Social Security and Medicare

I am currently taking a financial statement analysis course, which covers a number of accounting issues that have wider implications in the economy. The adjustments to property, plant, and equipment, leases, inventories, and pensions are made by financial analysts to get closer to economic reality and the prospects of a company. With current payroll taxes and benefit schedules, there is a substantial unfunded liability that is not included in the national debt. If believe the numbers, either taxes need to go up or benefits must be reduced.

The early recipients of social security received much more than they paid into the system. When there was a huge number of works for every retiree, there was no problem with this model. However, the population is aging and fewer workers support each retiree. The excess paid to early recipients will catch up with us, and somebody has to pay in reduced benefits or increased taxes.

Under GAAP standards, the obligations of the federal government are several times the official national debt. While I'm not in the business of predicting a collapse, I have to wonder who is going to buy the bonds of such a leveraged country going forward.

Trillion with a T

The national debt is increasing at a rate of over $3 billion per day. From the lows of December 18th, the 10-year and 30-year Treasury bills have risen substantially. December was a panic flight to quality that pushed the 30-year yield to 2.55%. It rose to 3.80% as the panic subsided and investors realized the supply of Treasuries in the next several years will be enormous. The Fed stepped in saying it would buy longer term treasuries which brought yields down sharply. This steep fall in yields was not sustained in the next few days. I believe that much of this is due to concern about the future rate of inflation. If the Fed sustains it's buying for too long, it will fuel inflation. China is talking about scaling back its purchases of US Treasuries. I am sure others will not be far behind.