How Far Is the U.S. From Becoming Another Greece?

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Includes: CS, ERO, GS
by: Daryl Montgomery

The only difference between Greece's blatant manipulation and falsification of its government statistics and what takes place in a number of other countries is that Greece got caught.

Greece's phony numbers have finally blown up in its face and this has led to the current crisis in the euro zone and an approximate 10% sell off in the euro since early December. There were obvious problems with the numbers from the earliest days when Greece joined the European currency union, but these were brushed aside. The economic and budget numbers aren't much more reliable in the U.S. and, even though this is an open secret, are also generally ignored.

The rules of the euro zone require a maximum annual budget deficit of 3% and a maximum debt to GDP ratio of 60%. Greece managed to 'hide' that its budget deficit was above the acceptable limit in the early 2000s by engaging in at least 12 currency swaps with Goldman Sachs (NYSE:GS) between 1998 and 2001. Greece also seems to have done business with Credit Suisse (NYSE:CS). Italy, one small step behind Greece in the budget mess race, reportedly engaged in similar activity, but its business was first done with the infamous Long Term Capital Management. Goldman earned $4.95 billion last quarter and has been super-profitable in the aftermath of the 2008 Credit Crisis blowup (how exactly has it been earning all of that money?) The transactions with Greece were covered by RISK Magazine (an appropriately named platform to say the least) at the time. Even before the current brouhaha, there seems to have been a Wikipedia article on the subject. Not exactly a well-kept secret, but apparently the EU's central office wasn't exactly working day and night to ferret out the truth.

Currency swaps were just part of Greece's attempt to finagle its way around EU regulations. In 2004, it was revealed that Greece's budget didn't exactly reveal all of its expenditures. It turned out that it hadn't reported a large share of its military expenditures and this was used to reduce its budget deficit considerably. The EU decided the Greek budget deficit still met its criteria however. It didn't seem to occur to anyone that a government that was less than honest about one set of numbers would easily lie about another. For those who are unaware of it, the U.S. has funded its operations in Iraq and Afghanistan mostly through supplementary spending bills and this has kept the costs, estimated to be around a trillion dollars so far, out of the military budget.

More recently, Greece's problems with its reported budget deficit numbers occurred when it revised its 2009 deficit from 3.7% to 12.7%. The crack sleuths at EU central were not the ones to catch this rather gaping error. Greece elected a new government toward the end of 2009 and the correction to the blatantly ridiculous figures was politically motivated. The new government didn't want to wind up being blamed for the mess the previous government left behind. The "excessive optimism" of the previous government was blamed for the discrepancy in the numbers. In January 2010, an EU report saw the situation differently and lambasted Greece for significant weakness related to data gathering, submission of incorrect data, disregard of accounting rules and a lack of timeliness of providing the numbers. U.S. government numbers also suffer from all of these problems.

U.S. budget figures don't look particularly good at the moment. There will be as much as a $1.6 trillion dollar deficit in fiscal year 2010, which ends on September 30th. The official national debt could easily reach $14 trillion by the end of the year, almost as much as the claimed GDP. The U.S. has a lot of potential off-balance sheet items, however. These include obligations from Fannie Mae (FNM), Freddie Mac (FRE), Ginnie Mae, the Federal Home Loan Bank, the FHA, the FDIC and the Federal Reserve. Together these obligations are potentially well over $10 trillion. At its current rate of spending, the FDIC is likely to run out of money before the end of 2010. Obligations for future social security and Medicare payments, which GAAP (generally accepted accounting principles) would require a company to report, are somewhere between $50 trillion to $100 trillion. The U.S. government does not follow the rules that it insists are necessary for honest accounting from from its companies, however.

The economic soundness of the state is not just dependent on government expenditures, but on the strength of a country's GDP. Only the most naive would assume that even though the budget numbers have been fudged, the GDP figures are honest. Once it exists, dishonesty motivated by self-interest tends to become pervasive in government reporting.

There are at least two major problems with U.S. GDP figures. First, there could be as much as $2 trillion, if not more, in illusory economic activity included in the calculations. Secondly, the numbers are adjusted for inflation, but the inflation numbers are grossly understated. This makes the final GDP number larger. Regardless of the sources of overstatement, the overstatement itself is obvious. The U.S. originally reported GDP numbers indicating close to a decent 3% growth rate in 2008, even though the economy was in the worst decline since the Great Depression (the numbers were subsequently revised down to a growth rate just above zero) . A declining economy means there should be a negative change in GDP. Where was the outrage from the economic community and the press when these impossible numbers were released? There was none. Just as in the case of Greece, the problems will not be generally acknowledged until there is some big blow up. Investors should stay tuned.

Disclosure: No positions.

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