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TheStreet Open House

The State of the Union -- and Its Debt

The financial state of the union is a mess. That's not a surprise. It's in the headlines -- from the mortgage crisis to the wild gyrations of the stock market. Surely President Bush's State of the Union address will touch on those financial issues.

But will the president tell the truth, the whole truth, about the numbers and the extent of our nation's financial woes over the long run? Will he acknowledge the true cost of the emergency economic-stimulus package now being worked out by Congress?

The Institute for Truth in Accounting is determined that the real numbers will not only be spoken and written, but considered by all the candidates running for office this year. This nonprofit, nonpartisan institute has created a Web site to bring the financial facts to the public attention.

Prominently displayed on the home page are two running series of numbers that increase almost faster than the eye can capture. The first is the "official" National Debt, which was $9,193,222,137,000.00 at the instant I checked. (That's the figure taken from the Treasury Department's Web site.) The number is growing by $1 million every minute!

Beneath it is another number, also constantly clicking higher. This, according to the Institute, is the true national debt figure: $55,146,513,890,000.00.

This calculation of the national debt includes all the "off balance sheet" liabilities of the government, such as its promises to pay benefits to Social Security and Medicare recipients far into the future, as well as military and civilian government workers' pensions.

In other words, the true liability of the United States of America is not only the Treasury bills, notes and bonds we sell to finance our annual deficit and past deficits. To get to the true liability, you must include all the promises we've made to make payments in the future.

That's how you get a staggering $55 trillion national debt!

Off Balance Sheet

No one talks about those "off balance sheet" obligations. It's as if you only looked at your checkbook balance to figure out your family finances -- and ignored the amount due on your mortgage and your credit cards. That would totally misrepresent the state of your finances.

Do you think you could get a loan if you presented only your checking-account statements? Surely your banker would demand the complete picture. And that's just what's happening around the world, as central banks have been recognizing that the U.S. is on a collision course with debt. The result is evident in the value of the U.S. dollar, which has collapsed over the past year. Foreign central banks have been dumping their dollars in favor of other currencies, as well as commodities like gold.

Of course, those foreign central banks still have huge holdings of U.S. Treasury securities. The U.S. remains the most stable country on the planet, and the safest place to hold assets during a crisis. And, the foreign central banks earn interest on the Treasury securities they hold. So far, they've kept holding our debt as the Fed pushes rates down to stimulate the economy.

Political Solutions?

All of the political candidates are rushing to give the American public their solutions to an economic slowdown. Most involve sending a check from the government, a rebate on the tax dollars that have been deducted from our paychecks all year long. In the long run, those checks will only increase the deficits, and thus increase our borrowing demand, eventually pushing rates higher.

The only other alternative is for the Fed to "print" (create) the extra money. That is the definition of inflation: excess money creation. As we all learned in the late 1970s, if inflation seems likely, lenders demand higher rates to compensate for the falling buying power of the currency.

If you're thinking the government is caught in a tight spot, you're right. In previous recessions the government could "stimulate" the economy and get growth back on track. Now, because we're so indebted to the rest of the world, our options are limited. If they won't buy our new debt, who will?

The American people need to ask their president, and their presidential candidates, how they'll deal with this tough issue.

Truth in Accounting Institute founder Sheila Weinberg says: "It isn't pretty. But we have to face the truth -- or we could face disaster." That's definitely The Savage Truth.

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Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book, The Savage Number: How Much Money Do You Need? in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald's and Pennzoil.

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