I have a B.S. in Accounting, an MBA and 12 years of experience in accounting, finance and management positions. I have handled finances of several businesses and know what it takes financially to keep a company alive and running.
Unfortunately, Congress and the President’s fiscal actions since 2008 raise the accounting issue of Going Concern. The assumption holds that “in the absence of evidence to the contrary, accountants assume that entity operations will continue for a reasonable period of time; that is, the entity will not be liquidated in the near future,” Intermediate Accounting, Third Edition, Williams, Stanga and Holder, 1989.
If you look at the U.S. through the factors accountants consider when analyzing the Going Concern assumption of any entity, private or public, a standardized perspective of the severity of the situation is appreciated (standards below taken from a recent Statement on Auditing Standards):
· Negative trends (recurring operating losses, working capital deficiencies, negative cash flow from operations, adverse key financial ratios, etc.)—With a few exceptions, decades of recurring operating losses (budget deficits), which caused working capital deficiencies, negative cash flow from operations and adverse key financial ratios, but are now considered ‘normal’ simply because we’ve been in this financial situation for decades. Very important people are now saying it’s very serious.
· Other indications of possible financial difficulties (default on loan or similar agreements, arrearages in dividends, denial of usual trade credit from suppliers, restructuring of debt, noncompliance with statutory capital requirements, need to seek new sources or methods of financing or to dispose of substantial assets):
o The U.S. came within a few days of defaulting on its debt in August 2011.
o The public equivalent of arrearages in dividends is tax refunds. Numerous stories have documented IRS 2011 tax refund delays.
o Restructuring of debt is occurring through Operation Twist.
· Internal matters (work stoppages or other labor difficulties, substantial dependence on the success of a particular project, uneconomic long-term commitments, need to significantly revise operations):
o Cutting tens of thousands of military personnel certainly qualifies as labor difficulties.
o The U.S. is the epitome of uneconomic long-term commitments, with deficits more than 40% of our budget and nothing, including debt brinksmanship, has significantly reduced this rate of debt accumulation, which is an order of magnitude faster than 4 years ago.
o Need to significantly revise operations—In 2011 the U.S.’ mandatory spending (Social Security, Medicare, Medicaid, etc.) alone exceeded all Federal receipts. In other words, when investors (the Fed is not an investor but a money printer deflating your wealth in the extreme) stop buying Treasuries, the U.S. government will still not have enough money to pay all mandatory obligations EVEN IF THE ENTIRE EXECUTIVE, LEGISLATIVE AND JUDICIAL BRANCHES OF THE GOVERNMENT ARE COMPLETELY SHUT DOWN. If you think the riots in Europe were bad, just wait …
· External matters (legal proceedings, legislation, similar matters that might jeopardize an entity’s ability to operate; loss of a key franchise, license or patent; loss of a principal customer or supplier; uninsured or underinsured catastrophes such as drought, earthquake or flood)—The big one here is loss of a principal customer/supplier. In other words, shortly after Europe collapses financially the market spotlight will shine on the U.S. government, investors will suddenly realize our fiscal situation is far worse than Europe’s ever was and Chinese, Japanese and all other sovereigns will stop U.S. bond purchases. Goodbye reserve currency status, hello hyperinflation.
Factors will vary in importance and may not be individually significant. Collectively or in partial combination with each other, however, they may tell a great deal about the future prospects of a business. In our case, the facts paint the succinct picture of “It’s not if the U.S. defaults, but when.”
While factors may exist that tend to mitigate the seriousness or significance of the negative information, the current situation of the U.S. is just the opposite: factors exist that tend to exacerbate the seriousness and significance of the negative information.
For example, how would you rate the probability of our public masters (No longer servants. To understand, please read The Road to Serfdom) adequately addressing our debt accumulation when 2011’s debt default episode’s final resolution ONLY reduced the budget deficit rate less than 3 percent?
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