Free Markets, Free People

Is the US bankrupt?

A good number of voices are beginning to say that technically, if not in fact, the country is bankrupt.

For instance:

America is a "Mickey Mouse economy" that is technically bankrupt, according to Jochen Wermuth, the Chief Investment Officer (CIO) and managing partner at Wermuth Asset Management.

"America today looks like Russia in 1998. Consumers, companies and the government are all highly indebted. America as a result is a bankrupt Mickey Mouse economy," Wermuth told CNBC.

Wermuth goes on to say that if the same IMF team that managed the 1998 Russian financial crisis in Russia were to walk into the US Treasury today, “they would withdraw support for current US policy”.

And don’t forget Mort Zuckerman who called the present policies our “economic Katrina”.

But as bad as present policies are, they aren’t solely the reason we’re in the awful economic shape we’re in.  We have a history of that.

"Even before the (Troubled Asset Relief Program) and the expansion of the Fed’s balance sheet, total US public and private debt as a percentage of GDP in the US stood at 290 percent, that figure is now far higher," Wermuth added.

Laurence Kotlikof explains it in terms of a “fiscal gap”. 

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

The IMF pointed out in its last report that the US must close this fiscal gap to “stabilize the debt to GDP ratio”.  The IMF estimates ““closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

So what does that mean in dollars?

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Note the two words – “immediate” and “permanent”.  In order to pay off the huge debt our “betters” in Washington DC have run up over the years, strictly from the revenue side, our taxes would have to see an “immediate” and “permanent” doubling.

Sounds like bankruptcy to me.

Kotlikof also tells us about the shady book keeping Congress has been engaged in for decades and what the books probably really look like:

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

But of course, “official” or “unofficial” it is still debt.  Whether Congress will admit to it doesn’t change the fact that it is future debt that Congress has incurred through its profligate policies.

And what’s going to bring this all crashing down, despite the smooth and reassuring words of politicians without a clue?  Promises made with no fiscal ability to keep them because, in reality, they’re Ponzi schemes:

We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

Got that – government promised $4 trillion a year that it doesn’t have and never has had.  And, thanks to Congressional Democrats, it just expanded that bill under ObamaCare.  The system, much like an engine running at hight RPMs with no oil, is going to stop and stop abruptly:

The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

The result of any of those, of course, would be economically catastrophic.  And the results among the citizens of this country would be horrible:

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

For years and years, politicians have claimed all is well with these programs, that we can afford them and that they’ll always be there for those who need them.  None of the above is or has been true since their inception.  If any private business operated as these programs have, the CEOs would be under the jail and wouldn’t see daylight until our sun exploded.

For years, the left and Democrats have made war on corporations and businesses all the while it has been government leading us to financial ruin.  This debt isn’t debt run up by the private side of the economy.  It is purely government’s doing.  Now, given the gravity of the situation, we have very few options and the future does not look bright.

Next time you see your Congressional representative or Senator, thank him or her for the mess they’ve had a hand in creating and ask them how they are going to fix it.  Don’t be surprised by the blank stare you receive in return.  They haven’t a clue.



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30 Responses to Is the US bankrupt?

  • First thing, throw off this Marxist revolution, every bit of it. ObamaCare should go down the toilet, every single part of it. Throw it all out.

    In it’s place do about one thing: Create a national free market in health insurance.

    Then rip the wires of the entitlement state clean out. There has to be a cut-off point for people who will expect it, and a grand buy-out. After that, everything private, nothing mandatory.

    Obama didn’t happen overnight. He is merely the scavenger who shows up when the bones are ripe for picking and he has picked them almost clean. But this has been 50-60 years in the making.

    But the federal government is not the only problem. The states are grotesque messes as well. They are being held hostage by the motorcycle gangs known as public employee unions. Deal with those creeps and you’re halfway home.

    And just get off this public education beast. It’s ruining generations before they’re even born. Now is the time to move to another paradigm. Like yesterday.

    And the regulatory state, federal and state. Take a bloody axe to it.

    But this is the problem with a democracy in an advanced state of self-destruction. It cannot correct itself. It’s like a glass of water is waiting for a man dying of thirst but he cannot reach for it.

    Not with a bang, but with a whimper.

    • I think you’re putting the cart before the horse.
      The one thing that Obama has done well, although I’m sure he doesn’t want credit for it, is to part the curtain that hides the underlying problems from the “ignorance is bliss” public.  Unfortunately, while the Tea Partiers have gotten the message, the rest of the country is still living under the “ignorance is bliss” cloud.
      This has got to be laid bare before any of what you lay out can even be put on the table.
      Cristie has done much of this in New Jersey, but I’m sure before long the clock on the short attention spans of the public will run out, and the political opportunists start their demagoguery..

    • It can correct itself. See Canada, Sweden, Netherlands, New Zealand, etc. Once you get into serious trouble, all  of a sudden the bloody axe appears viable.

    • Relax my friend. When all the dominoes have fallen, Rothschild’s and Friends will be there to pick-up the pieces and tell us what to do.

      D0n’t worry. Be happy.

  • Are we bankrupt as a nation?  Yeah.
    Are several of our states also bankrupt?  Yeah.  Several are not, but all suffer from decades of crap imposed by DC.
    Several things Martin says are true, but not his dark conclusion.  He’s such an Eeyore.

    • I don’t see a politically feasable way out of this. Many of the town hall protestors were in fact seniors trying to protect their Medicare. I don’t see any room for reform.

      Democrats will block reform. It’s what they do.

      Republicans will chicken out.

      Libertarians will get wrapped around the axle of ferret rights or such.

      The American people will oppose Obama, but they won’t support efforts at serious reform of things like Medicare and SS.

      • I think you’re right, and it’s the biggest problem of all.  Any time a politician even hints at change in SS or Medicare, the torches and pitchforks come out.  I’ve pointed to the situation in Greece before.  They were hanging on the edge of a cliff by their fingertips, and when they agreed to spending cuts in order for the EU to step in and help stabilize their economy, people rioted.  They rioted!  They rioted in protest over changes for which the only other option was FAR WORSE!
        Everyone wants the economy to be ‘fixed.’  No one wants to be asked to suffer.  We want our entitlements and our welfare and our government jobs with their union benefits.  But when the governor warns us about looming deficits and cuts in service required to deal with them, they are viciously attacked.  Because most people still think that there is a free ride, and they will absolutely not life their faces from the trough, even when it is about to run dry.  We won’t fix anything until the whole damn structure comes down around us.

        • The MSM helps this. They don’t explain there is no money and its mainly the right who comes out to mention SS or Medicare reform. Remember what they did to Bush?
          I suspect we will have a Democrat Chris Christie eventually appear who the MSM will reluctantly support when finally we can borrow no more. Isn’t this what happened in Canada? Or, maybe the MSM will die off or reluctantly support a GOP reformer, as long as they are OK with gay marriage. (sarcasm)

      • People can learn.  We all will have to sort of “volunteer” to face some risk to our future “entitlements”.  I have no intention to apply for SS.  That is a small thing I will leave for my progeny.
        Some, of course, will not.  Some of us will have to also work actively to assure people who actually need help they will get it.  We have a great history of doing that kind of thing in America, before Uncle Sugar preempted that function.  Private charity is a prove, viable means of helping those who really need it.  That group will be relatively small if we can return to a market economy.

    • I suggest the state refuse to execute on any mandates that they don’t want to.
      I really want to see a federal judge take over a state … there would be revolution.

    • Several things Martin says are true, but not his dark conclusion.  He’s such an Eeyore.
      You and I agree on something, Rags.  You’re right – McPhillips is an ass. 😉

  • Generally agree. But there are two sides to every ledger. We have liabilities, but also assets. I think our situation is more like someone who owns a large amount of illiquid assets. In the sense that it would take a great deal of time and effort to convert those assets to cash. Prudent management of those assets, such as leasing federal land for oil exploration, can produce large long term cash flows. We suffer from a toxic combination of imprudent political leaders and abysmal federal management of our assets. I single out oil leases as just one example because it is the most obvious. There are many others. We stretch the limited management and financial resources of the Park Service by adding to the amount of sites and acreage, while keeping the fees for entrance far below the cost of maintaining the enterprises. That might be good public policy, but it’s terrible management. We subsidize Amtrak and the Postal Service with of billions of dollars in the name of “public service”. Again, maybe it’s good public policy, but poor financial management. The list of examples is not nearly exhausted.
    How do we deal with Social Security and Medicare? Begin with the end in mind. If the objective is to limit their impact on budgets in the mid and long term, then the solutions (there will be more than one) must meet that test. We need more approaches like the one offered by Paul Ryan. A comprehensive set of solutions. It’s going to be a long struggle, but maybe the prospect of near certain death will concentrate enough minds.

    • Oil leases. I like that, but the Dims are still pushing for crap and tax and green energy.

      We have a long way to go to turn this around.

    • This what Chapter 11 of the bankruptcy law is all about, reorganizing after a “cash flow” problem, not total insolvency.

  • By the way, the only solution I see for this problem in the short term ..
    after some meager efforts to trim costs, there will be an across the board cut in every thing, with no exemptions.

    • Here’s an idea for scaring up revenue in lieu of a carbon tax: Let’s stop paying organizations millions of dollars to “prove” anthropogenic global warming. The only practical purpose of such research is to tell us we need alternatives to fossil fuel. Let’s put our money toward developing those alternatives, as well as making existing technologies cleaner and greener. While we wait for the revolution, we may as well produce something more useful than collective guilt.

      • You miss the point of the Red Green activism behind trying to convince people to believe in catastrophic anthropogenic global warming.  It isn’t to convince people to find solutions to cut greenhouse gases so much as it is to scare people enough that they willingly try to trade their freedom (and that of their “non-green” neighbors)  for safety.  As the old adage goes, people who vote pro-green will end up with neither freedom nor safety.
        The Red Green proponents want the power that comes from scared people trying to buy safety by offering up freedom.  It gives them massive control over every aspect of the economy, making the percentage of the economy devoted to medical costs seem like chump change.
        The Green agenda is the socialist agenda, with a few editorial changes here and there.  They don’t want practical solutions.  They want fear and panic.

      • Also, these “alternative fuels” are mostly crap.  Nuclear power would solve a lot of problems.  But so would opening up shallow waters and locations on land to oil drilling.  Yes, there would still be CO2 emissions, but there would be less dependence on foreign sources.
        Wind and solar energy are unreliable and extremely expensive.  They can’t pay for themselves, but require government subsidies.  Their proponents ask us to have faith that someone smart will eventually make fantastic technological advances to make them efficient, eventually, if we just keep spending billions on them.
        If Spain is any indication, the chances are that all of the government “investment” of taxpayer money and incentives for “green jobs” and “green energy” will continue to be a big money pit.

        • Oil is going to be over $100 a barrel permanently in a few years, even with massive off shore exploration we’re simply running out.   We’re in the process of moving to geothermal and solar to simply get off oil for heating and hot water.  Nuclear energy can provide some assistance, but the fuel for that is also limited.   Solar, geothermal and wind technology is increasing at  a fast pace, and though the Volt is ridiculed, for a first generation new technology, it’s making strides.  The oil era began in 1901 and is fading.  We had a century of cheap energy which allowed easy prosperity.    If the US moves ahead in alternate fuel technology, that could bring a new boom.   The oil era is fading, be wise enough to be prepared for rapidly increasing prices, especially if the world economy picks up pace.

          • Wrong on virtually all counts.

          • even with massive off shore exploration we’re simply running out.

            There are vast amounts of oil in areas where oil companies are blocked, by US law, from drilling.  Predictions for decades that the oil supply was nearing a crisis point have proved to be false.

            Nuclear energy can provide some assistance, but the fuel for that is also limited.

            In the US, how many new nuclear power facilities have been built in the past 30 years?  The fact that localities are afraid to allow these plants to be built near them is the biggest blockade.

            Solar, geothermal and wind technology is increasing at  a fast pace…

            Can you quantify this?  How many more decades before they reach the break-even point for replacing carbon-fueled power plants?
            The amount of money spent on them is a product of government subsidy.  If Spain is any indication, the “green jobs” and “green energy” government programs are nothing but a big money pit, which have resulted in the loss of many real jobs.

            If the US moves ahead in alternate fuel technology, that could bring a new boom.

            And, if researchers discover cures for cancer and HIV, that will make this world all sunshine and bunnies!
            There are a few promising areas for alternative fuel technologies, which may pay off in a decade or two, and if I were in the energy business, I’d look at the ones which had the potential to return a profit on investment.  But a lot of this “green” stuff is just feel good symbolism.

          • “but the fuel for that is also limited.”

            If it is, it is only because your hero Jimmy C. outlawed breeder reactors.

  • We should be so lucky as to have a “Mickey Mouse” economy.  Last I checked, Disneyland was doing great business in spite of the recession.  “Toy Story 3” was a big success.  Third quarter earnings exceeded expectations.  There’s something to tightening your belt and focusing on what works while investing in long-term infrastructure.
    Bob Iger for president!

  • This country use to be about making money.  Now all sides are fixated on either money that someone else is getting or has or wants that they feel they don’t deserve. 

    We need to make room to start caring about how we all can make more money to fit along side the infighting of how we should or shouldn’t divvy it up.  Otherwise we’re just jockeying for a better cabin on the Titanic. 

  • The US is in recession with very high debt.   Meanwhile, the more heavily taxed, regulated countries in Europe with more advanced social welfare systems are chugging ahead, despite the Greek crisis.  I suspect those predicting gloom and doom for the Euro and the EU will be eating their words.

    • I don’t think your link says what you think it does.  Try here for a far broader perspective.
      Heroin always feels great until you stop shooting it.

  • The comments have moved from the Fed to the economy.  By design, the latter tracks the former plus DC policy.  The Fed is the primary culprit — meaning the monetary system — aided by DC.  More correctly, the nature of our money, in combination with decades of jacked up policy, is what doomed the economy nearly a hundred years ago, thanks to the progressive Wilson.
    You can’t run an inherently unstable, debt-as-money system on a parabolic curve indefinitely.  Every fiat-reserve system has failed.  Ours is failing now.  The question is how, when, and what’s left standing.
    The fourth comment had it.  There’s nothing the lever-pullers can’t ruin the lever pullers can’t then fully absorb.