US 'could be going bankrupt' By Edmund Conway, Economics Editor http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/07/14/cnusa14.xml The United States is heading for bankruptcy, according to an extraordinary paper published by one of the key members of the country's central bank. A ballooning budget deficit and a pensions and welfare timebomb could send the economic superpower into insolvency, according to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, a leading constituent of the US Federal Reserve. Prof Kotlikoff said that, by some measures, the US is already bankrupt. "To paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors," he asked. According to his central analysis, "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''. The budget deficit in the US is not massive. The Bush administration this week cut its forecasts for the fiscal shortfall this year by almost a third, saying it will come in at 2.3pc of gross domestic product. This is smaller than most European countries - including the UK - which have deficits north of 3pc of GDP. Prof Kotlikoff, who teaches at Boston University, says: "The proper way to consider a country's solvency is to examine the lifetime 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." Experts have calculated that the country's long-term "fiscal gap" between all future government spending and all future receipts will widen immensely as the Baby Boomer generation retires, and as the amount the state will have to spend on healthcare and pensions soars. The total fiscal gap could be an almost incomprehensible $65.9 trillion, according to a study by Professors Gokhale and Smetters. The figure is massive because President George W Bush has made major tax cuts in recent years, and because the bill for Medicare, which provides health insurance for the elderly, and Medicaid, which does likewise for the poor, will increase greatly due to demographics. Prof Kotlikoff said: "This figure is more than five times US GDP and almost twice the size of national wealth. One way to wrap one's head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143pc." The scenario has serious implications for the dollar. If investors lose confidence in the US's future, and suspect the country may at some point allow inflation to erode away its debts, they may reduce their holdings of US Treasury bonds. Prof Kotlikoff said: "The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century." Paul Ashworth, of Capital Economics, was more sanguine about the coming retirement of the Baby Boomer generation. "For a start, the expected deterioration in the Federal budget owes more to rising per capita spending on health care than to changing demographics," he said. "This can be contained if the political will is there. Similarly, the expected increase in social security spending can be controlled by reducing the growth rate of benefits. Expecting a fix now is probably asking too much of short-sighted politicians who have no incentives to do so. But a fix, or at least a succession of patches, will come when the problem becomes more pressing."
All the more reason to dump these socialistic government programs. They are a huge drain on the countries resources. We could also start by firing the career politicians who seem to think that the federal government has a bottomless bank account. And don't go blaming Bush for this either, this stuff has been brewing since 1913 when the they passed the income tax ammendment. It didn't get any better when the social security was started or in the 1960's when welfare was started. Anybody care to guess who's idea social security and welfare were? Or how about income tax?
Ok lets pretend that you're right. But the real issue is what have we done lately. The administration has engaged in everything you have described. They have overspent, failed to enforce any fiscal discipline, pass huge government programs like the medicare drug benefit, and all while cutting taxes. Don't put this on past administrations. Classical economics was proven to be bull**** after the great depression. We all learned that laissez-faire economics not only lead to the largest economic inequalities the world had ever seen but also led to massive swings in economic growth and depression that set off all sorts of global problems. The rise of Hitler is in part due to horrendous economic conditions in Germany and Europe at large. While the free market is important, don't pretend that government intervention doesn't have value. Hell you go so far as to suggest income taxes are wrong. So where does the government get money to do even basic things like build an army or officers to enforce the law? Remember before the income tax, the government got most of its money off of customs duties. Of course now with all the free trade acts and the fall of protectionism, that is no longer a source of any sizeable revenue. I'm glad you're at least consistent with your libertarian philosophy but the fact of the matter is that we tried your system for a while and it turned out really really badly.
First I'm not a libertarian so lets clear that up. Second the rise of Hitler had more to do with the country still hurting emotionally over losing the first world war. The fact that he improved the economy only strengthened his position. All the while the propaganda machine was brain washing the minds of the people, kind of like most of todays media...hmmmmm Yes income tax is wrong. Why should I have to pay a tax on my income? Because the government knows how to spend my money better then I do? Please.....we see how well that is working out. Yes the government should get its revenue from import taxes, export taxes, consumption taxes etc. That way people have a choice as to whether they will be penalized or not for spending their money. Saving is not a bad thing either, neither is living on less then you bring in. Most of the stuff the federal government is doing should not be handled by the feds but rather the individual states as it was initially designed. The founding fathers did not want a large central government but rather individual state governments that could more easily be managed by the people living there. Too much government intervention is a bad thing, or have you not studied the constant pendulum of passing regulations on businesses only to have to deregulate everything when things get out of control. Here is an idea, how about educating the general population on more important things like fiscal responsibility and the importance of civics in society rather then who is getting voted off the island next, or how about personal accountability? Instead we are taught that debt is good, the government will take care of us, I deserve better but shouldn't have to work so hard for it, and America is a bad place. Its a funny thing in history, socialistic societies always crumble while capitolistic societies seem to prsoper until the people in power get to greedy and the populations get to caught up in their decadence that they quit paying attention. Bottom line is history is importantand a lot of things in this country were changed out of greed and corruption instead of need. I choose freedom of choice any day over having somebody tell me whats good for me.
By sound financial analysis we are already bankrupt by debt. The US cannot possibly expand the debt enough to pay off the debt. When you are borrowing ever increasing amounts of money to pay off debt you don't win you just prolong the collapse. But we do have the biggest and baddest military in the world and that helps keep your currency a float. Keeping the dollar stable is the key to our current prosperity. It is amazing the value the world places on paper with green ink. Let's see how the Federal Reserve (the Central Banker- in other words the bad guys) allows our bankrupcy to unfold. Will they tighten credit and freak out our foreign debt holders sending the dollar into confusion. That would be very hard to swallow because so many foreign nations are holding dollars and need them to prop up their own central banks. Or will they back off raising interest rates further and hope for that 'soft' crash landing into the ocean of debt. That is also a very poor solution since there are no soft crashes, once the debt begins to crush the private sector it's all over and you basically end up with a few rich people and mostly poor people. If you don't have oil, gas and sound money nobody pays much attention to you- unless of course you can blow them off the map. I vote for cancelling the debt- cancelling the Fed and the IRS and returning the country to sound money backed by gold and silver. Return the manufacturing and industrial base to the shores of the US (along with our troops) and let the bankers and industrialists who have pillaged this nation for 100 yrs. sweat out where their next trillion dollars is going to come from. The next priority would be to understand and begin to make adjustments to the oil/gas crisis. With energy dependency on oil and gas we have to find a way to survive dwindling reserves and find alternative energy that is profitable and determine how to find new reserves without penalty. Keep growing food, we do this better than anyone and feed our people. With sound money, an industrial base and agriculture a nation can rise to economic independence. Providing the people will work and be honest. But again, it is hard to do the right thing when extremely wealthy thieves control the politics.
this is perhaps the single scariest thing in the world today. can you imagine the US Govt defaulting? jesus that would be a freaking worldwide disaster. i get very, very angry on this issue because our government DOES NOT take this issue seriously. instead we are debating gay marriage.... and this is why i am so disgusted with government that i have practically become apolitical. it is sad but the bubble may have to burst for people wake the fk up.
You are never 'bankrupt' if you own the printing press. You can cause hyperinflation but you always have money. I read a story about hyperinflation in Zimbabwe this weekend, if you wanted to buy a beer using coins, the coins would weigh 45 tons but I'm guessing Mugabe is still living large. You are not bankrupt if you have assets with greater value than your debt. The US can sell the interstate system to private investors for a toll roads or possibly sell Alaska to Canada. (just joking but you get the picture) And as the old Texas wildcatter saw goes: Owe the bank a million dollars and the bank owns you, owe the bank a 100 million dollars and you own the bank. With respect to the US's foreign debt, Japan China and Great Britain have more to lose than the US if our debt goes worthless because you can't physically move American assets out of America. Government debt is bad because it causes inflation, commits future assets, bolsters competeing economies and funds competeing ideolgies. If I were a young person in America, this would be my "Viet Nam' issue. You guys are gonna get F*cked.
I am 100% convinced this is what will happen, and why our military is being kept so incredibly well funded. The question is how long can the charade continue?
It is IMPOSSIBLE for US government to go bankrupt because they could monetize debt (print money), only states could go bankrupt. What is the point of this article? Who is he trying to fool? Does he understand economics? Who is he bashing?
this is exactly my thought. they will always have "cash." it may not mean as much, because of inflation... eventually they will get a handle on this problem. there's too much at stake not to.
Good thing this rapture thingy will happen before the default thingy!!! Those of us left behind will then have a fighting chance to straighten this sh*t out.
That is the problem- when you print (today it is actually electronic) money it is worth just the value of the paper and ink plus whatever someone will exchange you for it. If the dollar holds value as a currency, fine somebody will use it as an exchange. But if the debt starts to come home to the tune of a crush on our standard of living, large % of unemployment, and the government cannot easily monetize its debt then you have a national crisis. Bankruptcy is an economic term to indicate that your liabilities exceed your assets and future ability to meet present obligations places you in receivership. In other words you can't pay your bills and you can't pay your debt and you do not have the assets to get by on. A nation rarely goes bankrupt- what happens to a nation like Germany after WWI is that bankers don't want to lend you anymore money because you have no assets or means of paying it back and they won't take your worthless paper currency either. Thus, because of all your government debt your nation no longer can keep up with obligations and either deflation or hyperinflation set in. This is when the bankers begin to take what it theirs and leave your nation looking for re-financing and the national standard of living drops through the floor. Most bankers don't want nations bankrupt, just want to control their economy and transfer the wealth from your pocket into their pocket. It is called central banking. Wealthy people lending literally tons of money to governments who spend it like it grows on trees in hopes that politicians get re-elected and people place their hard earned money into the debt cycle. It is not a doomsday thing at all. Eventually the US must either stop borrowing and pay back or lose the ability to pay. At that point the Great Depression will be remembered by the few who still remember and with hope alot of people will be poor for a while until the bankers can get the nation's debt re-financed and the standard of living adjusted accordingly. If and when the US shows signs of its 'bankruptcy' it will be in the form of a big lowering of the avg. standard of living, super tight credit, high unemployment and basic financial collapse for those who are choking on debt at the moment. This is historical stuff that anyone can study as nations rise and fall. From the Roman Empire forward. (Remember when the sun never set on the British Empire?)
Your reasoning is on target for problems associated with high debt levels and most with agree. However, the title of this thread is not ' US has high debt levels'. It is 'US could be going bankrupt'. I say it's IMPOSSIBLE.
No problem. We can just nationalize everything. Its ok for Chavez et al apparently, so I'm sure he won't mind if we just seize Citgo.
On the brightside, the dollar is so ubiquitous around the world that we could have a sliver of a chance to pretend it's all a bad dream, and the next morning everything will be a-okay with not a mention of debt.... If we get shot down, we'll take the rest of the world with us.
that's one way to look at it, but it goes both ways. i hear that if other countries such as china and saudi arabia can #$% up our economy royally, just by cashing in their u.s. dollars.
Yes, they can. Our relationship with the Saudis is far more complicated than most Americans care to understand, it goes far beyond oil.
Now why would they do that, that would hurt their economy badly, and their society is a lot more unstable. All these countries are so dependent on each other, its in everyone's interest to help US not go bankrupt.
