March 1999 - Volume 19, Number 3

The Budget Surplus is an Illusion!

Politicians really are not accountants. Perhaps, that is why the Internal Revenue Code is so complicated and they have the unmitigated gall to refer to a $70 billion dollar surplus for fiscal 1998. A first year accounting student can tell you that is another big lie.

First, a distinction between "Deficit" and "Debt".

The Deficit is the amount we go into the red each year. The Debt is the accumulation of all those deficits.

The following chart will show why:


Federal Debt as of: Dollars (last six digits are eliminated)
September 30, 1997



September 30, 1998


Difference $ 113,047

Source: On the 4th workday of each month this statement will be available after 3:00 pm eastern time on the Bureau of the Public Debt's website at http://www.publicdebt.treas.gov


If we had a budget surplus, why did not the Federal Deficit go down?

The actual Federal Debt of the United States increased by over $113 billion in fiscal 1998.

What surplus are the politicians talking about?

Is it not amazing that we continue to get fed untruths by the members of this government? My old accounting professor at HBS, Professor Vancil, would have ripped a new a**hole in any student dumb enough to believe that an increase in federal debt is a budget surplus.

If any public corporation used the government's accounting practices of smoke and mirrors, the Securities and Exchange Commission would be issuing fraud complaints and suspending their securities and bonds from trading. Why don't they suspend the government Treasury Bills and Bonds and all the other government backed securities from trading. Some accountants figure that the real debt exposure of the federal government based upon Social Security unfunded liabilities, debt guarantees, etc., probably exceeds $22 trillion, not $5.6 trillion. In other words, the government is only talking about 25% of this nation's debt exposure.

Ah, I forgot, something to do with "trust and the full faith and credit of the government."

The following chart clearly shows the accelerating growth in the federal debt over the past fifty years. Doesn't anyone believe that someday the principal will have to be repaid.

debtgrowth.gif Source. Bureau of Economic Analysis

A large portion of the so-called "government surplus" has been caused by three factors, a healthy economic environment, declining interest rates on the federal debt and a decrease in the average maturity of the federal debt.

Interest Expense on the Public Debt Outstanding

The monthly Interest Expense represents the interest expense on the Public Debt Outstanding as of each month end. The interest expense on the Public Debt includes interest for Treasury notes and bonds; foreign and domestic series certificates of indebtedness, notes and bonds; Savings Bonds; as well as Government Account Series (GAS), State and Local Government series (SLGs), and other special purpose securities. Amortized discount or premium on bills, notes and bonds is also included in interest expense.
The fiscal year Interest Expense represents the total interest expense on the Public Debt Outstanding for a given fiscal year. This includes the months of October through September.
FISCAL Year totals for last 10 years
1998 $363,823,722,920.26
1997 $355,795,834,214.66
1996 $343,955,076,695.15
1995 $332,413,555,030.62
1994 $296,277,764,246.26
1993 $292,502,219,484.25
1992 $292,361,073,070.74
1991 $286,021,921,181.04
1990 $264,852,544,615.90
1989 $240,863,231,535.71

Updated February 12, 1999

The 1999 budget as presented estimates that interest on the federal debt will be approximately $375 billion or approximately 14% of the federal budget. Interest payments, primarily the result of previous budget deficits, averaged seven percent of Federal spending in the 1960s and 1970s. But, due to the large budget deficits that began in the 1980s that share quickly doubled to 15 percent. Since the budget is now in surplus, interest payments are estimated to drop to 12 percent of the budget in 2000 (11 percent of your Federal dollar).

Well, as I have pointed out, trust is a fragile thing. Ask the Japanese, ask any of the countries that have had to devalue their currency in the past few years. Well, I am afraid that trust in the American government is slowly sinking throughout the world. With a significant portion of our federal debt instruments held outside the borders, a run on the bank could start and then watch for "Katy to bar the door." And with the average maturity of the debt at almost its lowest level since 1985, the number of refinancings required could cause problems. The real question is whether the last Treasury auction is a foreboding of the problem in the future. Secretary Rubin has played the declining interest game for the last four years by reducing the yield curve. Now with long bond rates at the lowest levels in years, the Treasury has not opted to lengthen the average maturity which would reduce the risk of a major run-up in the bond market.


Today, we no longer owe the federal debt to ourselves. A large percentage of the federal debt is owed to foreign sources as the chart indicates and the percentage owned by foreigners has been expanding almost at an exponential rate. The percentage has doubled in the last four years as the savings rate in the U.S. remained flat and actually decreased and the U.S. dollar was perceived as the holding of last resort by many overseas investors..


The real question is what will happen if the Eurodollar actually challenges the U.S. dollar as a stable currency holding.


If as some suspect, the Eurodollar becomes a reserve currency, we could see a significant shift in the foreign debt held by the United Kingdom, Germany, France and the other Euro countries. If this happens, then the U.S. will have to increase its interest rates to compete for debt funds resulting in a reduction in the so-called budget surplus.

The federal budget for FY 1999 proposes to spend $1.8 trillion dollars. Here is where the dollars will go.Chart2_6.gif

Only by bringing the "off-budget items" into play does the federal deficit become a surplus.


So in the final analysis, it is only by using semantics that the budget can be said to be balanced. Of course, we also know what the interest rate on the federal debt will be in the year 2001 and upwards. Sure we do! Just like the farmers believed in 1996 that corn would be $3.50 per bushel instead of $1.75 in February 1999. Just gaze into that crystal ball and conger up any number. I guess the CBO believes that the stock market will go to 14,000 and that the economy has overcome recessions.

You know the old adage . . . the best laid plans of mice and men . . .

But then, ‘Tis Only My Opinion!

Fred Richards
March 1999

This issue of 'Tis Only My Opinion was copyrighted by Adrich Corporation in March 1999.

It is intended to provoke thinking, then dialogue among its readers. Quotation with attribution is encouraged.


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