What would happen if you based all your financial decisions upon simple cash accounting, that is, just tracking how much money goes into and out of your checking account, but neglected to account for future expenses such as payments on vehicle loans, adjustable-rate mortgage payments, credit card debt, and an unsettled doctor’s bill?

If this were the 1700s, you would probably go bankrupt and end up in debtor’s prison.

Yet, according to USA Today, this deceptive accounting practice is exactly what the U.S. government purposely uses to try to “balance” its books.

In fact, Congress has written its own accounting standards—standards that would be illegal for a business to use because they ignore important costs such as retirement benefits and other future obligations.

“The audited financial statement—prepared by the Treasury Department—reveals a federal government in far worse financial shape than official budget reports indicate,” says USA Today (August 4).

Using cash accounting, the government officially reported that its 2005 budget deficit was $318 billion. However, a document produced by government accountants using standard accounting rules showed that the government actually ran a huge $760 billion deficit for 2005. If the government accounted for future retirement promises (as the government legally requires businesses to do) such as Social Security and Medicare, the budget deficit would actually be a massive $3.5 trillion.

But what about the purported $559 billion budget surplus that the U.S. had during the Clinton administration’s last four years? Surely those surpluses would help pay for the government debts. Unfortunately, standard accounting reveals that the alleged surpluses were really a $484 billion deficit over that time period.

Since 1997 alone, the audited federal government figures show a cumulative deficit of $2.9 trillion, as opposed to the officially released deficit of just $729 billion. If future retirement liabilities were included, the deficit over that time period would rocket to $40 trillion. That is not a typo: forty trillion dollars.

The total U.S. fiscal gap, including future liabilities, could be approximately $65.9 trillion according to a report by professors Gokhale and Smetters (Telegraph, July 14).

America is heading for bankruptcy, says Professor Laurence Kotlikoff in a paper published by the Federal Reserve Bank of St. Louis (ibid.). The Federal Reserve Bank is the nation’s central bank, the institution responsible for setting U.S. economic policy.

According to Kotlikoff, “[T]he U.S. government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds.” He says that the payment solutions—which he describes as “terrifying”—include an immediate and permanent “doubling of personal and corporate income taxes” or “two-thirds cut in Social Security and Medicare benefits,” or slashing of all “federal discretionary spending by 143 percent.”

Yet if America’s financial condition is so dire, why haven’t more governmental leaders addressed the issue?

One reason is that the government’s own accountants don’t really think the government will follow through with its promised retirement benefits.

Social Security and Medicare do “not represent a legal obligation because Congress has the authority to increase or reduce social insurance benefits at any time,” wrote Clay Johnson iii, in a letter last May, while he was acting director of the president’s Office of Management Budget (USA Today, op. cit.).

Stephen Gross, the Social Security chief actuary, agrees, saying the government should not have to account for these programs because they are not “legally binding federal obligations, although many people view them that way” (ibid.).

Perhaps a second reason is that America’s financial mess is embarrassing.

Leaders from both parties agreed 15 years ago that something needed to be done to fix the problem, yet today, despite some improvement, one quarter of governmental departments and agencies have accounting issues so severe that auditors refuse to certify their records, according to the government’s annual report.

The third and probably most important reason that more leaders haven’t sounded warnings over this issue is that they fear drawing public attention to the government’s precarious financial condition would only harm the country due to the serious implications for the dollar.

Remember, the dollar, like all other currencies, is only fiat and can be created by the click of a button. Confidence is the only thing backing the value of the dollar. If investors lose confidence in the U.S. government and think it will be tempted to just create the money to pay for its promised future liabilities, they may reduce their holdings of U.S. Treasury bonds. The increased supply of U.S. Treasuries on the market would fuel inflation and cause the value of the dollar to fall faster than a dirty, wet sock.

“The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century,” warns Kotlikoff (Telegraph, op. cit.). When you think hyperinflations, think of past Argentinean peso and Russian ruble crises.

Also think about evaporating savings, soaring prices and escalating unemployment—all characteristics of inflationary environments.

Democratic Rep. Jim Cooper, a former investment banker, summarized America’s book-keeping situation this way: “We’re a bottom-line culture, and we’ve been hiding the bottom line from the American people. … It’s not fair to them, and it’s delusional on our part” (USA Today, op. cit.).

Sadly, the statistical manipulation surrounding the government’s massive deficits really is delusional. Manipulating the books may make things look better in the short term, but it only causes bigger problems later.

“[I]t is impossible to have effective monetary and economic policy when guided by faulty statistics,” says statistical analyst Jim Willie. “Effective policy demands accurate information, reliable future indicators and competent forecasts. This is indisputable. We do not have it” (Financial Sense Online, July 26).

Reliance on bad statistics will result in economic debacles, Willie warns. He says people should prepare for “big accidents in the near future. Expect a nearly endless sequence of crises. They will become so regular that investors and citizens alike will grow accustomed to them. Crisis and scandal will be regarded as normal. In my humble opinion, we are there already” (ibid.).

Massive governmental debt is just one of the many economic problems facing America today. Unfortunately for Americans, bad leadership and erroneous accounting are pointing to a future of broken promises and financial hardship. For more information on how America became the most prosperous nation on Earth and why that status is about to slip away, read The United States and Britain in Prophecy.