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Words, numbers, and U.S. government fiscal stability

July 30, 2019

Accounting is about numbers, but it is also about words. The amounts on the financial statements are in numbers, and they quantify amounts for the accounts labeled with words. And the reporting process isn’t just about the financial statements – it includes lengthy verbal discussions of results, risks, and responsibilities.

Financial reports can get pretty complex, but there are times when simple cues provide value. Simple word counts can unearth significant clues.

Consider AIG -- American International Group, one of the largest insurance enterprises on Planet Earth, until it imploded in the 2008-2009 financial crisis. In 2007, AIG sported a balance sheet boasting more than one trillion dollars of assets. It had some of the most complicated financial statements on the planet. Analyzing those statements wasn’t easy. However, a simple indicator was flashing a bright warning signal.

Credit default swaps (CDS) provide a form of insurance on financial instruments. AIG issued a lot of CDS on mortgage-backed securities in the 2000s, effectively standing behind those instruments while absorbing massive risks in the event of a housing market downturn. Which arrived, in spades, combining with other factors to sink the AIG ship – at least before government used taxpayer resources to stand behind the devastation AIG posed to its creditors.

Not everyone was surprised. For example, the book (and movie) “The Big Short” chronicles the work of some bright, independent thinkers that anticipated the housing market devastation and broader financial and economic crisis. 

Here’s a clue that was available in 2007 – a simple one. Anyone who counted the number of times that the term “credit default swap” appeared in AIG’s annual report from 2003 to 2007 would have seen a jaw-dropping jump in 2007 -- in a report that came out in early 2008, before AIG’s meltdown.

Perhaps similar clues can be found in the reports of our government(s)?

That’s why we’ve added a new section to our State Data Lab database – “Rhetorical Analysis.” This section includes word counts for the number of times that informative words (and phrases) appear in the annual financial report of the U.S. government. We plan to add similar sections for states and cities.

For example, consider this chart, which shows the number of times the word “unsustainable” appears in the federal government’s annual report every year since 1998. It’s been on a long upward march, amidst discussion of the risks that federal fiscal policy is simply unsustainable given sharply higher debts and interest expense that are projected under current law and policy.

You can have some fun with other words. For example, here’s a chart that compares the number of times the words “inflation” and “unemployment” appear. The federal government itself cites how the ability of government to set monetary policy serves as a potential resource for paying off its debts, and inflation will be an important factor to watch in the years ahead.

Here’s another fun chart. It shows the number of times the words “tax,” “borrow” and “spend” appear.

Have fun, and be careful out there! 

 
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