Interesting article about the current calculation of the federal deficit and the federal debt.

The popular press has typically picked up the amount of this year’s federal government deficit (revenue minus expenses) as around $1.3 trillion.

The total amount of the debt of the US is around $15 trillion.

The USA Today argued today that the deficit for this year is much larger due to the increase funding required for Social Security and Medicare. 

http://www.usatoday.com/news/washington/story/2012-05-18/federal-deficit-accounting/55179748/1

The addition of just these two liabilities (SS and Medicare) this year, if translated into additional expenses, would push the deficit to $5 trillion (for just this year).

Obviously, this is not a good situation – but unfortunately, there are so many assumptions that go into this model, it could just as easily be close to a zero deficit as $5 trillion. 

Let’s just take one example of how “iffy” those numbers could/can be.  The US currently “owes” $15 trillion.  Well, last year, prices (the CPI index) went up about 3%.  That means the $15 trillion deficit is actually worth less this year – by about $450 billion (or 3% of $15 trillion).  Inflation eroded the value of the bonds and hurt those holding those bonds – so when eventually they get their money back, they will be able to purchase less with the cash proceeds.

Yes, you can argue that those bondholders were compensated by interest payments from the US government.  Very true – and those interest payments are included as government expenses.  But the fact the government now theoretical owes less to each person because of inflation (which is revenue to the government) – is not included as a $450 billion decrease in the government deficit for the year.

And this is just one of many, many assumptions that the US government “accounting” has to make in arriving at a number such as $1.3 trillion or $15 trillion.

Unfortunately, a comment made at the end of the article by Sheila Weinberg of Institute for Truth in Accounting implies that accounting, particularly at this level, can be simple – like “arriving” at a single number or amount.  Not true.  Even in my introductory financial accounting course, I point out all the ways “assumptions” can significantly change the reporting results of companies (like in expensing for depreciation and bad debts).