For you out there who aren’t accountants, (neither am I), GAAP stands for “Generally Accepted Accounting Principles.” In other words, financial institutions want good figures before they loan. The stock market wants good figures too. It’s very easy to fudge on accounting, to make everything look like roses when the outfit is going down the tubes. Enron did it, as did Global Crossing. All looked very healthy, and crooked accountants made it look so, which is one of the reasons why a one time major accounting firm is no longer with us.
Suppose you owned a company, which made widgets, and you grossed $10 million a year. Your materials cost $3 million, transport and utilities another $2 million, and labor cost $2 million. This brings us up to a $7 million cost of doing $10 million in business. Great huh? So you issue stock and sell them to buyers who are impressed with your figures. Stock went goes to $25 a share. You failed to mention insurance, employee withholdings, repairs, postage, licenses, attorney’s fees, bad debts, interest, and a few other things, which amounted to $4 million. In other words, you were actually in the hole for $1 million, but you hold 50% of the stock you issued, and you are rich even though your company is not only broke, but in debt. What to do? Of course! Sell your stock before it all comes out, and you are home free a rich man who has defrauded the stockholders. GAAP wasn’t used, in other words.
There are those who won’t buy stocks because of the possibility of the above scenario happening to them, which would wipe out their investment. They then resort to bonds. A bond does not reflect ownership of a company, but of a debt, which it owes you for loaning it money. Bonds come in different interest rates, depending on the value of the company, the reputation it has for profit and repayment of debt, plus its net worth. A bond requires a long term investment, many times for decades. Some municipalities issue “tax free” bonds, and these are bought by those who don’t want any additional tax liability. Bond payments and value, have no inflation increase in interest or principle. Buy a bond for twenty years, and that’s it. You get the same interest and repayment for twenty years, regardless of what happens in the world. If the outfit to whom you loaned your bucks to, goes bust, you’ll never get an additional dime. If it goes bust, your stocks are worthless as well.
Bonds are rated by “Moody’s,” and the best rating is “AAA,” meaning the bond issuer is a top-notch risk, and unlikely to default. Not only do corporations and municipalities have bond ratings, but nations do too. One shouldn’t invest in a poor risk, even though poor risks, or “junk bonds,” do pay a lot higher interest rate. They have to, because if they want your money, they have to make it worth your while. GM and Ford have both had their bonds depreciated to “junk” status. When corporate bonds get to the “junk” status, it costs far more to borrow, thereby making it more difficult to show a profit. Pity GM and Ford.
U.S. Treasury bonds are “AAA” rated, and it is said that the U.S. government uses GAAP in keeping its books, and declaring its economic situation. Do they? Does the United States of America, keep bad books, and under-exaggerate its debts and liabilities? Is the U.S. a bad risk? Let’s see. The government keeps its books on a “cash” basis. In other words, it records what comes in, and what goes out. According to the Treasury, the U.S. had a deficit of about $450 billion on this “cash” system of keeping books. It had a deficit of $158 billion in 2002, and $374 billion in 2003. Is that all there is to it? Hardly! This “cash” basis, is like the guy making widgets, and leaving out his liabilities. This fools people, and makes them think things aren’t too bad after all. After all, it’s only a couple of bucks for each man, woman, and child, correct? On a “cash basis,” yes, but this is a total fraud.
The widget guy left out his interest, taxes, repairs, bad debts, insurance, etc, to come up with a rosy picture. Uncle Sam leaves out Social Security and Medicare obligations, and these alone make the deficit a thousand times more than $450 billion. It is more like $4.5 trillion. But this $4.5 trillion, does not count future Medicare and Social Security obligations, only what was paid during 2004. If the total obligations were included, as GAAP requires, in 2003 alone, the total negative worth of the U.S. would be $34.8 trillion. This is arrived at by subtracting assets of $1.4 trillion from liabilities of $36.2 trillion. During the year 2003 alone, the federal debt went up by $7.3 trillion. The figures are so large as to be incomprehensible literally.
It is so bad, that the GAO (General Accounting Office) won’t certify the statements made by its own government, as being accurate and true. According to the IMF’s “World Economic Outlook,” “The United States is the world’s largest net-debtor nation, has the world’s largest current account trade imbalance, and has the highest level of debt or financial obligations ever seen, irrespective of relative measure, for any major country, by at least an order of magnitude.” Want to loan the U.S. some money? Think it would be a good investment? Well, Moody’s rates not only corporate bonds, but bonds issued by various nations. Their ratings of nations take into consideration several things, such as debt to GDP ratios. They also take into consideration the obvious fact that a nation can print its way out of debt, thereby reducing value of issued bonds to far less than when they were bought. To quote:
“Sovereign borrowers usually enjoy the very highest credit standing for obligations in their own currency. If they retain the right to print their own money, the question of default is largely an academic one. The risk instead is that a country may service its debt through excessive money creation, effectively eroding the value of its obligations through inflation.” In other words, the bastards may print their way out of debt, as have hundreds of nations in the past, making their currency only fit to take to the outhouse.
As far as debt to GDP is concerned, the US ratio is a whopping 335%, as compared to Canada, with 75%, France 71%, Germany 64%, and Austria 64%. Little Luxembourg has a debt to GDP ratio of 4.9%. Remember also that at least in the U.S. the GDP includes government spending! Why then, would Moody give the U.S. a “AAA” rating? Beats me. Is there a payoff somewhere? Would you, using the above statistics, loan to a risk like the U.S.? We owe everyone, are printing the bejesus out of dollars, our debts increase every year, and we owe tens of trillions of dollars to everyone. We have a negative net worth, but still have a “AAA” credit rating with Moodys?
Why trust anyone’s cooked books? Is there an honest government in the entire world? Are any corporations to be trusted? Since it is so easy to cook books and produce fake profits and net worth, why trust anyone? Why not invest in something that owes no one, depends on no one’s books or GAAP? Why not invest in gold and silver, which have been actual, genuine, money, for thousands of years? Why, why, why, do 99% of the citizens of any nation, trust its government and loan it money? Obviously, because they believe what’s given to them on the boob tube or controlled media. Did the newspapers and TV pick up the fact that the IRS lost a biggie last week, when a Jury found Joe Bannister innocent? No, and neither do they pick up the fact that the U.S. is totally bankrupt, and becoming more so on a daily basis. It’s all a rickety scaffold, just waiting for a strong wind to come along. When that wind comes, will you be in pieces of paper with ink on them, or in real money?
Protect yourself, and have a glorious 4th of July. If you celebrate it with a 5th (whiskey) don’t drive! Closed July 5th.