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Financial Experts Tend to 'Assume What Can Go Wrong, Will Go Wrong,' and Usually Manage Expenses in that Way

• In projecting scenarios, financial experts would note that USA Inc.'s revenue and expenses are highly correlated to economic changes – for example, a 0.1 percentage point slowdown in real GDP annual growth rate could worsen USA Inc.'s F2011-F2020E budget deficit by $288B, or 5% owing to lower tax revenue and higher welfare spending.

F2011-F2020E Impact on USA Inc.'s

Key Economic Variables | CBO Base-Case Assumption | What if... | Revenue ($B / % of Base-Case) | Spending ($B / % of Base-Case) | Deficit ($B / % of Base-Case)
---|---|---|---|---|---
Real GDP Y/Y Growth Rate | 2.1% F2011E 4.4% F2012-14E 2.4% F2015-20E | Real GDP growth rates are 0.1 percentage point lower per year | -$247B (-1%) | +$41B (--%) | -$288B (-5%)
Interest Rates | 4.6% on 3-month T-bills 5.5% on 10-year T-notes | Interest rates are 1 percentage point higher | +$94B (+0.3%) | +$1,214B (+3%) | -$1,120B (-19%)
Inflation | 1.7% | Inflation is 1 percentage point higher | +$2,475B (+7%) | +$3,191B (+7%) | -$715B (-12%)

KPCB www.kpcb.com
Source: CBO, "The Budget and Economic Outlook: Fiscal Years 2010 to 2020," 1/10.
USA Inc. | What Might a Turnaround Expert Consider? 245

Past Performance Does Not Guarantee Future Results – Japan’s Economic Miracle From 1960 to 1990 Rapidly Deteriorated Into the ‘Lost Decades’ of 1990’s & 2000’s

Japan Real GDP Annual Growth Rates, 1960 – 2010

[Chart showing Japan Real GDP Annual Growth Rates (%)]
Inflection Point – Bursting of Real Estate Bubble in 1991

Average Annual Real GDP Growth, Japan vs. USA, 1960’s – 2000’s

| 1960's | 1970's | 1980's | 1990's | 2000's
---|---|---|---|---|---
Japan | 10% | 5% | 4% | 1.5% | 0.7%
USA | 4% | 3% | 3% | 4% | 2%

KPCB www.kpcb.com
Source: World Bank, IMF.
USA Inc. | What Might a Turnaround Expert Consider? 246

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