IS THE USA BANKRUPT?

[David S]

IS THE USA BANKRUPT?
Excerpts from:
http://www.freemarketnews.com/Analysis/28/5662/usa.asp?nid=5662&wid=28
Tuesday, July 18, 2006

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?"
Answering his own question in the affirmative, Professor Kotlikoff explains: "This partial equilibrium analysis strongly suggests that the U.S. 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."
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 behavior," 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 the word '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."
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 occasionally are, is $65.9 trillion – or about 500% of the nation's GDP..
Besides, there is no chance that the gap will be closed, anyway. Kotlikoff has a sense of humor 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 United States? You probably can guess – America, the land of the free stuff. In fact, in the U.S. public health care benefits grew twice as fast as in Sweden during that period, which is a big part of the reason the United States is going broke.
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 U.S. 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 spiraling expectations of higher inflation, with the process eventuating in hyperinflation."

Bill Bonner

 Editor: The Daily Reckoning

[Swing low, sweet chariot. Comin' for to carry me home.]

"...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."

Future recipients of entitlements are the "creditors" of the US?

And this guy is a professor of economics?!

[MODU]

In general, no we aren't.  We can easily pay down (not off) our debt if Congress wanted to. 

[adam]

Well, If I was several trillion dollars in the hole...I would probably file for bankruptcy.

[Swing low, sweet chariot. Comin' for to carry me home.]

Well, If I was several trillion dollars in the hole...I would probably file for bankruptcy.

Not if your income was $11Trillion a year.  Has the debt held publicly even reached 40% of GDP under Bush?

[David S]

In general, no we aren't.  We can easily pay down (not off) our debt if Congress wanted to. 

That's one of his points; there is absolutely no will to pay down the debt. Congress cannot even muster the will to not fund the "bridge to nowhere."

[David S]

Well, If I was several trillion dollars in the hole...I would probably file for bankruptcy.

Not if your income was $11Trillion a year.  Has the debt held publically even reached 40% of GDP under Bush?

He is talking about the government, and government's income from revenues is about $2.3 trillion not $11 trillion. Also the unfunded liabilities for the future adds up to $65 trillion in present value. In other words the present value of the planned expenditures exceeds expected revenues by $65 trillion. The point is that government has no means of raising the necessary funds other than to just print more dollars, which will cause inflation. The question is whether the inflation will be hyperinflation.

[MODU]

In general, no we aren't.  We can easily pay down (not off) our debt if Congress wanted to. 

That's one of his points; there is absolutely no will to pay down the debt. Congress cannot even muster the will to not fund the "bridge to nowhere."

One of the reasons why the President should have the modified line-item veto power to help check the funding power of the Congress.

[adam]

Well, If I was several trillion dollars in the hole...I would probably file for bankruptcy.

Not if your income was $11Trillion a year.  Has the debt held publically even reached 40% of GDP under Bush?

http://www.brillig.com/debt_clock/

[David S]

In general, no we aren't.  We can easily pay down (not off) our debt if Congress wanted to. 

That's one of his points; there is absolutely no will to pay down the debt. Congress cannot even muster the will to not fund the "bridge to nowhere."

One of the reasons why the President should have the modified line-item veto power to help check the funding power of the Congress.

Maybe so, but who will check the funding power of the president?
President Bush's Rx drug plan increases the debt significantly.

[opebo]

Well, If I was several trillion dollars in the hole...I would probably file for bankruptcy.

Not if your income was $11Trillion a year.  Has the debt held publically even reached 40% of GDP under Bush?

The income of the State is not 11 trillion, jmfcst.  A good portion of that income cannot be realized by the State because 1) the working class must have a part of it to subsist, and 2) the owning class (the politically powerful), must have a part of it to enjoy.  The first part is an unfortunate necessity - if the workers all die there is no income.  The second part is of course the entire purpose of the system.

No, the potential income of the State which has incurred the debt is more like, at the very most, at the moment, $3 trillion.

[MODU]

Maybe so, but who will check the funding power of the president?
President Bush's Rx drug plan increases the debt significantly.

At any point, Congress can enact legislation to restructure the plan and reduce its expense.

[Swing low, sweet chariot. Comin' for to carry me home.]

Well, If I was several trillion dollars in the hole...I would probably file for bankruptcy.

Not if your income was $11Trillion a year.  Has the debt held publicly even reached 40% of GDP under Bush?

http://www.brillig.com/debt_clock/

that's NOT the debt held publicly

[Swing low, sweet chariot. Comin' for to carry me home.]

Well, If I was several trillion dollars in the hole...I would probably file for bankruptcy.

Not if your income was $11Trillion a year.  Has the debt held publically even reached 40% of GDP under Bush?

He is talking about the government, and government's income from revenues is about $2.3 trillion not $11 trillion.

We, the American people, ARE the government!  It is OUR debt.  And our GDP is our collateral.

---

Also the unfunded liabilities for the future adds up to $65 trillion in present value. In other words the present value of the planned expenditures exceeds expected revenues by $65 trillion.

So our wish list exceeds our income...that does NOT make us bankrupt!

---

The point is that government has no means of raising the necessary funds other than to just print more dollars, which will cause inflation. The question is whether the inflation will be hyperinflation.

1) we will NOT print more dollars to cover the public debt, we are basically a CASHLESS economy, as is much of industrialized world

2) hyperinflation just isn't possible anymore:  we are the market of last resort, we are basically cashless, and we are the reserve currency

[opebo]

Well, If I was several trillion dollars in the hole...I would probably file for bankruptcy.

Not if your income was $11Trillion a year.  Has the debt held publically even reached 40% of GDP under Bush?

He is talking about the government, and government's income from revenues is about $2.3 trillion not $11 trillion.

We, the American people, ARE the government!  It is OUR debt.  And our GDP is our collateral.

Hah, what a naive misapprehension of your government, jmfcst!

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This 'cashless' thing you're talking about is irrelevant, jmfcst.  Money is the same thing whether it is generated digitally or is actually printed.  Also being 'the market of last resort' has no bearing on inflation, though the importation of goods from slave-labour nations does make inflation more difficult to create.

[Swing low, sweet chariot. Comin' for to carry me home.]

This 'cashless' thing you're talking about is irrelevant, jmfcst.  Money is the same thing whether it is generated digitally or is actually printed.  Also being 'the market of last resort' has no bearing on inflation, though the importation of goods from slave-labour nations does make inflation more difficult to create.

You missed my point:  there is nothing to deflate our currency against.  The US currency is NOT going to plung against other currencies because we are their market.

And they aren't going to print digital money either, talking as though they could shows a lack of understanding of what a floating currency is.

Add to that the fact that our public debt is owed in our own currency, and you end up with almost a zero chance of hyperinflation as long as we are the consumers of world economic output.  Since we are the consumer, we control the price of goods and services.

[Swing low, sweet chariot. Comin' for to carry me home.]

$4.8 Trillion is the current Public Debt, that is the amount we are obligated to repay, U.S's 2005 GDP was $12.49 Trillion, so the public debt represents around 40% of our annual GDP.

In contrast, Japan's public debt, as of 2001, was $6.3 trillion representing 136% of the Japan's 2001 GDP.

http://www.publicdebt.treas.gov/

[opebo]

This 'cashless' thing you're talking about is irrelevant, jmfcst.  Money is the same thing whether it is generated digitally or is actually printed.  Also being 'the market of last resort' has no bearing on inflation, though the importation of goods from slave-labour nations does make inflation more difficult to create.

Add to that the fact that our public debt is owed in our own currency,

Well in fairness, jmfcst, the public debt of all the 'advanced' countries is owed in their own currency.

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This is a good point, and a reason to dread the day - getting closer all too rapidly as they get richer - when the producers don't need us anymore.

[Swing low, sweet chariot. Comin' for to carry me home.]

This is a good point, and a reason to dread the day - getting closer all too rapidly as they get richer - when the producers don't need us anymore.

There is no one to take the place of the US, we are the only demand based economy of reasonable size. 

As far as the producers getting richer, look at Japan.  That is the fate of EVERY producer country (outside of energy or other natural resources), for there is always someone willing to take a lower salary.  Japan was undercut by China, and China will be undercut by someone else.

Japan could have survived if they would have built a demand driven economy to keep things going as they lost market share to lower wage countries. 

[Swing low, sweet chariot. Comin' for to carry me home.]

Well in fairness, jmfcst, the public debt of all the 'advanced' countries is owed in their own currency.

Which is why hyperinflation only hits second and third world countries, first world countries don't owe huge piles of debt in foreign currencies.

[opebo]

This is a good point, and a reason to dread the day - getting closer all too rapidly as they get richer - when the producers don't need us anymore.

There is no one to take the place of the US, we are the only demand based economy of reasonable size. 

As far as the producers getting richer, look at Japan.  That is the fate of EVERY producer country (outside of energy or other natural resources), for there is always someone willing to take a lower salary.  Japan was undercut by China, and China will be undercut by someone else.

Well, presumably there is eventually an end to the 'untapped' workers - isn't that predited by Marx?  Especially in our current situation - a world with a falling birthrate, and soon enough a falling population.

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I hardly think Japan has failed to 'survive' - it is still a high-functioning society whose standard of living is roughly the same as the US, though with much lower crime and other social problems.  True, it is not growing any more, and that is partially attributable to the mistaken focus on 'production' that you point out.  However other factors like its abysmally low birthrate are at work as well.

[minionofmidas]

Well in fairness, jmfcst, the public debt of all the 'advanced' countries is owed in their own currency.

Which is why hyperinflation only hits second and third world countries, first world countries don't owe huge piles of debt in foreign currencies.

Hyperinflation as in, thousands of percent? Yes, true.
But then again, look at the inflation levels Britain had in the 70s and 80s. They weren't exactly hyperinflation, but they weren't exactly desirable either.

[Swing low, sweet chariot. Comin' for to carry me home.]

Hyperinflation as in, thousands of percent? Yes, true.
But then again, look at the inflation levels Britain had in the 70s and 80s. They weren't exactly hyperinflation, but they weren't exactly desirable either.

I think the flow of capital is much more efficient now; suppliers simply can't raise prices without creating a competitor to quickly undercut them.  Also, the risk of spikes in labor costs has basically been removed from the equation. The threat of inflation is now largely limited to commodities (oil, copper, land for development, etc) and lawyers driving up insurance costs. 

[David S]

$4.8 Trillion is the current Public Debt, that is the amount we are obligated to repay, U.S's 2005 GDP was $12.49 Trillion, so the public debt represents around 40% of our annual GDP.

In contrast, Japan's public debt, as of 2001, was $6.3 trillion representing 136% of the Japan's 2001 GDP.

http://www.publicdebt.treas.gov/

Your ignoring the amount stolen, er, borrowed from the SS trust fund. The total debt is $8.4 trillion. Your also ignoring the unfunded future liabilities, $65 trillion.

[opebo]

...and lawyers driving up insurance costs. 

Hah, what an off the wall, but typically right-wing comment.  Of course what drives up insurance costs in reality is the injuries done by the insured to their victims.