Wednesday, December 21, 2016

More on National Balance Sheets


More on debunking the "govt is same as a firm!" or "govt is same as a household!" rote falsehoods.



From an accounting perspective, how this falsehood is remaining operative is through a lack of knowledge about the unique Basis of Accounting that is used exclusively by the Federal Government.

This Basis of Accounting is termed, Modified Accrual basis.

What is 'Modified Accrual Accounting' 
Modified accrual accounting is an accounting method commonly used by government agencies that combines accrual-basis accounting with cash-basis accounting. 
Modified accrual accounting recognizes revenues when they become available and measurable and, with a few exceptions, recognizes expenditures when liabilities are incurred.

So what this means is that the federal govt reports the right column using Accrual Basis while at the same time, uses Cash Basis in the left column.

The federal government institution is the only institution that does this.

So if you are the typical unqualified moron going all around out there all around the place dispensing rote falsehoods, you don't understand this.

The morons use the typical non-govt Accrual Basis standards in their evaluation of the govt position and will look at the right column (accrued) as overwhelming the left column (cash) and think "the govt is bankrupt!" and start going all around the place repeating this false phrase attempting to edify fellow citizens via rote methodology.

When the truth is they are stupid which you can learn via active learning methodology via the accounting science.




48 comments:

Penguin pop said...

I think accounting courses should be a requirement at the high school level or combined in the economics curriculum there. In the two economics courses I ever took, the professors never went into any of this at all about the federal government using modified accrual accounting. I doubt they would even be able to tell me what that is. Even in the accounting 101 and 102 classes, cash basis accounting and accrual accounting are discussed and the GAAP standards, but the classes focused on the business side, not the government either.

That is the main source of all this ignorance today about how federal financing works. It doesn't help when Ayn Rand books are a reading requirement in public school or at least the one I attended. In one high school economics class I remember taking, I am pretty sure it was mostly about personal finance with very little of anything about the federal government besides a bit about monetary policy with some debt clock fearmongering added in too. The AP textbook I read at the time was hardly any better either and it was a Greg Mankiw book. You can see why so many people have a hard time wrapping their mind around these facts which you pointed out. It's easy to fall prey to the "we're out of money mindset" if you don't know anything else. Reading Ayn Rand at 16 was exactly how I eventually wound up being part of the Peter Schiff crowd and thinking MMT and Post-Keynesian concepts were insane. It took me a while to truly come around after delving into monetarism a bit.

Matt Franko said...

I would bet $1000 that even if you ambushed David Walker (big Peterson moron out there running all around on the loose...) that he would not be able to explain the difference between these two basis of accounting...

And fortunately I never read any Ayn Rand... I didnt even know about that until maybe in my 40's... I stick mostly to non-fiction....

Six said...

Government accounting should be done on a cash basis ...

Matt Franko said...

Daily Treasury Statement uses Cash Basis which is what Mike uses in his analysis of leading Fed govt flows...

Monthly Treasury Statement uses Modified Accrual and what is what is always referred to by other people in assessing the govt position...

Tom Hickey said...

BTW, the US government uses its accounts payable like a big firm with huge monopsony power. The require much longer terms and lower rates than are standard in business, because they apparently think that they need it. I know because I have had friends that have done business with the USG and complain about it. They have to finance the purchases themselves, I guess so the USG can "save" USD.

Matt Franko said...

Tom last time I talked to my commercial banker the kid told me that was the biggest area of business development for them...

This was a few years ago post GFC... they would do it under the SBA too!

So #1 they would only lend like 90% of the Invoice #2 with an SBA guarantee first position... and #2 backed by full credit of Fed. govt for 2nd position! ... at like 6 or 7% or wtf!!!!

M_ferrrrrrsssss!!!!!!!!!!

Matt Franko said...

You know if they would reduce the A/R period for non-govt it would probably increase the rate of income exchange in non-govt in general... that T is probably a high weight variable in this...

https://en.wikipedia.org/wiki/Weight_function

MRW said...

I didn't know about this difference in accounting methods on the same balance sheet. Fucking fascinating to me. Thanks, Matt, for pointing it out. Valuable info for me, and I really appreciate it. I've been trying to figure out the diff between the Monthly Treasury Statements and the Daily Treasury Statements for some time other than their treas.gov explanations, which barely explain much.

Matt, I appreciate it when you take the time to express yourself clearly, as this post was. Let me give you an idea of what is not clear, in fact, opaque: your comment at December 21, 2016 at 11:58 AM. What the fuck are you talking about?

You frustrate the hell out of me when you use your elliptical shorthand to express yourself. Sentences separated by ellipsis [i.e: ...] , hand-waving, drive-by acronyms.

Take your knowledge (or POV) seriously and express yourself so that a kid can understand it.

Again, thank you for this post.

Matt Franko said...

Hey I get to have fun too no?? ;)


The other thing is I'm a math person (borderline verbal moron... ok maybe more than borderline...) so its often extremely difficult for me to get words out ...

I'll look into that comment...

MRW said...

Clear writing is clear thinking.

Whether the thought is right or wrong is a matter of opinion, or knowledge, of the matter.

Whether the thought is expressed clearly is not. It's either clear or it isn't, independent of the content.

In your case, you just need to spend a little more time expressing yourself. That's all.

Think of it as talking down to me.

Bob Roddis said...

The government IS THE SAME AS A FIRM, except that it can commit theft, murder, genocide and pillage and get away with it whenever or before it gets over-extended. Quit trying to make that simple distinction more profound (or less profound) than it really is.

Because government will surely commit theft, murder, genocide and pillage which is the primary problem of humanity, not non-existent "market failure".

MRW said...

@Bob Roddis,

You are confusing intent (or malicious intent in your assertion) with recording of actions.

Matt is talking about how actions are recorded, dispassionately, how they are accounted for. To the public.

And, in my view, he is making a valuable distinction that must be understood before "Intent" even enters the picture.

Bob said...

Auditors often question the intent of accountants...

Matt Franko said...

MRW,

Right Accounting is ex post... i.e. Financial description of what has already happened...

MRW said...

Auditors often question the intent of accountants...

Fine.

But they always come back to accountancy rules, n'est ce pas?

When the Muslim great who invented double-entry accounting in the 12th or 13th C created it (Ibn Khaldun?), it was to reduce or show up collusion, theft, or cheating.

Unfortunately, I don't have the accountant stones that a CPA has. I remember when I first encountered Quick Books--not Quicken--years ago. I thought I was going to go mad. The idea of a right-side/left-side ledger that equaled zero drove me out of my mind. I couldn't hook my mind around the mathematical clarity, and certainty, of it.

Matt Franko said...

Bob,

Why in your opinion are so many libertarians currently flipping over to the alt-right?

What the heck is going on?

Matt Franko said...

Bob Roddis I mean...

MRW said...

WRITING LESSON, MATT. ;-)

You should have written:

I meant my comment at December 21, 2016 at 1:40 PM to be addressed to Bob Roddis, not "Bob."

Get it?

Mathematical clarity.

Six said...

"Because government will surely commit theft, murder, genocide and pillage which is the primary problem of humanity, not non-existent "market failure".

You are correct, Bob Roddis. And so will the non-government. The common dedominator: both groups contain humans.

MRW said...

The common dedominator: both groups contain humans.

Accounting doesn't.

It is simply a record. A history of actions already occured.

That is all Matt is saying.

He is saying that, furthermore, that record is recording it in ways not normally understood AND unique to the federal government. What he is saying is not apparent to the cognoscenti.

Matt is pointing out something few understand.

I think his enlightment of this is vitally important.

MRW said...

Let me cleaer.

Matt's post is brilliant.

Period.

Six said...

I got Matt's point, MRW. I was commenting on Bob Roddis' point that gubmint is evil by pointing out that non-gubmint is evil too.

lastgreek said...

...via the accounting science.

Well there is arithmetic involved in accounting, so, yeah, it's kind of scientish ;)

http://www.hbla.com/uploads/ACCOUNTING%20IS%20AN%20ART_OCBJ%20reprint%20version.pdf

Michael Norman said...

Roddis is back.

Michael Norman said...

Matt,

Where are you seeing this? Left side cash basis, right side accrual basis?

Matt Franko said...

It's a Bachelor of Science in Accounting at many accredited universities .... Big 10 anyway...

Matt Franko said...

Mike if you look at the link at Investopedia it says here:

"recognizes revenues when they become available and measurable and, with a few exceptions, recognizes expenditures when liabilities are incurred. "

So they assume "when liabilities are incurred" .... and we have millions of people both IN Social Security and YET TO BE in Social Security... so they are accruing the Social Security liability (on the right) and PV of that decades of future SS liability is accrued to PV and its a big number...

Meanwhile they treat the tax deposits as cash and dont accrue the future cash flow of the $bazzillions of taxes they will receive over the same decades...

It would be like saying for myself I plan on living another 25 year lets say, and I have to live somewhere and pay a utility Co. for powering my dwelling like say $2500 per year so (to them) they would say "hey! you are in debt to your power company $62,500!!!! and you only got $7500 in your bank account you're bankruptcy!!!"

Which you might look at it that way if you were using Modified Accrual but nobody does that outside of the Federal Govt we use Cash Basis or Accrual Basis.... so current liabilities for power for a household would be $200 or so for the current month so I would have it covered and my accounting wouldnt look like a disaster... because I use normal Cash Basis...

Accrue the PV of the Fed govts future stream of tax deposits as a Perpetuity at the current annual risk free rate the Fed has at 0.75%:

Perpetuity:

https://en.wikipedia.org/wiki/Perpetuity

The formula for PV of a Perpetuity is A/r where A is the annual amount and r is the annual rate...

So you know govt took in like over $3.85T last year (from Cash Basis DTS) so if we convert that to PV via Accrual its 3.85T/0.0075 = $513T ...

So these morons dont do that...

If you use Accrual on the right side, you should also use Accrual on the left side...

so these people say "hey! if you accrue the future SS/Meds liability, its $25T! and you only have like $300B in the TGA!!! youre busted!!!"

Theyre f-ing morons...

Matt Franko said...

Look here is today's DTS:

https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=w&fname=16122000.pdf

Table I Closing Balance about 393B on the left .... they are saying (cue the prospector!) "that's all govt is worth!" using Cash Basis.. "that's all govt has!" "govt is out of money!" "US is the bankruptcy!" "the US is going down!" "the US will have to be printin' money!"

Meanwhile they are accruing the liabilities of the so-called 'entitlement' programs on the right out many years to present value of $bazillions....

So this is very odd with these people... These are not qualified people we have here... these people are f-ed up...

Penguin pop said...

Brilliant way of dissecting this, Matt. I feel very enlightened and not only that, but this is one of those issues where many people just repeat things they've heard without question and never stop to evaluate where the Peterson wackos are really getting their numbers from and on top of the confusion already resulting from the federal government not being consistent with which accounting method used.

I recall seeing how the U.S Treasury would also use 'debt' and intergovernmental holdings interchangeably and noticed how these two figures were always added together to get the total and how the conclusion was made that those are the total assets.

Total morons indeed, especially to whoever didn't catch these errors in the first place. I think what you said is worthy of another post too so I can easily refer back to it when I deal with the debt doomsday buffoons.

Matt Franko said...

"people just repeat things they've heard "

Peng, that's textbook rote methodology 101....

How does anybody get out of a rote falsehood they have taken in?

I assert you can get only out of any rote falsehood via MATH ONLY...

So its "rote to go in, math to get out..."

This is how I see it right now...

Unknown said...

Quote:
Modified accrual accounting recognizes revenues when they become available and measurable and, with a few exceptions, recognizes expenditures when liabilities are incurred.

Since Government spending comes first, and taxation comes later. This implies that in any fiscal period, there is a gap between collection and spending.

This continuous lag then becomes the basis for "the US Government is bankrupt" and "If I ran my business this way, I would be forced to declare bankruptcy (or I will end up in jail)"

Tom Hickey said...

https://en.wikipedia.org/wiki/Basis_of_accounting#Modified_accrual_basis

Penguin pop said...

"people just repeat things they've heard "

Peng, that's textbook rote methodology 101....

How does anybody get out of a rote falsehood they have taken in?

I assert you can get only out of any rote falsehood via MATH ONLY...

So its "rote to go in, math to get out..."

This is how I see it right now...

Being a former Peter Schiff Show subscriber felt exactly like that. You'd just listen to whatever Peter had to say and take him at his word day in and day out. Watching someone like Mike and many other people online expose Peter for the hopelessly wrong idiot he's always been for the first time really hit a nerve in me and caused so much cognitive dissonance at the time. I used to think people like Mike were crazy and I'd lurk a bunch of Austrian blogs. This was a couple of years ago, but the seeds of getting out of that mindset I had been trapped in had been planted.

I would keep watching the Schiff critics though as much as I kept thinking they were full of it and stupid, but then overtime, slowly looked into more and more of what they were saying and how well they were backing up their arguments with logic and hard evidence and then observed how much Peter kept getting the econ wrong most if not all the time. It took a long time for me to realize how accurate and logical MMT has been in describing how US monetary systems work compared to everything else I had been exposed to, like monetarism, Paul Krugman blog posts, etc. I could never really go back into accepting what I thought I had known before and as I kept challenging myself to understand more complex concepts in other fields of study besides economics, MMT became clearer and clearer to me. Now everything else I hear, even from so-called "progressives" when it comes to their understanding of these issues has been incredibly weak and flawed. I can fully see how others contradict themselves and can't see their own mistakes and continue to repeat falsehoods like "George W. Bush nearly made the US bankrupt with tax cuts" or "Trump will explode the deficit and make us broke" without any sort of critical thinking at all or they still think "the deficit!" is something to be worried about as if we're still on the metals.

There are even some people in that camp who I've come across online who have shared with me deranged "End the Fed!" and "Audit the Fed" kind of thought when those same people don't even know that the Fed is already audited several times a year. That's the kind of ignorance we are dealing with. Everyone thinks they're an expert on these systems when all they do is run at the mouth with garbage which directly contradicts and renders their points moot.

It took a lot of data and critical thinking for me to escape my limited POV at the time. I can see how one needs math to climb out of their dogma.

Matt Franko said...

Unk,

Accounting is not equivalent to Time Domain Analysis..

so you cant say "FIRST" as that implies chronology or sequence in time domain...

Accounting is a report at a point in time ("end of quarter", "at conclusion of FY" , etc...

You cant conflate Accounting with Time Domain Analysis they are different disciplines...

https://en.wikipedia.org/wiki/Time_domain

Matt Franko said...

Unk,

Here in rote/analogy: "an oscilloscope and a multi-meter are not the same instrument..."

Unknown said...

Matt you misunderstand me - if the government is running a deficit, and except for the brief Clinton blip, the USG has run a deficit. Then on an accrual basis, all expenditures incurred during that period are liabilities. Tax revenues while running a deficit will always lag recognized expenditures, and will thus always be smaller than the expenditures. Thus there will always be an imbalance, and that is what makes for the unjustified view that "the US Government will grow bankrupt" It also makes for the false economic pov that over the business cycle the government should balance intake and outflow.

Magpie said...

Thanks for the link, Matt!

Six said...

Matt, the quarterly reports, annual reports, etc. are just a summary of a series of distinct events, recorded as distinct transactions in some form of ledger. These transactions occur before, during and after the time period covered by a periodic statement. They happen sequentially and produce what you often refer to as "flows". The word "flows" implies more than one distinct event and is in fact, the result of multiple distinct events. A balance sheet is a snap shot (summary) of an entity's finances at a point in time and does not have a time element. Am I missing something?

Michael Norman said...

Matt,

It's not presented that way in any table or report. It is SPOKEN that way or, FRAMED that way, but not presented like this. It's all about power and ideology and it speaks to the failure or lack of desire by economists and policy makers to frame it properly. The public goes along because they have been propagandized effectively. The people in control present it like that because it's all about power and control. They use it to effectuate a certain outcome, which is, to direct government money away from the general public and to a small few. It's also about stupidity, too, which you and I know.

Matthew Franko said...

Six,

yes looks good...

from what Ive read the flows are PER UNIT TIME while the stocks are measured at A POINT IN TIME...

Like velocity is km/hr (km PER UNIT TIME) while distance is km (at a certain time)...

So that is in the accounting too ie the accounting can report both stocks and flows depending on what report you are looking at Balance sheet is at a point in time... income statement at end of FY would be per unit time (ie "per year")

Matt Franko said...

Mike,

It is 100% stupid imo...

The public goes along because the public has no familiarity with Modified Accrual... they cant legally use it... so they never do... how are they going to be knowledgeable about a Basis of Accounting that they can never legally use?

So the publics CRITERIA they use in evaluating the govt position reported in Modified Accrual is the SAME CRITERIA they use when evaluating their own in Accrual... and it looks bad to them... so they frame it or talk about it that way... which btw is not unreasonable of them ...

Qualified accounting professionals are gone from the scene.... we are given Larry Kudlow the History major instead who sorry is not qualified...

Matt Franko said...

Mike I bet you a beverage of your choice that if you went to Kudlow and asked him what the difference was between the DTS and the MTS he would say "one is for the day and one is for the month!"

Exhibiting complete ignorance about the different Basis of Accounting that each report uses...

So this is not a "conspiracy!" its moronism.... he's stupid about this...

Tom Hickey said...

First derivative = rate of change on curve at a point of time = "Flow"
Second derivative =rate of rate of change = rate of change of flow at point
Integral = area under curve between points in time = stock

Tom Hickey said...

The public goes along because the public has no familiarity with Modified Accrual... they cant legally use it... so they never do... how are they going to be knowledgeable about a Basis of Accounting that they can never legally use?

This is a big one. Modified accrual is non-GAAP.

Who would suspect that government is breaking the rules if it were not called to attention?

Further blows up gov. as big firm

Matt Franko said...

Mike,

"It's not presented that way in any table or report."

Here:

"In 2011, the federal government owed $10.2 trillion in public debt, accrued
federal employee pension and other retirement benefits of $5.8 trillion
and
other federal liabilities of $1.5 trillion, for a total of $17.5 trillion. These
liabilities are reported each year on the federal government’s balance sheet.
However, Social Security and Medicare benefits payable to current retirees
are not included as liabilities on federal balance sheets, though these two
programs currently account for over one-third of federal spending. Including
these accrued obligations would provide
a more comprehensive picture of
the liabilities of the United States. The accrued Social Security and Medicare
benefits payable to current retirees are $12.8 trillion
. The public debt plus
benefits payable to federal workers and the accrued Social Security and
Medicare benefits payable to retirees total $30.3 trillion"

http://www.ncpa.org/pdfs/st338.pdf


So where is all the accrual going on on the left side to match the accrual that is going on on the right side?

Accrue the left side we have 3.85T/yr coming in as a flow so do a PV computation of the Perpetual flow of taxes at 1%.... its like 400T...

MRW said...

What does PV mean?

Matt Franko said...

Present Value:

https://www.khanacademy.org/economics-finance-domain/core-finance/interest-tutorial/present-value/v/introduction-to-present-value

They dont use this...

Six said...

MRW, the main focus of finance undergraduate study is determining PV (present value) ... at least it was the main focus in the 80s when I was roaming a college campus!