The U.S. is on a Fast Track to Bankruptcy

In less than a year we have seen the bankruptcy of financial and industrial behemoths once thought impregnable: Lehman Brothers, Chrysler and GM. Selectively employing the mantra "too big to fail" with companies such as AIG and Citigroup, the U.S. government has sought to reassure the American public that it is acceptable for other large corporations to endure the tribulations of Chapter 11 reorganization; that bankruptcy is actually a healthy business process that will restore profitability to big companies overwhelmed by debt and the consequences of the Global Economic Crisis. Yet, amid this Orwellian business vocabulary, the most essential question is perhaps being missed. Will the United States government be forced into bankruptcy?

If your reaction is one of incredulity, with the temptation to write off such a dire mega-financial event as a fringe-group fantasy, think again. Witness what some otherwise boring yet highly respected accountants and bankers have been saying recently about the exploding indebtedness of the United States.

David M. Walker served as the Comptroller-General of the United States from 1998 to 2008. In his capacity as the chief congressional financial watchdog, Walker warned long before the onset of the current financial and economic crisis that the nation faced more than $50 trillion in unfunded obligations due to Medicare and Social Security. Rather than allocating revenue to ensure these future liabilities were fully funded, Congress and the federal government have done exactly the opposite. Not only has no funding provision been made for these two major entitlement programs; while Medicare and Social Security have been in surplus their revenue stream has been used to artificially deflate the actual government deficit. Unfortunately, this shell game will come to an end in only a few years, when both programs enter into extreme and growing deficits of their own. And the figure of $50 trillion in unfunded liabilities, separate and apart from the U.S. government's official national debt of more than $11 trillion, is already outdated by a cascading avalanche of dire financial news.

Richard W. Fisher, President of the Dallas Federal Reserve, delivered a speech to the Commonwealth Club of California back in May, and revealed that the authentic national debt of the United States, using generally accepted accounting principals, was nearly $100 trillion! Putting this surreal as well as apocalyptic number in perspective, Fisher said, "With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four, over 25 times the average household's income."

It is in the context of an already fragile fiscal architecture that the Obama administration and Congress are unleashing a torrent of unprecedented debt. The rationale is that this must be done, or the economy will crater. For the sake of short-term moderation of the worst ravages of the Global Economic Crisis, an already disastrous fiscal posture is being stampeded towards unmitigated catastrophe. Yet, the political leadership still claims it is committed to fiscal responsibility and that once the economy recovers and strong economic growth is restored, the deficit will shrink as a proportion of the nation's GDP. Does anyone still believe these political promises of a new era of fiscal discipline that surely awaits us just around the bend?

There is mounting evidence that America's primary overseas creditors are no longer easily fooled. Their collective skepticism is mounting, as Treasury Secretary Timothy Geithner discovered recently on his beggar's expedition to China. The policymakers in Beijing are shifting their sovereign fund investments from U.S. Treasuries to commodities as a clear indication of their growing concern about the staggering level of indebtedness of the United States. And they are not the only major global financial actors to manifest a growing level of unease at Uncle Sam's ballooning debt.

The Co-Chief Investment Officer at Pacific Investment Management Company, otherwise known as Pimco, is Bill Gross. He is one of the most important individuals on the planet at this time of global crisis, as Pimco manages the world's largest bond fund. It is through the bond market that sovereigns finance their national debt. This is what he had to say about the credibility of the Washington political establishment on its claimed intent to restore fiscal sanity:

While policymakers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery's corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington's hat.

Undoubtedly, Mr. Gross is correct. There is no rabbit to pull out of a magician's hat. Which leaves just three alternatives for resolving America's fiscal imbalance: 1. Raise taxes exorbitantly and/or drastically cut government expenditures 2. Unleash hyperinflation to reduce the real value of the national debt -- and destroy the value of the currency in the process 3. Default on the national debt.

Defaulting on the national debt, which in effect is a declaration of U.S. insolvency, would have tectonic ramifications for the entire global system. Financial and economic power, international relations and strategic alliances would be altered so radically, the world that would ultimately emerge would be vastly different from the one we know today. While its exact composition cannot be predicted, it is a rule of history that great powers that go bankrupt lose their great power status.

Do any members of the Washington political establishment actually reflect on the long-term implications of the untenable fiscal policies they have authorized with their votes? If there are, they are sadly too few in numbers.

Comments

[bohemiangrooves]

PART 2
The biggest misconception revolves around the scary "debt". There is this fallacy that debt is caused when we deficit spend because we had to borrow money to spend. It is the opposite. Defecit spending releases increased demand into the economy. Much of that demand is "consumed" by banks, individuals and foreign governments "buying" U.S. govt. bonds, since these are safe havens for these American dollars. Your debt is the bonds. The debt increases because there is a deficit, not because you had to borrow for a deficit. Paying the bonds or interest owed on them is, again, a simple accounting of the U.S. government making a bank transaction into the bondholders account. Period. Your government doesn't sell bonds to borrow money, it sells them to clear up excess reserves in financial institutions to reduce interbank competition. In short, debt is a government tool to control interest rates. Period. For more on how your government monetary system really works please visit Warren Mosler's site "the center of the universe" and read some of his mandatory readings.

[bohemiangrooves]

wow, where to begin. As an economist (non-conservative and from Canada I will add, lest you think I'm taking sides here) I hate to say it, but this is pure nonsense. I am always amazed at how many American "economists" and "financial giants" fail to understand how their own system works. First off, you have a fiat currency in a sovereign country, which means, barring a tax revolt, you can never go bankrupt or have an "unfunded liability" because you have currency monopoly! So rest easy. I think Filger bows to the common misconception of how things are "funded" in the U.S. (and largely the rest of the world, operating under fiat systems). First off, you should know that your tax dollars don't pay for a single federal expense. When the government wants to spend money, it simply credits the bank account of wherever the money is spent and makes an accounting record of that payment with the treasury. The treasury has "rules" on how much it spends, but these are purely political. Therefore it is impossible to have a program go bankrupt (hence the silliness of the "social security fund debate", much like its possible to keep paying military servicemen without a military trust fund. Taxes, in short, are an aggregate demand tool. The government imposes taxes to make sure there is not too much demand on goods and services with private and govt. funds, thereby causing inflation. Taxes are also used as an incentive mechanism. Period.

[gvc]

If you remove the hyperbole and other leading adjectives, the choices you cite are:

(a) increase taxes
(b) decrease spending
(c) devalue the dollar
(d) default on debt.

I'll argue that the dollar has long been overvalued, by virtue of the financial shell games that have been going on since Reagan's time. The net worth of the U.S. is, quite simply, 20% less than was previously thought. But then, so is most of the rest of the world's net worth, so the (c) option isn't necessarily so bad.

In the long term, revenues and expenditures have to balance. A whole generation have bought into Reagan's "free lunch" economics. Its time to pay the tab, and then to properly budget the ongoing cost of lunch. It is up do Americans if they want to eat bread and water, or to fork over another buck a day for a healthy lunch.

[PINO]

But he plans on pushing his health care reform, come hell or high water. Regardless whether we are out of money
----------­----------­----------­----------­-
In a sobering holiday interview (May 23 2009) with C-SPAN, President obama boldly told Americans: "We are out of money."

C-SPAN host Steve Scully broke from a meek Washington press corps with probing questions for the new president.

SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

obama: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we've made on health care so far. This is a consequence of the crisis that we've seen and in fact our failure to make some good decisions on health care over the last several decades.
----------­----------­----------­----------­-

WE ARE OUT OF MONEY: But let's push through health care anyway. What's another $3-4 Trillion to be added to the deficit.

[FairTalk]

We need to get health care off the backs of business.

And health insurance is not the same as health care.

[powercosmic]

Look there's not going to be any change of course, you know it and I know.

Americans aren't going to give up anything and if asked by Obama they'll bring back the GOP in 2010/2012.

Nope, the fact of the matter is that we are in the pipe 5x5 to go off the cliff no matter how many intelligent people talk about this.

Oil, Cars, and Lobbyists are the doom of civilization and there isn't anything you can do about it now but hunker down and get ready for the SuperStorm thats about to engulf civilization as the world order reorganizes around our grave.

[jsgaetano]

There's no money left- the "Fiscal Conservatives" squandered it all.

[bannorhill]

Obama's defecit this year is four (4) times what the defecit was last year. And that is before health care reform.

[jsgaetano]

Proof?

[TrekBear]

The US government's debt is still far less than 100% of GDP. Even in WW 2, when US debt was slightly over 100% of GDP, we didn't default. There's no danger the US government will default on its opbligations. This is in stark contrast to many European, mainly eastern, countries whose debts are several times their GDPs.

[brianadler]

It's far less that 100% of GDP right now. But there are very few likely scenarios where it doesn't become 150-200% of GDP in the next decade. I love Obama and I am very left leaning in general (socially at least). But the financial crisis we face has only seen it's first (and much smaller) wave.

[bohemiangrooves]

agreed. it is virtually impossible in the Fiat system for the debt to be defaulted on. The only way the government could default on it is if people stopped paying taxes and the US currency became useless, thereby eliminating the existence of the government.

[ThesagaciousOne]

"... and the US currency became useless, ...

Step 1
On 20 Mar 09 the Fed quietly added 1 Trillion dollars to the money supply to accomodate the 800+ Billion dollar stimulus Plan (passed the month before) and the 410 Billion dollar Spending bill (passed on 17 Mar 09).
Before the injection, M3 was equal to $14.2 T. In one day, our currency was inflated by 7.04% (1T / 14.2T), gold rose $26.60 to $942/oz, and the dollar dropped sharply against the Euro and the Yen.

Financial Data:
http://www.nytimes.com/2009/03/19/business/economy/19fed.html?_r=1
http://www.nowandfutures.com/key_stats.html
http://www.portalfornorthamerica.org/spotlight/2009/03/budget-spending-stimulate-economy

[mickslam]

Exactly right. I am a huge fan of Warren Mosler as well and comment there frequently.

We cannot go bankrupt. Sheldon is simply wrong. Under a fiat currency system, it is impossible for a govt to be unable to repay debt.

Also FYI, after WWII debt to GDP was about 250%. We basically blew up two full years of economic growth in America and were still solvent and rich.

As long as we have fools like Sheldon who cannot reconcile accounting and economics, we are going to needlessly suffer.

I had a chat with my mom yesterday. When she was growing up in 1952, there were teenagers who worked for the town who would just show up at the part across the street and do little projects with the kids. No signup required.

We are supposedly 3X richer than we were then, but somehow we are not able to afford this? Why the hell not? I will say becuase our national debt is not high enough to support the demand for savings.

[FearlessFreep]

Of course, during WWII Americans had lots of savings and brought victory bonds to support the government debt. Today savings have been depleted.

[mickslam]

The reason we don't have savings is because there is not enough net currency in circulation. The total amount of dollar savings available is the total amount of the U.S. national debt.

Since China wants to hold lots of our dollars, we do not have much opportunity to save. Want to increase savings? Have the govt spend more.

[TheBurdicks]

Bankruptcy is not inevitable. The money is here, but it is in all the wrong places.
End all wars, bring all troops home, close all foreign military bases, destroy all offensive weaponry, dismantle the 95% of the military, end all military foreign aid, and close the CIA, NSA, and other organizations of covert warfare.
Cease every form of corporate welfare, institute measures to recover some of the hundreds of billions already wasted, and aggressively regulate Wall Street, big finance, and big business.
Nationalize the Federal Reserve and retake control of the Dollar.
Nationalize health care, institute aggressive programs of preventive medicine, and regulate and prohibitively tax every public health threat, including tobacco, alcohol, and decriminalized drugs.
Reform the tax code with steeply progressive income, inheritance, capital gains, and luxury taxes structured to close the outrageous gap between those that have and those that don’t.
Withdraw from NAFTA, CAFTA, all other free trade agreements, IMF, the World Bank, and WTO.
Close the Department of Homeland Security and open the borders with Mexico and Canada.
Close Supermax prisons and release all inmates incarcerated for victimless crime and those who can be successfully rehabilitated.
Ban import of all unsafe and ecologically unsound products, and products produced by exploited workers.
Reform government spending through mandated and carefully audited competitive bidding.
End highway and bridge construction, impose heavy taxation on gasoline, and use the funds to develop national electric rail with American made equipment.

[FortressOrange]

I must admit, I laughed.

[brianadler]

I would love to see all this happen.

[swanlake2004]

I doubt this will ever happen. We are "democrat country" that serve special interest rather than national interest. Our country do not do what make sense but the opposite.

American middle class and lower class are doomed. The only way out is REFORM the government from top to bottom.

[local21]

The only way out of debt for the gov't debt is inflation.

[dsws]

Inflation is not a way out of the debt. Enough of the debt is in short term bills that we have to roll a lot of it over. Even the expectation of inflation would raise the rate we have to pay on that debt. Iiuc we structure the debt that way specifically to provide bondholders with the assurance that we won't try to use inflation as a way of virtually defaulting .

[tomasedison]

Raygun borrowed $4 TRILLION, Papa Bush borrowed another TRILLION, and Junior capped it off bt borrowing $5.8 TRILLION. That totals about $11 TRILLION the sum of all the republican debt run up during the past 30 years. And what did we get ? Tax breaks for the rich and trickle down for everybody else.

[Proletarian101]

So what are you saying, it is a good thing that we have quadrupled deficit spending?

[bannorhill]

That is quadrupled defecite spending in 5 months!!! Without healthcare reform.

[FearlessFreep]

Thank you, Ronald Reagan.

As for the solutions, I support seriously higher taxes. (Though Argentina survived defaulting pretty well, despite the resulting credit squeeze.)

[S1m0n]

Medicare is solvent, according to Krugman, yet neocons constantly yoke it to social security in order to claim that both programs are broke. When you see this, you should recognise that what you're looking at is someone committing the fallacy of lying by statistics.

But nice try.

[pm247]

We now see that global trade is a zero sum game after all. The mercantilists were right. In exchange for millions of lost jobs and trillions in foreign debt, all we have to show are endless mountains of imported, toxic junk.

America must become self-sufficient again. Everything we need can and should be produced right here. Stop globalization or watch America disintegrate.

[darker]

Republicans OUTSOURCED AMERICA.
End of story, financially.

[bobo5]

Young Americans can escape the debt burden by emmigrating to Australia.

[pm247]

They don't want us. Australia is smart enough to tightly control all immigration.

[bobo5]

They like young people with college degrees and experience to fill certain sectors of their economy. Good health and a clean police record are required.

I believe Australia has a merit based system.

If I were a teen again I would be seriously looking for a life raft to escape the USS Argentina.

[zakwouldhave]

We are living in denial. GM was in denial forever. Enron and its investors were in denial. New Orleans was in denial (there were plenty of WeatherChannel and Discovery Channel story's of the future flooding to come), people having kids they can't afford are in denial. And this article is right on....we are in denial concerning our financial state. Our economy needs an overhaul and it will not be painless. Raising taxes on gasoline would be so smart right now for various reasons but even just a few months ago Hillary and McCain were for suspending the gas tax completely!!!! The article mentions cutting defense spending but that has as much chance as a higher gas tax.
Obama is doing great things but he does seem to be in complete denial of the debt situation he inherited and is contributing to. Forget universal health care......how can we afford even Social Security in the future?

[confidance government]

We can't afford social security in the future. As someone in the 20-30 demographic I have realized for a while that I will never see my soc sec contributions.

[bohemiangrooves]

This is not true. As long as the government 'chooses' to pay for social security, you wil have it. There is no such thing as an "unfunded" program, only a poltical impasse to paying it. The social security trust fund is a "scorekeeping" methodology, i.e. when you pay taxes, its not going into this fund (and in fact your federal taxes don't go into "anything" in a fiat monetary system, they are simply knocked off your banks account). The only real danger in your future is that because of conservative policies you may not have the goods and services to purchase at a reasonable rate when you get your social insecurity because of inflationary pressure.

[darker]

Don't fall for believing in SCARE HYPE. Pay attention, use COMMON SENSE.
If we can afford to bail out CORPORATE WELFARE QUEENS and CEOs, then
we can afford universal health care and Social Security now and in the future.

[brianadler]

Agreed!