US government bankrupt!

Bill Bonner - Mon 17 Jul, 2006

..."This partial equilibrium analysis strongly suggests that the US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors"...

 
 
Let’s begin today’s reckoning at the end.

Is the United States of America, asks Laurence J. Kotlikoff, professor of economics at Boston University, "at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors?"

Or, abandoning the Oxford English Dictionary for Ray Charles, are Americans "busted...broke...no bread....I mean like nuthin’?"

Answering his own question in the affirmative, Professor Kotlikoff explains: "This partial equilibrium analysis strongly suggests that the US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds."

US government bankrupt: Probing deeper

We don’t know what a partial equilibrium analysis is. But since it supports our general view, we ask no questions. Instead, we merely probe more deeply into the report for elaboration and amusement.

"Unless the United State moves quickly to fundamentally change and restrain its fiscal behaviour," Kotlikoff continues, "bankruptcy will become a foregone conclusion."

This does not particularly help us. We have no doubt that the nation will be bankrupt. What caught our eye was the assertion that it is already broke. But that, it turns out, depends on what you mean by 'broke.'

"The proper way to consider a country’s solvency," goes on the professor, "is to examine the life-time fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country’s policy will be unsustainable and can constitute or lead to national bankruptcy.

"Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke."

US government bankrupt: 'Fiscal gap'

Among the strongest reasons is a study of the total net 'fiscal gap' that the country faces. This is the present value of the difference between the government’s future income and expenses – calculated using optimistic assumptions and not including any contingent liabilities, such as those that rise with the water level in New Orleans, or with insurgent activity in Iraq. No, these are the basics – interest payments, government operations, social security, and drug money.
The figure, as negative and depressing as our daily reckonings themselves, is $65.9 trillion – or about 500% of the nation’s GDP.

We have reported this number before, more in mischief than despair. Somehow, that gap has to be closed. Otherwise, the feds will have to stop sending out cheques. But what do we care; the government already sends out too many cheques to too many people, in our opinion. Then again, we don’t depend on Social Security or have a safe full of T-bonds.

Besides, there is no chance that the gap will be closed, anyway. Kotlikoff has a sense of humour on this point. He notes that the government would have to cut discretionary expenses by 143%. Or, personal and corporate income taxes could be doubled. Just in case the reader missed the joke, he includes a chart that tells us that people at the upper end of the income scale already pay more than 50% of their incomes in taxes.

Now, a question: which country do you think expanded its health care benefits most over the 32 year period – 1970 to 2002? Sweden, Japan or the US? You probably can guess – America, the land of the free stuff. In fact, in the US public health care benefits grew twice as fast as in Sweden during that period, which is a big part of the reason the US is going broke.

US government bankrupt: Saving the republic

With a problem this big staring them in the face, you might think the custodians of the nation’s financial health would be staying up late at night trying to come up with solutions. If you thought that, you would be an idiot. It is late in the cycle, dear reader. Patriots can no longer save the republic; it no longer exists.

Instead, they spend their time trying to get what they can out of a decaying empire. Paul O’Neill was the first treasury secretary to bother to calculate the 'fiscal gap.' George W. Bush fired him for it and proceeded to sign every spending bill – no matter how preposterous – to come his way. For its part, Congress continues to add to the fiscal gap every day it is in session. Which leads Kotlikoff to conclude:

"The most likely scenario is that the government will start printing money to pay its bills...This could lead to spiralling expectations of higher inflation, with the process eventuating in hyperinflation."

This is not the only reason to buy gold, dear reader, but it is one of them.


Regards,

Bill Bonner
The Daily Reckoning
 

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