Coming Clean Beyond the Fiscal Cliff
Katherine Austin-Fitts

"Information is the hardest currency." -Andrew Vachss

Washington's negotiations to address the fiscal cliff of automatic tax increases and spending cuts legislatively triggered at the close of 2012 are the latest in an ongoing effort to address increasing U.S. federal government deficits and debt levels. Enormous monetary and fiscal stimulus has failed to produce an economic recovery. In short, the U.S. government and central banks have failed to dig out. Instead, they are now dug in deeper. What to do now?

What is missing from this and other debates on the reengineering of the U.S. federal finances is an understanding or discussion of the structural problems in the federal finances that have been accumulating since WWII, when the United States - with 6% of the world’s population - found itself the master of 50% of the world’s resources.

The purpose of this article is to provide an overview of some of these structural issues in the hope that more citizens will be encouraged to consider how the federal finances flow through the immediate world around us - our household budget, our business, farm or place of work, our municipality - and the government-sponsored organized crime and fraud draining us, so we can begin to implement real solutions.

Ultimately, the fiscal cliff is the tip of the iceberg of our economic and cultural woes. Our problems are deeper. The more of us there are, who are prepared to look honestly at our situation and take responsibility for it, the sooner authentic solutions will become possible and emerge.

As we look over the fiscal cliff into our financial abyss, now is a good time to “Come Clean” about the real state of our lives, our communities, and our economy, starting with the U.S. federal finances that flow deeply and intimately throughout every aspect of our lives.

First, a Story

Imagine that you live in a historical mansion in a large, privileged family on a fine property -- rich with good land, good water and natural resources that your ancestors originally acquired through surreptitious means.

Imagine that the mansion and estate have serious structural problems that accumulated over many years. The reasons are complex.

There is enormous distrust within the family. As the vigor of the generations dissipated, expenses rose and numerous members have turned to activities that are unproductive at best, or fraudulent and criminal at worst.

Those in charge of family finances were highly distrustful of the collective family intelligence and wisdom, and have mortgaged the estate and cut reinvestment in infrastructure to liquidate as much capital as possible to reinvest abroad - albeit in hidden legal forms. They have engaged in numerous criminal activities, including ones that had significantly harmed the neighborhood economy.

Almost no one in the family objected as allowances continued to be funded, even increased and promises continued to be made. As long as everyone was getting his or her check, most everyone was willing to ignore the deterioration of the real human and physical assets and equity on the family balance sheet. They were also willing to ignore the harm done to their neighbors.

The occasional relative who demanded a financial accounting of what was happening, or was not satisfied with petty bribes of various kinds, was sent packing or to work abroad, or even occasionally dealt with in a way that we pretend never happens - they developed diseases, were admitted to mental institutes, were said to have committed suicide or just disappeared. These instances were sufficient to strike terror throughout the family, leaving those in command of the family trusts unquestioned, as their offshore accounts and numerous enterprises grew.

The result was a fragile peace that grew thin, as the deterioration in the infrastructure of the estate and the structure of the mansion accelerated. Innovation was not encouraged. The managers were interested in their own global competition. They did not want any pesky entrepreneurs taking risks that could in any way attract attention or create liabilities for their grand plans. Indeed, young members were encouraged to use student loans to get their advanced education, thus ensuring their dependence on their allowance and reluctance to branch out on their own. Thus the family members' general understanding of the world around them and how to navigate it deteriorated rapidly.

So now the day has come when the deterioration in the management of the estate, the growing debt, the structural problems in the mansion and the diminution of the family trusts has necessitated a dramatic reduction in allowances.

Those in control face a marketing challenge. How do they arrange a dramatic reduction in allowances without providing an accounting of where monies had gone, thus threatening their offshore holdings and enterprises, or exposing criminal liabilities to their global enemies? How do they maintain control without the continual flow of allowances to placate family members? And what would happen when the family members discover that their retirement savings and benefits are empty promises?

A task force was commissioned of family lawyers and counselors to make recommendations as to what could be done. They were instructed by the controlling family members to only make recommendations that involved cutting allowances or required contributions from those receiving them.

Under no circumstances were they to ask for a real accounting, delve into the issues related to where family capital had been shifted abroad, the fundamental flaws in the family governance systems, property infrastructure needs, or the need for serious investment in the mansion foundation, let alone how to reinvigorate the prosperity of the land and property and the productivity and health of family members.

They were to deal only with whose allowance were to get cut and by how much,and how much various family members should contribute to a fund to restore the property.

The family lawyers and counselors wanted to keep their jobs and they certainly did not want to be "suicided." So for months, they argued over proposals -- none of which addressed the real problems, let alone solved them.

After months of this, the family members reached a unique consensus. Their lawyers and counselors were incompetent and should be replaced by new ones. Who would, of course, be subject to the same restrictions....

U.S. Federal Finances: 22 Challenges

Here are the most significant challenges we must address to put our federal fiscal house in order. Each includes a brief description. Click on the link that follows for more discussion of the particular challenge, including examples and stories from my experience as well as other recommended references.

Disclosure

We do not have reliable financial information about federal financial operations which provides government officials or citizens with the data they need to easily understand federal operations, to make informed choices or to hold their legislative representatives and their fellow taxpayers accountable.

The current government budgets and financial statements reflect "overt" operations. They exclude a significant amount of classified or illegal government activities - "covert operations" - whether paid for out of classified intelligence agency and military budgets or the "black budget."

The financial statements that reflect "overt operations" have not been able to pass independent audits for almost two decades (as required by law) and report that trillions of dollars have gone missing in transactions that are "undocumentable." This has included years when such "undocumentable" transactions exceeded total annual tax receipts.

In addition, it is nearly impossible to track federal expenditures by place using federal reporting structures; and thus it is very difficult for communities to hold their congressional representatives accountable. Some information about local sources and uses of federal funds can be indirectly gleaned from financials prepared by state and local officials (see: Comprehensive Annual Financial Reports). But it is impossible to get a comprehensive picture from these or any government issued financial reports. Perhaps by design.

As a government official, I struggled with the problems of trying to understand the origination of government mortgage credit by place without basic financial information. If reliable government budgets and financial statements were easily accessible to citizens by county or congressional district, mortgage fraud would never have become as bad as it did during the last few decades.

"When I joined the Bush Administration in 1989 as Assistant Secretary of Housing, I read the budget for the Federal Housing Administration (FHA). It described a $300 billion portfolio of mortgage insurance in force with about $50-100 billion a year of annual originations. I asked the person responsible for the comptroller function to direct me to the place in the budget where it explained how much we were making and losing. I was told there was no such place. I asked where the financial statements were. I was told that the accountants had them, that they reported to a different Assistant Secretary and that I was not allowed to speak with them. The Government Accounting Office (GAO) had audited our financial statements several years ago. We could not afford an outside auditor, let alone every year. Besides, we operated on a cash basis. The Office of Management and Budget (OMB) would never permit accrual statements.

After months of working with a variety of parties at HUD, OMB and in the Administration, and with much support from GAO, the accounting group was moved over to my area and legislation was introduced and passed that required a comptroller for the FHA Funds, a chief financial officer for the department, and a legal requirement for annual audited financial statements and actuarial statements.

When we got access to our financial information, it turned out that we were losing $11 million a day in the single-family fund, the Mutual Mortgage Insurance Fund, and more in the multifamily and special risk fund called the General Insurance Fund. What is more, I discovered that we had never tracked our financial results on a place-based basis. In other words, ten regional and eighty field offices had no idea how they were doing. So we put together crude place-based cash flows.

What we found was simply astonishing. First, the national data on which the portfolio was based turned out to be the irrelevant product of averaging. A look at all ten regions and eighty field offices showed that no one part of the portfolio fit the image depicted by the national averages. Our vision of our business had been substantially distorted by the way in which the data had been presented. Second, it turned out that over 100% of our losses were generated in two regions.

The first was headquartered in Texas, and included Oklahoma, Louisiana and Arkansas. We discovered that the Texas region had lost over $2 billion the year before. They had no idea. The second was headquartered in Colorado. What the numbers showed was that S&L fraud and HUD fraud were perpetrated by the same networks and in the same places involving the use of federal credit."

Catherine Austin Fitts, "The Myth of the Rule of Law"

How does Congress make choices or educate and align constituencies without reliable, independent feedback regarding their financial and economic decisions? It's difficult - and in turn many decisions are made based on inaccurate information. More...

Legality

A significant portion of federal government spending operates in violation of the laws governing federal financial management and reporting and the United States Constitution which stipulates that no payments can be made that are not provided for in an appropriations bill approved by Congress. Specifically, Article 1, Clause 7 states: "No Money shall be drawn from the Treasury but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.

Let me give you some examples my own experience:

We [my company, Hamilton Securities Group] were blessed with an advisory board of very capable and committed pension fund leaders. In April 1997, we had an advisory board meeting....I gave a presentation on the extraordinary waste in the federal budget. As an example, we demonstrated why we estimated that the prior year's federal investment in the Philadelphia, Pennsylvania area had a negative return on investment. It was, however, possible to finance places with private equity and then reengineer the government investment to a positive return and, as a result, generate significant capital gains. Hence, it was possible to use U.S. pension funds to increase retirees' retirement security significantly by investing in American communities, small business and farms — all in a manner that would reduce debt and improve skills and job creation. This was important as one of the chief financial concerns in America at that time was ensuring that our retirement plans performed financially to a standard that would meet the needs of beneficiaries and retirees. It was also critical to reduce debt and create new jobs as we continued to move manufacturing and other employment abroad. If not, we would be using our workforce's retirement savings to finance moving their jobs and their children's jobs abroad.

The response from the pension fund investors was quite positive until the President of the CalPers pension fund — the largest in the country — said, "You don't understand. It's too late. They have given up on the country. They are moving all the money out in the fall (of 1997). They are moving it to Asia." He did not say who "they" were but did indicate that it was urgent that I see Nick Brady (former Chairman of Dillon Read and former U.S. Secretary of the Treasury) — as if our data that indicated that there was hope for the country might make a difference. I thought at the time that he meant that the pension funds and other institutional investors would be shifting a much higher portion of their investment portfolios to emerging markets. I was naive. He was referring to something much more significant.

The federal fiscal year starts on October 1st of each year. Typically the appropriation committees in the House and Senate vote out their recommendations during the summer. When they return from vacation after Labor Day, the various committees reconcile and a final bill is passed in September. Reconciling all the various issues is a bit like pushing a pig through a snake. Finalizing the budget each fall can make for a tense time. When the new bill goes into effect, new policies start to emerge as the money to back them starts to flow. October 1st is always a time of new shifts and beginnings.

In October 1997, the federal fiscal year started. It was the beginning of at least $4 trillion going missing from federal government agency accounts between October 1997 and September 2001. The lion's share of the missing money disappeared from the Department of Defense accounts. HUD also had significant amounts missing. According to HUD OIG reports, HUD had "undocumentable adjustments" of $17 billion in fiscal year 1998, and $59 billion in 1999. The HUD OIG refused to finalize audited financial statements in fiscal year 1999, refused to find out the basis of the undocumentable adjustments or to get the money back and refused to disclose the amount of undocumentable adjustments in subsequent fiscal years.

Catherine Austin Fitts, Dillon Read & Co. Inc. & the Aristocracy of Stock Profits

See Also:

• DOD IG: $1.1 trillion missing
• HUD IG: $59 billion missing

Here is more I wrote in the process of trying to hold a Congressman on the budget and appropriations committees accountable:

In June 2001 the Senate Governmental Affairs Committee, published its study, "Government at the Brink." The study describes the failure of federal government agencies to maintain reliable financial systems and/or to publish as independent annual audited financial statements as required by law. The President's initial 2002 budget (before increases for 9-11) proposed that approximately 85% of all federal appropriations be awarded to the very same agencies the Thompson study states either (a) fail to maintain reliable financial systems, (b) fail to publish trustworthy or, in some cases, any, independent certified financial statements (as required by law), or both.

At that same time, Congressman Steve Horn (R-Calif.), Chairman of the House Government Reform subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations issues a report card regarding attempts by federal agencies to produce reliable annual audited financial statements.

We [my company, Hamilton Securities Group] were blessed with an advisory board of very capable and committed pension fund leaders. In April 1997, we had an advisory board meeting....I gave a presentation on the extraordinary waste in the federal budget. As an example, we demonstrated why we estimated that the prior year's federal investment in the Philadelphia, Pennsylvania area had a negative return on investment. It was, however, possible to finance places with private equity and then reengineer the government investment to a positive return and, as a result, generate significant capital gains. Hence, it was possible to use U.S. pension funds to increase retirees' retirement security significantly by investing in American communities, small business and farms — all in a manner that would reduce debt and improve skills and job creation. This was important as one of the chief financial concerns in America at that time was ensuring that our retirement plans performed financially to a standard that would meet the needs of beneficiaries and retirees. It was also critical to reduce debt and create new jobs as we continued to move manufacturing and other employment abroad. If not, we would be using our workforce's retirement savings to finance moving their jobs and their children's jobs abroad.

The response from the pension fund investors was quite positive until the President of the CalPers pension fund — the largest in the country — said, "You don't understand. It's too late. They have given up on the country. They are moving all the money out in the fall (of 1997). They are moving it to Asia." He did not say who "they" were but did indicate that it was urgent that I see Nick Brady (former Chairman of Dillon Read and former U.S. Secretary of the Treasury) — as if our data that indicated that there was hope for the country might make a difference. I thought at the time that he meant that the pension funds and other institutional investors would be shifting a much higher portion of their investment portfolios to emerging markets. I was naive. He was referring to something much more significant.

The federal fiscal year starts on October 1st of each year. Typically the appropriation committees in the House and Senate vote out their recommendations during the summer. When they return from vacation after Labor Day, the various committees reconcile and a final bill is passed in September. Reconciling all the various issues is a bit like pushing a pig through a snake. Finalizing the budget each fall can make for a tense time. When the new bill goes into effect, new policies start to emerge as the money to back them starts to flow. October 1st is always a time of new shifts and beginnings.

In October 1997, the federal fiscal year started. It was the beginning of at least $4 trillion going missing from federal government agency accounts between October 1997 and September 2001. The lion's share of the missing money disappeared from the Department of Defense accounts. HUD also had significant amounts missing. According to HUD OIG reports, HUD had "undocumentable adjustments" of $17 billion in fiscal year 1998, and $59 billion in 1999. The HUD OIG refused to finalize audited financial statements in fiscal year 1999, refused to find out the basis of the undocumentable adjustments or to get the money back and refused to disclose the amount of undocumentable adjustments in subsequent fiscal years.

Catherine Austin Fitts, Dillon Read & Co. Inc. & the Aristocracy of Stock Profits

See Also:

• DOD IG: $1.1 trillion missing
• HUD IG: $59 billion missing

Here is more I wrote in the process of trying to hold a Congressman on the budget and appropriations committees accountable:

In June 2001 the Senate Governmental Affairs Committee, published its study, "Government at the Brink." The study describes the failure of federal government agencies to maintain reliable financial systems and/or to publish as independent annual audited financial statements as required by law. The President's initial 2002 budget (before increases for 9-11) proposed that approximately 85% of all federal appropriations be awarded to the very same agencies the Thompson study states either (a) fail to maintain reliable financial systems, (b) fail to publish trustworthy or, in some cases, any, independent certified financial statements (as required by law), or both.

At that same time, Congressman Steve Horn (R-Calif.), Chairman of the House Government Reform subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations issues a report card regarding attempts by federal agencies to produce reliable annual audited financial statements.

Other reports from sources like agency inspectors general and government whistleblowers charge that the problems are much deeper than mere accounting: they allege stolen and missing inventory (planes, tanks, etc.) and in some cases actually admit that they rely on black budget funding (i.e., funding that is "off balance sheet" and not subject to Congressional oversight). The existence of such reports requires that we ask whether the very government officials and contractors who are paid handsomely to protect and manage our resources in accordance with the law are looting the federal government.

Total undocumented accounting adjustments for reported periods for the Department of Defense (fall of 1997 to date) amount to a whopping $3.3 trillion, or $11,700 for every American. (Many American families don't even have $11,700 in savings in their bank accounts.) The Department of Defense has failed to produce independent audited financial statements since the requirement went into effect in 1995. HUD's Inspector General refused to certify HUD's fiscal 1999 financial statements. Since both agencies have refused to explain the undocumented adjustments in adequate detail for some years and declined to report or make public undocumented adjustments, we have no evidence to document that large amounts of assets or money are not being stolen.

Catherine Austin Fitts, Saving Tennessee

The missing money problem is systemic and bipartisan. In "Treasury Checks and Unbalances," that appeared in the April 2004 edition of Insight magazine, Kelly Patricia O'Meara demonstrated this fact quite conclusively. As she reports, according to the GAO (General Accounting Office), the year end financial reports submitted by four U.S. Secretaries of the Treasury were unreliable and essentially "unauditable" despite the assurances of the accuracy of these reports by these Treasury officials.

Kelly continues: "It is the job of the U.S. General Accounting Office (GAO) to audit the federal government's financial statements, and this year, as in all previous years in which the auditing requirement was in force, "certain material weaknesses in internal control and in selected accounting and reporting practices resulted in conditions that continued to prevent us from being able to provide Congress and American citizens an opinion as to whether the consolidated financial statements of the U.S. government are fairly stated." Indeed, the GAO further reports, "As a result of material deficiencies in the federal government's systems, record-keeping, documentation and financial reporting, readers are cautioned that amounts reported in the consolidated financial statements and related notes may not be reliable."

So the books can't be audited and what information is made available "may not be reliable."

Contrast this with the statements of the various Secretaries of the Treasury.

Robert E. Rubin, 1997 — "We believe that the publication of these audited statements is an important step in providing American citizens with more information about the operations of their government."

Robert E. Rubin, 1998 — "We believe that the publication of this financial report is an important step in providing the American public with useful information about their government's assets, liabilities and operations."

Lawrence H. Summers, 1999 — "We are committed to producing and reporting financial information that meets the highest standards of integrity and to provide to the American people the accountability and professionalism they expect from their government."

Paul H. O'Neill, 2000 — "I am committed to producing and reporting financial information that meets the highest standards of integrity and to provide the American people the accountability and professionalism that they expect from the government."
Paul H. O'Neill, 2001, Unauditable?"I believe that the American people deserve the highest standards of accountability and professionalism from their government, and I will not rest until we achieve them."

John W. Snow, 2002 — "I intend to continue the commitment to producing and reporting financial information that meets the highest standards of integrity and to provide the American people the accountability and professionalism that they expect from their government."

Remember — these unreliable and essentially "unauditable" financial reports from the U.S. Treasury were being issued before the bailouts.

A Congressman, who was on the budget and appropriations subcommittee in 2002, told me that he was helpless to address trillions in unconstitutional transactions. How then is Congress supposed to grapple with them in 2013?

Operations

A significant portion of governmental accounting functions, payment systems, and financial operations have been outsourced to private banks and corporations. Indeed, the government has become so dependent on outside corporations, that government officials do not have the knowledge or operational capacity and independence to assert control. And worse yet, the same private contractors and banks that control the government's data and financial operations also control access to the bond markets that finance the government's operations? So who is really in charge?

It is critical to understand that government officials who are technically responsible for financial operations do not have control, nor can they necessarily rely on the government for "protection." So how can they fulfill their fiduciary responsibility to the citizenry?

The NY Fed member banks serve as depository for the U.S. federal accounts and manage the U.S. Treasury Exchange Stabilization Fund. The Treasury is also dependent on them for an enormous number of servicing functions, such as for processing bonds, mortgages and foreclosures. Finally, the NY Fed member banks and the other primary dealers market Treasury and agency debt to fund ongoing deficits.

Within the agencies, private defense contractors provide the primary information and payment systems. Hence, the largest contractor at DOD, where over $3.3 trillion has gone missing, runs many of their accounting and payments systems while it is also selling large weapons systems to DOD. The DOD's supplier of accounting software and systems is also their largest supplier of weaponry and services, as well as the manager of numerous highly classified and secret weapons programs.

As agents, these banks and contractors are the custodians of vast amounts of data from scores of federal agencies, including military and intelligence agencies, and in turn have access to the full range of confidential data about citizens, their taxes and transactions. In effect, the sovereignty of the United States Government and its citizens has been transferred to those who control the data and telecommunication systems. There has been a financial coup d'etat.

The largest defense contractor at HUD on several occasions refused to give senior government officials or me access to data on HUD subsidies that they were managing and for which they operated the payment systems. In essence, the defense contractor was in control and the government officials were subservient to them. I assume this was because the HUD subsidies were being run in a manner that was very different from the budget and financial statements described.

In March 2000, the HUD Inspector General testified that HUD would not publish financial statements for fiscal 1999 and that the undocumentable adjustments made so far to balance the books was $59 billion. A close reading of the undecipherable preliminary audit indicated that, in fact, the number was $17 billion in fiscal 1998 and $70 billion on the asset side and $59 billion on the liability side in fiscal 1999. As a practical matter, since HUD was assuring us that their systems did not work and that they had simply not bothered to check their accounts and cash balances in the old fashioned way using paper and pencil, we had no numbers of any meaning. In fact, anything was possible. Worse yet, GAO reports of the Treasury accounting systems both as to their reliability and control by private contractors are also disturbing. With little or no information sovereignty, the internal controls are insufficient to assure that cash balance reconciliation between an agency such as HUD and Treasury are accurate.

When an agency can issue government guarantees and not record what they have issued correctly and then write checks that are not recorded correctly, then one or more of the players that handle the money, namely the US Treasury, the Federal Reserve Bank of New York, AMS and Lockheed, may be in a position to steal literally hundreds of billions of dollars with no one the wiser except those enjoying the fruits.

Such a thought seemed far-fetched not that long ago. Indeed, in 1994 after the first FHA/HUD financial audit was published, a mortgage banker came to see me. He was a serious engineering type who clearly worked hard and mastered the details of his business. He was distressed, he said. For decades he had been keeping a tally of total outstanding FHA/HUD mortgage insurance credit. He had brought printouts of his database for me. It turned out that the government's published financial statements showed the amount outstanding was substantially less than the actual amount outstanding. He was sure. I assumed that the guy was crazy. If what he said were true, then the US Treasury and the Federal Reserve would have to be complicit in significant fraud, including securities fraud. This was inconceivable. To this day, I regret not accepting a copy of the printouts from his databases. I wonder if they might have illuminated what our [Community] Wizard and other portfolio tools were about to find. They might have helped explain why our efforts to distribute information on the HUD outstanding mortgage and defaulted mortgage portfolios inspired such opposition and distress.

The indications are growing that Treasury and OMB are engaging in fraudulent transactions and that the key financing, accounting and payments systems are run by contractors who are either in on the deal or turn a blind eye. What this means is that the financial disclosure provided by the federal government may be essentially meaningless. It does not take long to realize that in a world with no financial controls with the fox in control of the chicken coop anything is possible. Life in the federal government is an endless series of shortcuts under impossible political stress and risk. With no internal financial controls, things can go far off course with no way for reasonable people to stop it.

Catherine Austin Fitts, The Myth of the Rule of Law

There are several other issues regarding government contracts that present challenges to anyone wanting to reengineer the federal budgetary process.

The first is that much of defense contracting has been organized and priced on a "cost plus basis." That is, contractors are reimbursed for their stated costs plus a set mark up. Experts familiar with the defense procurement process believe that this has resulted in ballooning expenses, poor performance and less innovation.

Second, government contractors are rarely disqualified despite criminal behavior or corporate malfeasance or even criminal conviction. One of the more infamous cases, concerned a government contractor that was sued on multiple occasions for sex slave trafficking, including by the project contract manager - accusations confirmed by defense department criminal investigators. The contractor in question continued on as the largest contractor at the U.S. State Department, was protected by senior state officials and then awarded a sole source contract to manage the criminal justice system in Iraq.

Third, there is often no more carefully hoarded information within a federal agency than the agency contract budgets. If our government is going to be run by government contractors, then we need to know who they are, what they are responsible for and how that relates to any financial reporting and accounting problems we are having.

David Walker was head of the GAO, chief auditor to the U.S. Congress, while the U.S. government consistently failed to comply with laws requiring audited financial statements and over $4 trillion went missing. One reporter with whom I was working was promised by Walker that he would publish the names of government contractors associated with these losses. This was after petitions under the Freedom of Information Act to the agencies failed to result in even basic disclosure of the relevant contractors and their contracts. Mr. Walker failed to ever honor that commitment. Today, with the names of those contractors still invisible, Mr. Walker serves as the CEO of the Pete Peterson Foundation, where he pontificates on fiscal accountability and the need for American's to tighten their belts.

Fourth, perhaps the greatest risk of all is the outsourcing of our military capacity. Overall, federal employment has declined in recent decades. One reason for this is the increased dependency of the military on outside contractors. Given the importance of the U.S. active and reserve military for national defense, the idea that these functions are dependent on private corporations whose investors also control governmental purse strings, is truly frightening to contemplate.

Fifth, private contractors often operate without legal liability, creating governmental and military operations for which no one is liable. One famous example of this "nether world" came out when Gary Webb published his Dark Alliance news series and book on government narcotics trafficking in South Central Los Angeles.

In response to citizen concern inspired by Webb's story, then Director of the CIA, John Deutsch, agreed to attend a town hall meeting in South Central Los Angeles with local Congressional representatives in November 1996. Confronted by allegations in support of Webb's story, Deutsch promised that the CIA Inspector General would investigate the "Dark Alliance" allegations.

This resulted in a two volume report published by the CIA in March and October of 1998 that included disclosure of one of the most important legal documents of the 1980s — a Memorandum of Understanding (MOU) between the Department of Justice (DOJ) and the CIA dated February 11, 1982 in effect until August 1995....

No history of the 1980s is complete without an understanding of the lawyers and legal mechanisms used to legitimize drug dealing and money laundering under the protection of National Security law. Through the MOU, the DOJ relieved the CIA of any legal obligation to report information of drug trafficking and drug law violations with respect to CIA agents, assets, non-staff employees and contractors. Presumably, this included the corporate contractors who, by executive order, were now allowed to handle sensitive intelligence and national security outsourcing.

With the DOJ-CIA Memorandum of Understanding, in effect from 1982 until rescinded in August 1995, a crack cocaine epidemic ravaged the poorer communities of America and disenfranchised hundreds of thousands of poor people into prison who, now classified as felons, were safely off of the voting roles. Meantime, the U.S. financial system gorged on what had grown to an estimated $500 billion-$1 trillion a year of money laundering by the end of the 1990s. Not surprisingly, the rich got richer as corporate power and the concentration of investment capital skyrocketed on the rich margins of state sanctioned criminal enterprise.

Catherine Austin Fitts, Dillon Read & Co. Inc. & the Aristocracy of Stock Profits

Sixth, there are numerous reports that government contractors are being allowed to use tax avoidance mechanisms that reduce their tax liability substantially. So while taxpayers provide their revenues these contractors avoid their fair share of taxes.

Finally, while the government is becoming more dependent on corporate America, corporations are becoming more dependent on government subsidies, contracts and purchases – thus radically increasing the dependency of the commodities, bond, mortgage, stock and derivatives markets on the federal budget. The financial markets have become a "proprietary" for various government agencies (i.e. a business secretly owned by and run as a cover for an intelligence organization). Hence, it is not surprising in the second Bush Administration that the National Security Council invented their right to exempt corporations that they specify from obligations to comply with SEC disclosure laws. Very few investors are aware of this, let alone that their retirement savings and personal assets are deeply dependent on ever increasing government borrowings because the corporations and banks in which they or their pension funds are investing are primarily U.S. government contractors.

On and Off Budget

Assets, revenues and expenses can be accounted for on-budget or off-budget, or simply not accounted for at all. Decisions as to what is on and off-budget are often crafted in a way that is not in the best interests of the citizenry. Rather, they are designed to benefit insiders at the expense of everyone else.

Let's look at some examples:

• The government's cost of waging war is on budget. But, the assets acquired in those wars are preserved for the benefit of insiders, often through local "agents" that outsource and "privatize," joint venture or simply function as puppets.
  
  
• Policies and regulations are crafted to transfer benefits to insiders while transferring (externalizing) liabilities to the taxpayers. We can see the results of this process in increasing health care and unemployment costs, for example.
  
  
• Trillions of dollars that have been used for bank bailouts are off budget or engineered with FDIC insurance, Fannie and Freddie takeovers, FHA insurance and the Federal Reserve actions that ultimately result in the expense coming back on the budget and in turn being subsidized by the citizenry (see Bailout 'Mo Money). To add insult to injury, the resulting bank profits are only lightly taxed while bonuses are increased.
  
  
• The government funded the space program for decades and paid defense contractors trillions to learn and acquire all the technology involved. Now that we are ready to proceed with energy and mining projects in space, space exploration is being privatized. So the benefits of valuable IP that was paid for by the taxpayer will now accrue to these corporations.

Essentially, the U.S. federal budget is designed to absorb liabilities (risk and expense) into the public sector while transferring assets to the private sector. This imbalance must be addressed to make the federal budget and finances economically viable.

Globally, the process of "piratization" is pushing federal finances in the opposite direction from accountability and viability – see my popular blog post, "Financial Coup d' Etat".

Currently, there is no political process to facilitate fiscal responsibility, short of war, wholesale tax revolt or collapse.

Restoration

There are trillions of dollars missing from federal accounts, as documented by the federal government itself.

The reports of significant money missing from the United States government over the years are many, including Kelly Patricia O'Meara's series for Insight Magazine on money missing from the U.S. government and Donald L. Barlett and James B. Steele's investigative reporting published in Vanity Fair on monies missing in US operations in the Middle East. For a time, there were so many stories on monies disappearing from the US government that we kept track of them on a part of the Solari website dedicated to stories about money missing from the federal government: Solari: The Missing Money

Kelly O'Meara's series on the missing money attracted significant attention in 2000 and 2001. Things seemed to be coming to a head on September 10, 2001, when Donald Rumsfeld conceded in a press conference that DOD was missing trillions. However, that fact was not to attract much attention given 9-11 events the following day. Rather, the tragedy was used to justify the loss of financial records at the Pentagon (we are apparently to presume that the Pentagon is incapable of making or keeping backups) and the inability of the Army to produce financial statements in 2001.

One Tennessee congressman on the House Budget and Defense Appropriations Subcommittee confirmed to me that these billions were missing, but said that he was helpless to do anything about it, despite being a member of the budget committee and defense appropriation subcommittee. (See Letter to Congressman Van Hilleary)

The missing money phenomenon was overwhelmed by the bailouts that began in the second Bush administration and continue through the Federal Reserve today (see QE3- Pay Attention if You Are in the Real Estate Market).

Catherine Austin Fitts, "The Housing and Economic Recovery Act of 2008: An Analysis"

Perhaps, the military-industrial-intelligence complex saw the opportunity to bypass the complexity of using dummy corporations and criminal enterprises to steal trillions covertly in order to fund their black operations and insider perks, and decided to take advantage of the bubble in the mortgage markets where knowledge of the fraudulent securities positions and the derivatives piled on top could be used to blackmail the banksters - resulting in money flowing out the front door through bailouts and the deflection of Fannie Mae's and Freddie Mac's liabilities to the taxpayer. Or perhaps that is why the bubble was created in the first place – the military-industrial-intelligence complex needed the cash – and as always, the banking system was there to accommodate (for their cut of course).

I have always said, "crime that pays is crime that stays." We need restoration of assets that have been stolen, whether by identifying them and reclaiming them or asserting liability of the parties involved and simply claiming ownership to their assets or asserting a common right of offset of any government or taxpayer liabilities to them.

Ultimately, the federal budget is like a milk bucket with a hole in the bottom of the bucket. The folks who milk the cows are tired of hearing that the bucket is empty and there is not enough milk. They do not want to put more milk in the bucket until they understand where the milk has been going and they are persuaded that the hole has been repaired.

Now do you appreciate why the federal government is increasingly interested in deploying drones domestically and promoting gun control as they contemplate the fiscal cliff?

Legacy Economics

The budget and the federal regulatory structure operate in accordance with a legacy industrial-based economic paradigm that is increasingly outmoded in the face of technological advances and globalization. Despite these trends, significant technologies continue to be suppressed.

The world is changing. Washington is often lobbied by a wide group of constituencies that want government to protect them from the risks and expense of that change. So, for example, as video on the Internet shifts market share away from Hollywood, the entertainment industry lobbies for greater control of the Internet.

This often puts Washington on the wrong side of numerous highly sensitive technology questions – involving both mistakes in adaptation or suppression. For example, Washington is leading the charge in the U.S. and globally to adopt GMO technology - corrupting the global seed supply, destroying agricultural diversity and paving the way for both the industrialization and control of the global food supply. My guess is that the suppression of breakthrough energy technologies cannot last. As we move away from fossil fuel for which the U.S. dollar is the exchange currency, the pressure is on to backstop the U.S. dollar with an asset other than oil – thus the push for GMO's.

This means that the general economy is paying for the U.S. governmental mechanism to engineer control for a private syndicate with the compromising of the fundamental nature of life.

Globalization has been engineered through international agreements that are then used to supersede national laws and national sovereignty. The result has been global devaluation of the value of labor relative to capital that has centralized wealth in a manner that has shrunk total wealth. One of the most persuasive descriptions of this process was provided by Sir James Goldsmith in 1994, when he came to the United States to lobby Congress against the adaptation of the Uraguay Round of GATT.

Goldsmith Interview - International Agreements? Sir James Goldsmith's 1994 Globalization Warning

Integration of new technology is expected to significantly increase middle class unemployment over the new decade. As I write this, the latest Kiplinger Letter, is warning of the danger of a significant squeeze on middle class incomes as a result of robotics and other automation trends. Expect this to put additional stress on the federal budget without a parallel effort to use technology to lower expenses and increase the productivity and self sufficiency of individual households and small businesses.

Health

Federal laws and regulations encourage or require practices affecting nutrition, health and pharmaceuticals that significantly and adversely impact the health and well-being of the general population, causing heath care costs to explode, resulting in economic stress and damage to households and small business. These issues along with an aging baby boomer generation are at the heart of the politics surrounding Social Security and Medicare.

Catherine on Federal Health Care Policy in 2010:

If you want to understand the fundamental problem with the American health system, watch my favorite food documentary, "Fat, Sick and Nearly Dead."

Australian Joe Cross heals himself of an autoimmune disease on a juice fast as he drives across America, engaging with the people he meets about diet and nutrition. At a truck stop in Arizona he meets Phil Staples, an Iowan trucker with the same autoimmune disease.

Persuaded by Joe, Phil starts a juicing regimen and within six months is also healed, along with losing half his body weight and transforming into the picture of vibrant health. Near the film's end, Phil sits with his brother who has just returned from the hospital as part of his recovery from a heart attack. Juicing costs $14 a day with conventional vegetables, $28 a day for organic. Phil's brother's heart attack cost $55,000. He sits and describes his pile of pharmaceuticals to Phil. It is relatively easy to add up the dramatic difference in health care costs between Phil and his brother resulting from a their vastly different diet and lifestyle choices.

The deterioration in the quality of the food and water supply is a driving force in exploding health care costs, particularly as the baby boomers age. See documentaries Obesity: Killer at Large and Sugar: The Bitter Truth and our interview on the Solari Report with Dr. Robert Lustig.

One of the most important factors is the increase of genetically modified organisms (GMOs) in the seed and food supply. See Jeffrey Smith's documentary, Genetic Roulette, as well as our Solari Report interview with Jeffrey.

This is exacerbated by the deterioration of household purchasing power, forcing a significant number of people onto food stamp subsidy, where dependency on highly processed foods to achieve the necessary caloric intake within a limited budget is typical. The number of food stamp beneficiaries grew from 33,489,975 in fiscal 2009 to 46,609,075 in fiscal 2012. Over the same time period, according to the U.S. Treasury, spending on the program increased from $55.6 billion to $80.4 billion. This development is not unrelated to increases in regulatory and compliance pressures on small farmers, which in turn helps to consolidate agricultural profits into large corporations.

There are numerous additional factors as well:

• Environmental pollution, including a secret (albeit obvious) global spraying program. See Michael Murphy's documentary, Why in the World are They Spraying? as well as our outstanding Solari Report interviews with Cliff Carnicom, Dr. Gwen Scott, Dr. Samuel Milham and Blake Levitt.
  
  
• Suppression of critical knowledge, such as the fact that expensive cancer treatments are not effective in many cases and that significantly less expensive treatments are available. Read Suzanne Sommers Knockout: Interviews with Doctors Who Are Curing Cancer or listen to our Solari Report interviews with Dr. Laura Thompson, Nora Gedgaudas or Lynette Louise.
  
  
• Suppression of technology prohibitively increases the cost of health care. For an excellent example of this phenomenon, see "The Rise and Fall of a Scientific Genius: The Forgotten Story of Royal Raymond Rife."
  
  
• Vaccine policies result in babies and young children receiving significant dosages of heavy metals that lower immune systems and are believed to significantly increase the incidence of autism and other conditions that significantly increase household expenses and adversely impact household health and economics. See Gary Null's documentary "Vaccine Nation."

To the extent that these factors are reducing life expectancy of older Americans, they may be also reducing some of the stress on the budget. A recent study shows that the life expectancy of the least educated Americans have fallen 5 years among women and 3 years among men since 1990. See http://solari.com/blog/life-spans-shrink-for-least-educated-whites-in-the-u-s/

The issue of life expectancy is a critical issue for the federal budget. For many years, the baby boomer generation has been paying funds into the Social Security Trust Fund. Those funds have been used to purchase Treasury securities that have financed government operations (yes the Social Security Trust Fund has been spent). In short, the U.S. government needs a continual inflow of these funds to keep going. Now that the boomers are retiring or need Social Security payments to fund living expenses in the face of declining incomes, those cash flows are turning negative. This presents a serious problem. The government needs an inflow of the next dollar. Instead of getting that inflow, it is getting a request for a dollar. That is a $2 dollar problem. Where is it going to raise sufficient capital to finance the replacement of the inflow and to fund the outflow?

The pressure to implement higher retirement ages and to access private and public pension funds, including 401k's and IRAs is growing.

Black Budget

Significant funds have been diverted into the "Black Budget" since WWII -- with no public accountability in terms of amounts, sources or uses.

The black budget has numerous sources. First there is funding allocated in secret by Congressional "oversight" committees. Second there are funds clawed from other agency appropriations. Third there are an endless series of other sources of funding include seizures, proceeds from the marketing of hard narcotics and engineering of mortgage and other financial fraud in your community and from many other illicit businesses operated globally by the intelligence cartel. Finally, I suspect one of the largest sources and uses has become market manipulations through the Exchange Stabalization Fund.

[George H. W.] Bush climbed through Republican politics to become Director of the Central Intelligence Agency (CIA) during the Ford Administration. After spending four years displaced by the Carter Administration, Bush was now Reagan's Vice President with Executive Order authority for the National Security Council (NSC) and U.S. intelligence and enforcement agencies. Bush's new authority was married with expanded powers to outsource sensitive work to private contractors. Such work could be funded through the non-transparent financial mechanisms available through the National Security Act of 1947, and the CIA Act of 1949.

This was a secret source of money for funding powerful new weaponry and surveillance technology and operations owned, operated or controlled by private corporations. Carter's massive layoffs at the CIA had created plenty of private contractor capacity looking for work. An assassination attempt on President Reagan's life two months after the inauguration meant that Vice President Bush and his team were called on to play an expanded role

Catherine Austin Fitts, Dillon Read & Co. Inc. & the Aristocracy of Stock Profits

The federal mortgage funds have long been subject to significant fraud with the full help and support of the U.S. Treasury, Department of Justice and NY Fed and its member banks. I believe that this fraud has been used to finance the black budget.

"In 1994, after the first FHA/HUD financial audit was published, a mortgage banker came to see me. He was a serious engineering type who clearly worked hard and had mastered the details of his business. He was distressed, he said. For decades he had been keeping a tally of total outstanding FHA/HUD mortgage insurance credit. He had brought printouts of his database for me. It turned out that the government's published financial statements showed the amount outstanding was substantially less than the actual amount outstanding. He was sure. I assumed that the guy was crazy. If what he said were true, then the U.S. Treasury and the Federal Reserve would have to be complicit in significant fraud, including securities fraud."

Catherine Austin Fitts, The Myth of the Rule Of Law.

For more on this topic see my online book, Dillon Read & Co. Inc & the Aristocracy of Stock Profits as well as excellent Solari Report interviews with Joseph Farrell, Adam Trombly and Richard Nolan and audio seminars on the housing bubble.

The opportunities for financial abuses and the impact on the general economy are beyond significant. Given the amounts involved, very advanced technologies undoubtedly have been developed, mostly to the benefit of the private contractors who have been paid to develop them. The value is literally in the trillions of dollars.

Monetary Policy

The federal government has delegated the management of monetary policy to a privately controlled central bank, resulting in the debasement of $20-30+ trillion of U.S. savings since its creation.

This is a significant topic that is well worth exploring. Much of global geopolitics is driven by what the U.S. government and miltary must do to ensure that the dollar's status as reserve currency is maintained.

Currency debasement is an especially sensitive issue as Congress approaches the fiscal cliff. Managed inflation has produced profits and increased asset valuations that do not reflect an increase in real wealth. If the money supply is growing at 10% and a real estate value is increasing at 2%, then in fact, real value is falling. Hence, paying an increased capital gains tax to the government on what is in effect a nominal increase but really a decrease in the purchasing value of real assets engineered by the government, is quite frustrating.

To better understand how debasement of the U.S. currency has drained you and your family:

"Positioning Your Assets"

Or how this has drained your community:
Is Your Community Waving Goodbye to $3.3 Billion

Or what you can do about it:
The Solari Report Building Wealth Collection

Building Empire

Global "Empire Building" and the deployment of our military to support that effort, has resulted in a huge loss of domestic investment, GNP and tax revenue.

Since the end of the Cold War, the deployment of military, intelligence and special forces assets globally has increased significantly, as have related expenditures. This has shifted expenditures from domestic economic activity to global activity as the army, contractors and support functions move abroad. This is compounded by the fact that the most recent U.S. invasions of Afghanistan and Iraq have exceeded their original costs by many multiples, with numerous reports of monies disappearing mysteriously along the way.

Trying to limit the "mission creep" of this part of the budget has seemed impossible and has been the subject of numerous books, including Top Secret America: The Rise of the New American Security State by Dana Priest and William Arkin and Blank Check by Tim Weiner.

Congress is now in the position of trying to rein back an insatiable security state - a dangerous thing to do.

Economic Health

The vast majority of the people lobbying the federal government are focused on what is in the specific interest of those who are paying their way, as opposed to what makes the pie bigger for everyone. Unfortunately, those lobbyists and the interests they serve have become our elected officials' real "constituency". Consequently, we find few in government or elsewhere whose primary focus and concern is the overall economic health of the domestic economy or the welfare of those they have been entrusted to represent.