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 Posted: Tue Dec 19, 2006 2:07 pm Post maybe stupid Post subject: The United States of America is Bankrupt! |
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THE UNITED STATES IS INSOLVENT
by Dr. Chris Martenson
The End of Money
December 17, 2006
Prepare to be shocked.
The US is insolvent. There is simply no way for our national bills to be paid under current levels of taxation and promised benefits. Our federal deficits alone now total more than 400% of GDP.
That is the conclusion of a recent Treasury/OMB report entitled Financial Report of the United States Government that was quietly slipped out on a Friday (12/15/06), deep in the holiday season, with little fanfare. Sometimes I wonder why the Treasury Department doesn’t just pay somebody to come in at 4:30 am Christmas morning to release the report. Additionally, I’ve yet to read a single account of this report in any of the major news media outlets but that is another matter.
But, hey, I understand. A report is this bad requires all the muffling it can get.
In his accompanying statement to the report, David Walker, Comptroller of the US, warmed up his audience by stating that the GAO had found so many significant material deficiencies in the government’s accounting systems that the GAO was “unable to express an opinion†on the financial statements. Ha ha! He really knows how to play an audience!
In accounting parlance, that’s the same as telling your spouse “Our checkbook is such an out of control mess I can’t tell if we’re broke or rich!†The next time you have an unexplained rash of checking withdrawals from that fishing trip with your buddies, just tell her that you are “unable to express an opinion†and see how that flies. Let us know how it goes!
Then Walker went on to deliver the really bad news:
Despite improvement in both the fiscal year 2006 reported net operating cost and the cash-based budget deficit, the U.S. government’s total reported liabilities, net social insurance commitments, and other fiscal exposures continue to grow and now total approximately $50 trillion, representing approximately four times the Nation’s total output (GDP) in fiscal year 2006, up from about $20 trillion, or two times GDP in fiscal year 2000.
As this long-term fiscal imbalance continues to grow, the retirement of the “baby boom†generation is closer to becoming a reality with the first wave of boomers eligible for early retirement under Social Security in 2008.
Given these and other factors, it seems clear that the nation’s current fiscal path is unsustainable and that tough choices by the President and the Congress are necessary in order to address the nation’s large and growing long-term fiscal imbalance.
Wow! I know David Walker’s been vocal lately about his concern over our economic future but it seems almost impossible to ignore the implications of his statements above. From $20 trillion in fiscal exposures in 2000 to over $50 trillion in only six years? What shall we do for an encore…shoot for $100 trillion?
And how about the fact that boomers begin retiring in 2008…that always seemed to be waaaay out in the future. However, beginning January 1st we can start referring to 2008 as ‘next year’ instead of ‘some point in the future too distant to get concerned about now’. Our economic problems need to be classified as growing, imminent, and unsustainable.
And let me clarify something. The $53 trillion shortfall is expressed as a ‘net present value’. That means that in order to make the shortfall disappear we’d have to have that amount of cash in the bank – today - earning interest (the GAO uses 5.7% & 5.8% as the assumed long-term rate of return). I’ll say it again - $53 trillion, in the bank, today. Heck, I don’t even know how much a trillion is let alone fifty-three of ‘em.
And next year we’d have to put even more into this mythical interest bearing account simply because we didn’t collect any interest on money we didn’t put in the bank account this year. For the record, 5.7% on $53 trillion is a bit more than $3 trillion dollars so you can see how the math is working against us here. This means the deficit will swell by at least another $3 trillion plus whatever other shortfalls the government can rack up in the meantime. So call it another $4 trillion as an early guess for next year.
Given how studiously our nation is avoiding this topic both in the major media outlets and during our last election cycle, I sometimes feel as if I live in a small mountain town that has decided to ignore an avalanche that has already let loose above in favor of holding the annual kindergarten ski sale.
The Treasury department soft-pedaled the whole unsustainable gigantic deficit thingy in last year’s report but they have taken a quite different approach this year. From page 10 of the report:
The net social insurance responsibilities scheduled benefits in excess of estimated revenues) indicate that those programs are on an unsustainable fiscal path and difficult choices will be necessary in order to address their large and growing long-term fiscal imbalance.
Delay is costly and choices will be more difficult as the retirement of the ‘baby boom’ gets closer to becoming a reality with the first wave of boomers eligible for retirement under Social Security in 2008
I don’t know how that could be any clearer. The US Treasury department has issued a public report warning that we are on an unsustainable path and that we face difficult choices that will only become more costly the longer we delay.
Perhaps the reason US bonds and the dollar have held up so well is that we are far from alone in our predicament. In a recent article detailing why the UK Pound Sterling may fall, we read this horrifying evidence:
Officially, [UK] public sector net debt stands at £486.7bn. That's equal to US$953.9bn and represents a little under 38% of annual GDP. Add the state's "off balance sheet" debt, however – including its pension promises to state-paid employees – and the total shoots nearly three times higher. Research by the Centre for Policy Studies in London says it would put UK government deficits at a staggering 103% of GDP.
If we perform the same calculations for the US, however, we find that the official debt stands at $8.507 trillion or 65% of (nominal) GDP but when we add in our “off balance sheet†items the national debt stands at $53 trillion or 403% of GDP.
Now that’s horrifying. Staggering. Whatever you wish to call it. More than four hundred percent of GDP(!). And that’s just at the federal level. We could easily make this story a bit more ominous by including state, municipal and corporate shortfalls. But let’s not do that.
Here’s what the federal shortfall means in the simplest terms.
There is no way to ‘grow out of this problem’. What really jumps out is that the US financial position has deteriorated by over $22 trillion in only 4 years and $4.5 trillion in the last 12 months (see table below, from page 10 of the report). The problem did not ‘get better’ as a result of the excellent economic growth over the past 3 years but rather got worse and is apparently accelerating to the downside.
Any economic weakness will only exacerbate the problem. You should be aware that the budgetary assumptions of the US government are for greater than 5% nominal GDP growth through at least 2011. In other words, because no economic weakness is included in the deficit projections below, $53 trillion could be on the low side. Further, none of the long-term costs associated with the Iraq and Afghanistan wars are factored in any of the numbers presented (thought to be upwards of $2 trillion more).
The future will be defined by lowered standards of living. As Lawrence Kotlikoff pointed out in his paper titled “Is the US Bankrupt?†posted to the St. Louis Federal Reserve website, the insolvency of the US will minimally require some combination of lowered entitlement payouts and higher taxes. Both of those represent less money in the taxpayer’s pockets and, last time I checked, less money meant a lower standard of living.
Every government facing this position has opted to “print its way out of troubleâ€. That’s an historical fact and our country shows no indications, unfortunately, of possessing the unique brand of political courage required to take a different route. In the simplest terms this means you & I will face a future of uncomfortably high inflation, possibly hyperinflation if the US dollar loses its reserve currency status somewhere along the way.
Of course, it is impossible to print our way out of this particular pickle because printing money is inflationary and therefore a ‘hidden tax’ on everyone. Consider, what’s the difference between having half of your money directly taken (taxed) by the government and having half of its value disappear due to inflation? Nothing. Except that the former is political suicide while the second is conveniently never discussed by the US financial mainstream press (for some reason) and therefore goes undetected by a majority of people as the thoroughly predictable outcome of deficit spending. All printing can realistically accomplish is the preservation of some DC jobs and the decimation of the middle and lower classes.
In summary, I am wondering how long we can pretend this problem does not exist. How long can we continue to buy stocks and flip houses, forget to save, pile up debt, import Chinese made goods, and export debt? Are these useful activities to perform while there’s an economic avalanche bearing down upon us?
Unfortunately, I am not smart enough to know the answer. I only know that hoping a significant and mounting problem will go away is not a winning strategy.
I know that we, as a nation, owe it to ourselves to have the hard conversation about our financial future sooner rather than later. And I suspect that conversation will have to begin right here, between you and me because I cannot detect even the faintest glimmer that our current crop of leaders can distinguish between urgent and expedient.
What we need is a good, old-fashioned grassroots campaign.
In the meantime, I simply do not know of any way to fully protect oneself against the economic ravages resulting from poorly managed monetary and fiscal institutions. For what it’s worth, I am heavily invested in gold and silver and will remain that way until the aforementioned institutions choose to confront “what is†rather than “what’s expedientâ€. This could be a very long-term investment.
Are you shocked?
All the best.
Chris
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Doc Flabby
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| Posted: Tue Dec 19, 2006 2:24 pm Post maybe stupid Post subject: |
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the minimum wage in uk is £5.35 that is now with the current us exchange rate $10.44. American stuff is starting to look very cheap...
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Bak
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Purge
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| Posted: Tue Dec 19, 2006 5:12 pm Post maybe stupid Post subject: |
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Well, the national debt does rise every second by about $10000.  |
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phong
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| Posted: Tue Dec 19, 2006 5:24 pm Post maybe stupid Post subject: |
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| Old news. |
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Animate Dreams
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| Posted: Tue Dec 19, 2006 11:40 pm Post maybe stupid Post subject: |
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This is why I want to move to Canada. Although once America gets taken over by some other country, I'll probably have to move again. Oh, well. Bush is spending all our cash, and the dollar is going to plummet. 
It makes me want to change my money over to Canadian. Their dollar used to be fairly lower than ours, and now it's almost equal. Even if nothing happens to our dollar, it's probably a good investment. |
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Bak
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| Posted: Wed Dec 20, 2006 4:02 am Post maybe stupid Post subject: |
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| except you can't send it anywhere. You're better off investing in stocks. |
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Quan Chi2
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| Posted: Wed Dec 20, 2006 12:17 pm Post maybe stupid Post subject: |
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See? I blame this stupid war. We were already in debt, but now we are even more in debt because we can't keep our noses out of our own business, and we can't stop bullying everyone else.
I say we blow up Iraq, end the way, keep Saddam in jail if we don't blow those people up, then work on on paying bills and building up our defenses.
Take no prisoners. |
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The Apache
BECAUSE I'M A STUPID IDIOT
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| Posted: Wed Dec 20, 2006 1:05 pm Post maybe stupid Post subject: |
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| Quan Chi2 wrote: | | I say we blow up Iraq, end the way, keep Saddam in jail if we don't blow those people up, then work on on paying bills and building up our defenses. |
and you think none of that of what you mentioned will cost money? |
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Quan Chi2
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| Posted: Wed Dec 20, 2006 1:23 pm Post maybe stupid Post subject: |
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| I never said that, but I think that if we get this war out of the way, then we could spend more time on rebuilding financially. |
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Purge
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| Posted: Wed Dec 20, 2006 3:13 pm Post maybe stupid Post subject: |
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Saddam already got the death penalty.  |
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Doc Flabby
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| Posted: Wed Dec 20, 2006 3:32 pm Post maybe stupid Post subject: |
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war was stupid in the first place
saddam was "our" guy he ran a non-religious state, he was the lid keeping the country under control and keeping the oil flowing...Some people didn't like his methods, but they worked alot better than ours have for controlling the country...It would have been alot cheaper to just to buy saddam out if we wanted a change of regime.
why we invaded iraq i have honestly no idea...I get the feeling it was more about control and distraction of the home population than about keeping us safe...iran would have been a better target for a start...
There is a new world order coming. |
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Quan Chi2
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| Posted: Wed Dec 20, 2006 9:06 pm Post maybe stupid Post subject: |
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| Purge wrote: | | Saddam already got the death penalty. |
He wasn't hung yet... He was sentenced to the death penalty, but he didn't get killed yet. |
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Purge
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| Posted: Wed Dec 20, 2006 10:12 pm Post maybe stupid Post subject: |
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| Yeah... I said he got the penalty. |
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Bak
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| Posted: Wed Dec 20, 2006 10:40 pm Post maybe stupid Post subject: |
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| instead of blowing them up, let's just leave and let them take care of it |
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Animate Dreams
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| Posted: Wed Dec 20, 2006 11:22 pm Post maybe stupid Post subject: |
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| Doc Flabby wrote: | war was stupid in the first place
saddam was "our" guy he ran a non-religious state, he was the lid keeping the country under control and keeping the oil flowing...Some people didn't like his methods, but they worked alot better than ours have for controlling the country...It would have been alot cheaper to just to buy saddam out if we wanted a change of regime.
why we invaded iraq i have honestly no idea...I get the feeling it was more about control and distraction of the home population than about keeping us safe...iran would have been a better target for a start...
There is a new world order coming. |
Well, obviously we invaded because they had Weapons Of Mass Destruction, even though our intelligence said(still says) they didn't. Oh, and North Korea, even though they were waving their Weapons Of Mass Destruction in our face, definitely did NOT have them.
Seriously, how did that ACTUALLY get by enough of the American populous to get voted in AGAIN?! I think anyone who even knows what the news is knows that North Korea is a much bigger threat to us than Iraq ever was, and somehow people believed him anyway. I don't get it at all. |
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The Apache
BECAUSE I'M A STUPID IDIOT
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| Posted: Thu Dec 21, 2006 8:51 am Post maybe stupid Post subject: |
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| Quan Chi2 wrote: | | I never said that, but I think that if we get this war out of the way, then we could spend more time on rebuilding financially. |
how can you rebuild financially when you are still spending money?
| Quan Chi2 wrote: | | I say we blow up Iraq, end the way, keep Saddam in jail if we don't blow those people up, then work on on paying bills and building up our defenses. |
this just backs up what i just said above. you can't rebuild money if you are still determined to spend it. |
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SyrusMX
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| Posted: Thu Dec 21, 2006 8:13 pm Post maybe stupid Post subject: |
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| Animate Dreams wrote: | | Seriously, how did that ACTUALLY get by enough of the American populous to get voted in AGAIN?! |
Think of it this way...even with the war, and horrible info and Bush's Administration, he was STILL a better choice than Kerry.
| AD wrote: | | I think anyone who even knows what the news is knows that North Korea is a much bigger threat to us than Iraq ever was, and somehow people believed him anyway. I don't get it at all. |
I think the main reason for that was because Saddam has been known to do crazy things in the past, like gas his own country-men, invade Kuwait, etc. However, North Korea is a country of asians, and even though asian's can't drive worth a damn, they sure can build stuff. They may only have a missle that they can shoot into the ocean, but how long before they're able to hit us? Not to mention Kim Jung Douchebag probably wouldn't hesitate to sell the technology to someone for the right price. |
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Animate Dreams
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| Posted: Fri Dec 22, 2006 1:02 am Post maybe stupid Post subject: |
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| SyrusMX wrote: | | Think of it this way...even with the war, and horrible info and Bush's Administration, he was STILL a better choice than Kerry. |
I don't know if you haven't heard, but there were actually dozens of candidates. |
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Doc Flabby
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| Posted: Fri Dec 22, 2006 5:32 am Post maybe stupid Post subject: |
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This is going to end up like another vietnam, america should look hard at its previous military campains and learn the lessons from them. You guys seems to have learnt nothing from the vietnam war. Tanks,planes and big guns don't win wars on their own.
You have to defeat your enermy mentally as well as physically to win any war which is something you systematically failed to do. |
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Bak
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| Posted: Fri Dec 22, 2006 9:14 am Post maybe stupid Post subject: |
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| 60,000 US dead in Vietnam vs 3,000 US dead in Iraq... give it 57 more years |
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Doc Flabby
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| Posted: Fri Dec 22, 2006 9:50 am Post maybe stupid Post subject: |
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| Bak wrote: | | 60,000 US dead in Vietnam vs 3,000 US dead in Iraq... give it 57 more years |
You missed the point. US lost in vietnam, they are losing in iraq because they failed to learn the lessons from vietnam. Once again as in vietnam lots of civilians are being killed. Once again there is an active resistance. Once again the war was conducted by polititions and the advice of the American military leadership ignored. They now sending more troops to iraq hoping it will fix things (as in vietnam). What you may not realise is the causlties to US troops were similarly small in vietnam to begin with as they are in iraq. The parellels with vietnam are there... |
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Cyan~Fire
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| Posted: Fri Dec 22, 2006 10:15 am Post maybe stupid Post subject: |
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It's nowhere near as horrible for the US as Vietnam because our military is so amazingly superior to the forces we're fighting. Yes, there's the occasional IED, but put the army in a straight-out fight against terrorists (it happens more than you see on the news) and we own.
The major problem is that we've created a civil war and totally destabilized the country with no end in sight.
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