11 Trillion Dollars Are Missing

May 22, 2010

My post today is about a macroeconomic accounting mystery. Macroeconomic statistics attempt to measure impossibly big, complicated systems. For my dissertation research, I focus on national income statistics (the National Income and Product Accounts, the UN System of National Accounts, etc.) which try to measure the value of the production of all the goods and services in a given region. But I’m also fascinated by some of the companion statistics to national income/GDP like unemployment and inflation, both of which are measure by particular surveys (in the US, the Current Population Survey and the Consumer Expenditures Survey, among others). There are fascinating stories behind and around all of these practices (check out last week’s NYTimes Magazine on the GDP’s history for a starting place, or a new book by Thomas Stapleford about cost of living statistics).

There’s another big macroeconomic data set in the US that gets a lot less attention than the three I listed above: the Flow of Funds Accounts (or FoF) produced by the Federal Reserve Board of Governors. The Flow of Funds attempt to track the movement of money between various sectors and subsectors – banks and other financial firms, large and small industrial corporations, households, and government entities. The Flow of Funds tracks the movement of money by attempting to balance the flows in and out of each sector, and by attempting to balance the buying and selling of every kind of asset (or ‘instrument’). So, for example, F.110 looks at flows of money in and out of US-chartered commercial banks. F.220 tracks the buying and issuing of commercial mortgages. In addition to tracking flows, the FoF tracks levels – L.220 looks at how many commercial mortgages are outstanding in total and which sectors have them, rather than looking at changes.

Like the NIPA, and unlike unemployment and inflation statistics, the Flow of Funds are cobbled together using all sorts of heterogeneous data rather than being based on some single survey. Trying to track all of the money (much like trying to track all the production) is not a task easily accomplished with a sample. And so, because the Flow of Funds are cobbled together, they have some… quirks. My favorite quirk concerns the category “Unidentified Miscellaneous Financial Claim” (F.231 and L.231). What, you might ask, is an unidentified miscellaneous financial claim? We don’t know! Here’s the entirety what the Federal Reserve says in its description of the table from the Guide to the Flow of Funds Accounts:

For many sectors, unidentified miscellaneous financial claims are determined indirectly as the residual after the total of changes in individual ‘‘identified’’ asset or liability items for the sector (which appear on other instrument tables in the flow of funds accounts) has been subtracted from the change in total assets or liabilities reported by the sector. For other sectors (nonfarm noncorporate business, the federal government, bank personal trusts and estates, private pension funds, and mutual funds, for miscellaneous assets; and nonfarm noncorporate business, for miscellaneous liabilities), the amount of such claims is obtained directly as the total amount reported by original sources as ‘‘other’’ assets or liabilities.

In most cases, the nature of the items in this category is truly unidentified. In some cases, however, items that are identified separately in original documents are included here because the items are not significant enough from an analytical viewpoint to be classified as individual transaction categories. Examples are interest accrued by, prepaid expenses of, and real estate acquired for banking-house purposes by the Federal Reserve System (the major component of the monetary authority sector), as reported in the System’s Annual Report; and the intangible assets of U.S.-chartered commercial banks, as reported in their quarterly reports of condition. [Emphasis added.]

So, to reiterate, the Federal Reserve has not identified most of what’s in this class of instruments. Ok, but it’s a residual category – it’s probably small, right? Enh… you be the judge. In 2007, the “Net Change in Assets” in this category was $1.5 trillion. In 2008, that collapsed to a still large $365.3 billion. The level outstanding at the end of 2009 – $11.7 trillion dollars. There are more than 11 trillion dollars in assets that we’ve identified as existing, but not what kind of asset they are! And this category has grown tremendously – at the end of 1997, for example, there were a measly $4 trillion in outstanding “Unidentified Miscellaneous Financial Claims”.

So readers, I ask you – what could be in this category? What would have made it grow so much in the 90s and 2000s?

One possible type of asset that could be in this instrument is goodwill. Goodwill is an accounting term that attempts to capture the value of a firm purchased by another firm above and beyond the value of the assets of the first firm. E.g. if firm A buys firm B for $2 million, but firm B is only worth $1 million on its books, what happens to the balance sheet of the new firm A+B? A shelled out $2 million in real assets, but seems to have only gotten $1 million in return. There have been a number of solutions to this problem over time – one option was just to write-off the difference as an accounting loss. Another was to put the difference on the books of the new firm as “goodwill”, to represent the value of the purchased firm above and beyond its book value (in terms of ideas and synergies and future earnings potential from a brand name and all that) and then amortize the loss over a number of years. More recent solutions are more complicated, and involve keeping the goodwill. (Check out this 2007 paper by Ding et al. for a bit of the history of goodwill.)

But is that the whole story to this missing $11 trillion? What else could be in this category? And how would we figure it out?

8 Responses to “11 Trillion Dollars Are Missing”

  1. Annie Says:

    Wtf? 11 trillion? This is an EXCELLENT post!

  2. yuvalmillo Says:

    A very nice post: political SSF meets forensic accounting. A guess about the source/nature of ‘missing sum’: the text you brought from the Fed’s regulation talks about a residual left ‘after the total of changes in individual ‘‘identified’’ asset or liability items for the sector’. So, this is not a ‘directly measured’ category, but a result of an aggregative accounting procedure. If this is the case, we want to ask what procedure(s) are involved and where there can be discrepancies between them. In addition, looking at the tables from 1945 untill today, the F. 231 category tends to grow, roughly, in accordance with inflation. The periods where there are off-the-trend-line spikes are interesting, because there you may find some goodwill-related stories (for example, what macroeconomic and macro-political factors make organisations pay more or less in goodwill? Wars? Booming economy?), but I am not sure that by looking at just several years you can say something about goodwill. In any case, this is, potentially, a very interesting starting point for a SSF-SSA (Social Studies of Accounting) research project.

  3. danielbeunza Says:

    I have to admit that national accounting did not use to be what got me out of bed in the morning.

    However, the Greek crisis has suddenly made it interesting. It seems from this post that the US is not so different from the Greek, which had a huge item in its accounts for its military spending.

    And since the country could not disclose exactly what this spending was for, it ended up being an instrument for creating obscurity.

    Should the sovereign debt/ credit derivatives desks at the Wall Street banks start looking at the US accounts with a Greek perspective? I have it from a good source that many of them are already skeptical, but that shorting the US debt at a US bank is frowned upon.

    • I don’t know if this quirk of the Flow of Funds Accounts filters up to be something we should worry about, but I’d say “perhaps”. A more obvious example where a macroeconomic accounting quirk has real implications for how we judge a country’s soundness is Ireland. Because of low corporate tax rates, Ireland has become a haven for reported corporate income more than it has for actual productive activity. GNP and GDP have become somewhat delinked, unlike in most countries. Here’s The Baseline Scenario’s take.

  4. Philip Roscoe Says:

    Hello Dan. I agree, this is an excellent post. There’s a similar, though smaller, issue here in the UK. Our recent election was dominated by the £150bn public deficit, and we are facing a decade of austerity. But where’s all the money gone? Even looking at the Office of National Statistics’ reports, it’s not clear. Much of it appears to be in asset insurance schemes, but what is the status of those assets and will the schemes be called? Will we get any back? Most of it has (I think) gone into quantitative easing and thus eventually into corporate bonds, and again, this should be repayable in the long term. I presume this has been funded by IMF SDR, which as far as I can tell are entirely notional “special moneys”. The UK seems to be in the strange position of having to make very real cuts in expenditure to repay debts that are apparently nothing more than accounting devices. The MacKenzie theory of finance as production of fact seems especially relevant here.

    • “…that are apparently nothing more than accounting devices.”

      I don’t have a lot of substance to say in response to this – the IMF SDR are interesting, but outside my expertise. Your comment did remind me of one of my favorite dichotomies in the whole world: the real vs. the financial. I think the above quote falls into a similar space – why does an “accounting device” feel so.. insubstantial, fake, fictional, etc.? Many of the “concrete” things we buy and sell are just as intangible – the right to use a piece of software on a particular computer for a year, for example. As lots of critical accounting research has argued, accounts are one important constitutive piece of our modern world (Hines 1988). Without accounts, we couldn’t have modern corporations for example (see Carruthers and Espeland 1991). And yet there is some resistance to letting finance be just another sort of commerce, another sort of productive activity, and to acknowledging that accounts are not just representations that float on top of economic activity, but messily connected to all sorts of things.

  5. danielbeunza Says:

    Hey Phil — that’s such a fun comment. Paper losses prompting real cuts. I wish you could elaborate or show it a bit more.

  6. Philip Roscoe Says:

    Dan H – you caricature me a little. There’s a full post on its way to draw some of these issues out.

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