Tuesday, October 11, 2011


Stock market lately has been very volatile and the news around worsening unemployment numbers and consumer sentiment along with declining house prices have been hard to ignore. In the 3rd quarter of 2011 U.S. stocks markets experienced the worst quarterly loss of 14% for the Standard & Poor’s 500 Index since the end of December 2008. Not all of these are US problems, bulk were the concerns surrounding the sovereign debt crisis in Europe and fears of a global slowdown.

Earlier this year, Mary Meeker, partner at KPCB and former financial analyst at Morgan Stanley, compiled the report "USA Inc" discussing USA's financial situation and outlook. The report analyzes United States Government as a public enterprise and analyzes its financial position by looking at the cash flow and net worth, its profits and liabilities.

The report presents a pretty grim picture of the current financial liabilities with the debt of 1.3 trillion dollars just in FY2010 and the net worth of negative 44 trillion. 76% of entitlement spending is directed towards medicare, medicaid and social security payments leaving very little for other essential programs. Between 1965 and 2010, entitlement spending went up by 11x whereas the GDP grew by 3x leading to higher debt levels. At current levels, the Congressional Budget Office estimates, entitlement spending and net interest payments combined will equal all of federal revenue by 2025.

The report not only highlights the key issues affecting the USA Inc. but also suggests some solutions. As the biggest concerns revolves around medicare and medicaid, reform is needed. Cut the benefits drastically, emphasize more on disease prevention by subsidizing healthy foods and introduce additional taxes on cigarettes, non-diet sodas. As for Social Security raise the retirement age maybe from 67 to 73, reduce the benefits by 12% or increase the Social Security tax rate by 2%. As far as the operating efficiency of government is concerned ideas laid out include reviewing of pension plans to match it to private corporations and reducing federal headcount by atleast 4%. Investments should be made in key sectors - technology, infrastructure and education to increase labor productivity. Reforms in taxes should be done including higher tax rates, carbon tax, worldwide corporate tax to discourage companies from keeping incomes offshore.

The report warns that doing nothing may no longer be viable for long term sustenance. Rising entitlement spending could eventually lead to higher borrowing costs for USA Inc as less investors will be inclined to lend money. This could also lead to USA Inc.’s currency to weaken significantly. USA Inc could learn lessons from other troubled organizations like GM which has now turned profitable to architect its turnaround.

Here is the complete video:

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