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Borrowed Friday Night

by Nicholas Barnard on October 1st, 2004

Okay, so I have a strange concept of an interesting Friday evening. Last week I spent far too many hours reading and researching the Federal Debt, Federal Deficit, Federal Debt Limit, and various related concepts. It was one of those things that I wasn’t really sure why I was researching it, but I just had to get to the end and satisfy my thirst. Next time I hope I get thirst for the bubonic plague or some hydrochloric acid.

This isn’t my usual style but here’s a link dump of what I considered the most useful and insightful documents: (I’ven’t read these since last week, because I was preparing my own documents to go along with this entry)

Okay, so after reading all of the above links, and some more I’ve come up with a few opinions.

One. Abolish the Federal Unified Budget. Its a horrible bit accounting trickery.

Here is a different way to look at the issue. Instead of investing in stocks a 401k you issue bonds (debt) to your 401k fund. Since you are borrowing from your 401k you get the benefit of having the money that you put into your 401k to utilize today, and you promise to yourself to pay back your 401k later. After executing this transaction, but before spending any additional money, your net worth has moved exactly nowhere. (Its actually likely to decrease, because of fees involved with executing the transaction.) So you’ve obtained the benefit of spending your 401k today. You promptly purchase a boat with all of the money. Instantly you’ve wiped out your savings, but it still exists on paper, you just owe yourself your savings. Sound confusing and dubious?

Another way to look at it that I like better. A company, JABFM Co. has three divisions, two regular operating divisions and a bank. One of the operating division, POTA Inc., is quite profitable, depositing all of the profits into the company’s bank, JAFS N.A.. The company’s bank also accepts deposits from other non affiliated people, and perhaps even from their competitors. The other operating division, SLNT LLC promptly borrows all of the money deposited in the bank at excellent interest rates, because the bank knows that SLNT is a good credit risk, well because their credit officers only produce one credit decision, “Yes, you can borrow that.” Its a form letter from 1958 that has been reproduced so many times the quality has deteriorated to the point that it appears the original edition was a stone tablet.

So while as a whole JABFM is not doing too bad, POTA will eventually want to withdraw money from their account in JAFS, but JAFS won’t have any because its all lent to SLNT.

On paper it all looks excellent, but in actuality its a huge mess waiting to implode, and there won’t be any insurance to cover the mess because the FDIC would never let a bank like JAFS be so wreckless with their lending criteria.

So what we’re stuck with now is something that looks decent on paper, and almost excellent, but is just a series of shells waiting to implode under pressure. Enron anyone?

What should really happen here? JABFM should report each of its divisions separately, and if it were an actual company it would likely be required to. Anyone reading the annual report would recognize that SLNT needs to a major turn around effort led by the people of Texas Pacific, POTA needs to find somewhere better to invest their money perhaps Delta Airlines, and JAFS needs to be spun off and merged with the remnants acquired from NextBank because a merged JAFS and NextBank would actually have a better credit quality than JAFS alone.

A clear accurate truthful accounting methodology would never allow this to happen, and any investors would jump ship from JABFM if they insisted on continuing their accounting legerdemain.

We must demand better.

Second. This is the part that took quite a while, and quite a few swear words at Excel to produce. While we always get charts of the federal debt, we never get charts of the Federal Debt Limit, the Federal Government’s credit limit. (Yet another slight of hand, the government sets its own credit limit. I’ve asked several credit card companies if I could set my own limit, the polite ones said, “No, I’m sorry sir.” The realistic ones said “I’m sorry what the fuck are you smoking?” and then hung up.)

So, after some searching I decided I’d have to put together the chart myself.

I’ll skip the analysis because I’m really quite tired. Unfortunately to say we’ven’t been doing very well recently, and both the Debt Limit and the Debt Limit as a percent of GDP has gone up significantly.

The Debt Limit info comes from Historical Tables from the President’s 2005 budget the GDP info comes from Bureau of Economic Analysis.

So thats what I did with my Friday night…. Now can I get it back with some interest, please????

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