A Review of the U.S. Financial Report and What Happens Next

Right around the middle of February of each year, the U.S. Department of Treasury releases the Financial Report from the U.S. Government, an annual report of the federal government’s financial condition. It looks a lot like the annual report you would expect to see from a company such as Apple, Google, or Facebook except that, unlike any of those companies, the Department of Treasury’s report is almost too hard to look at and this year is no different.

This year’s report was released nearly a month and a half later than previous years which we will credit to the extended government shutdown. You can see the annual report for yourself, but we thought we would take some time to give you the short version and provide you with a few highlights from the report.

Breaking Down the U.S. Financial Report

financial-report

In 2018, the government collected $3.4 trillion in tax revenue, but they spent $4.5 trillion, giving them a total net loss of 1.16 trillion dollars.

Yes, you read that correctly – $1.16 trillion. If you want to view the full report, click here.

Of the $4.11 trillion that was spent, nearly half of that spending went towards Social Security and Medicare, which is quite extraordinary given the fact that Social Security and Medicare trust funds are set to run out of money within the next 15 years.

In other words, despite spending nearly half of the federal budget on Social Security and Medicare, both programs are essentially insolvent. That’s not to mention that on page 10 of the report, the U.S. government estimates that Social Security’s long-term funding gap is $53.8 trillion, roughly 10% worse than last year.

To put that in context, $53.8 trillion is nearly 70% of the entire world economy. Also stated in the report, the federal government tallied up its assets and liabilities, just like any individual or company would do, and came to a total of $3.8 trillion.

The single largest component of that number? Student debt with an amount of $1.08 trillion. That’s right, the U.S. government’s number one asset is the debt owed by young people across America. The next biggest asset of the U.S. is something called property, plant, and equipment, otherwise known as PP&E (physical or tangible, long-term assets vital to business operations that are not easily converted into cash). Lastly, for Fiscal Year 2018, the U.S. government also reported $581 billion in equipment, mostly military, and nearly $500 billion in real estate.

Now, we understand that $3.8 trillion in assets sounds like a lot. However, when you factor in the U.S. government’s liabilities (a total of more than $25 trillion), it makes the government’s net worth a whopping negative $21.5 trillion. To put that number in context, the U.S. government’s net worth was negative 17.7 trillion in 2014, negative 18.2 trillion in 2015, negative 19.3 trillion in 2016, negative 19.3 trillion in 2016, and 20.3 trillion in 2017. See the pattern?

We’re not reporting this information to encourage fear or panic by any means. Nor are we attempting to suggest that there is an imminent financial crisis ahead of us. In fact, we hope this information can result in some sort of optimism. There’s a solution to every problem, but it always starts with recognizing that there’s a problem. However, we do want to be honest with you because this is an important conversation to be had and things might only get worse moving forward.

Throughout history, there has never been a nation or an empire that was immune to the financial laws of the universe and it would be counterintuitive to think that this time would be any different.

What Happens Next?

So, knowing this information, what are some viable solutions the U.S. government has? Let’s take a look at a few different options.

Raise Taxes

This solution is the most likely to happen because it also happens to be the most politically palatable option. This would result in wealth taxes, dramatically higher income taxes, corporate taxes, surtaxes, etc. The only problem is that it probably won’t help.

Since the end of World War II, tax rates in the United States have never quite been consistent. In the 60s, the wealthiest paid a highest marginal rate of 90% and during that period, corporate, individual, and capital gains rates have continued to bounced around.

Now, the highest marginal rate among the wealthy is 37% and despite how high or how low tax rates have been set, overall tax revenue has been relatively the same (17.7%). The point is, no matter how high tax rates become, tax revenue likely won’t budge.

Default

This option means the U.S. government would either default on their creditors (people who own the debt) or defaulting on their obligations to taxpayers (ie. Social Security) which, as we stated earlier, is already happening.

Defaulting on its creditors would be difficult for the U.S. considering the top owners of U.S. debt are Social Security, the Federal Reserve, and foreign creditors such as China. Social Security is the top U.S. debt holder, the Federal Reserve owns trillions of dollars worth of U.S. debt and defaulting on them would wipe out the Fed’s solvency and create an epic currency crisis for the U.S. dollar, and defaulting on the Chinese would create a global financial crisis, as nearly all foreigners would dump their U.S. bonds.

Inflation

Seeing as none of the above are great options, we’re left with inflation. For thousands of years, governments in financial distress have resorted to debasing their currencies and creating inflation in order to make ends meet. Governments like inflation because it gradually reduces the value of the debt that they’ve borrowed (~3% annually) and there’s never much backlash from it.

As we said, all of this information is based on the government’s own data, but it’s nothing to fear because there are some solutions. However, at the end of the day, people should at least consider owning some inflation-proof assets such as gold, silver, real estate (including foreign property), and shares of a well-managed, high cash-flow business. It would also make sense for you to create a robust retirement structure like a solo 401(k) or SEP IRA so that you’re not dependent on Social Security. All of these assets are not volatile property to own and are almost immune to inflation rates.

Contact West Hills Capital

Right now is the best time to invest in precious metals, to ensure that your investments are safe against inflation. Committing a portion of your portfolio to these assets can be one of the best investments you make. Call (800) 867-6768 to speak with one of our metals strategists today.