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liabilities, separate and apart from the U.S. government's official national debt of more than $11 trillion, is already outdated by a cascading avalanche of dire financial news.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.