to adhere to traditional lending guidelines it always ends badly. Every credit bubble (and subsequent bust) starts with a departure from traditional underwriting guidelines. The 2007–2009 housing crisis wasn’t the fault of the Monopoly Man (AKA the Wall Street investment banker), but rather HUD and its reckless stated-income/subprime loan program.

To be clear, credit, if used judiciously, is your friend. Borrowing for the purpose of making a prudent investment—one with a return that sufficiently exceeds the cost of credit—is a proper use of credit. However, borrowing for the sake of increasing consumption isn’t just folly—it’s dangerous.

As of today, the government’s cost of funds is roughly 4%. However, if the CBO’s forecasts are correct, in just ten years the total national debt will be nearly $60 trillion with annual net interest exceeding $2 trillion/year—roughly the size of Canada’s current annual GDP.

Absent a major fiscal epiphany and subsequent course correction, the trajectory of the US’s finances is unsustainable. Presently, the world is still purchasing Treasury bonds and the US dollar is still the primary reserve currency. However, if Washington bureaucrats don’t come to their senses soon, the global markets will eventually shun dollar-denominated assets.

To that point, the famous investor, Ray Dalio, recently opined that the US was just three years away from what he termed a debt heart attack. If/when that day comes, US bonds will no longer be considered risk-free and Uncle Sam may find the only credit option open at that time would be a hard money lender.

Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™