Federal Reserve Study: U.S. Going Broke

dollar chain breakingWell, now that oil is going for $78 a barrel, this report isn’t really surprising (via Robot Wisdom):

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”.

It seems not all is lost, if people start voting for someone other than the current crop of fiscally irresponsible bobble-heads:

Paul Ashworth, of Capital Economics, was more sanguine […] “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.”

Or, we’ll just come crashing down really hard with a side-helping of police state crackdowns on everyone who suddenly stops getting a benefits check each month, which seems more likely if you consider the knee-jerk reaction our republicrats tend to have.

Update: In related news, Raw Story caught president George Bush talking out of his ass when he ceremoniously claimed victory over the budget:

The reduction of the budget deficit to $296 billion, touted by President George W. Bush in a White House ceremony yesterday, will be completely reversed by 2007, RAW STORY has learned.

A report in today’s Wall Street Journal shows that by 2007, the budget deficit will rise to $339 billion. The projection was offered by the White House’s own Office of Management and Budget, the source of yesterday’s numbers on deficit reduction.

  1. The United States government has been in default for a number of years. This happened in totality when Nixon closed the gold window. What else is new?

  2. Our government liars, er I mean masters, er I mean servants do this all the time. Whether it’s the jobs reports or other economic statistics, the “good” news in Iraq (e.g. what Bush said after his last trip there), the “news” about the Afghan “democracy” the US is creating, etc. they tell pie in the sky, good news lies that get quietly “revised” later. Of course all the sheeple remember is the original good news lies, not the revisions.

  3. How can the government go bankrupt when it can just print more money to pay for whatever it wants? Of course this will weaken the dollar further and create inflation which is like an additional tax on the productive class. Nonetheless, it seems like a government with the power to create fiat money can just print its way out of debt. Another reason why the parasitical class hates the gold standard.

  4. Leroy beat me to it. The perfesser is using a creative, politically charged — and dead wrong — definition of “bankrupt.”

    So long as the government can increase debt (albeit at ever higher interest rates) or monetize its obligations (albeit at ever higher inflation levels), then a sovereign can never be “bankrupt” in the way you or I or General Motors can.

  5. It’s extremely easy to go broke by issuing debt, because you have to persuade someone to buy the debt to do you any good. As PT Barnum noted, there is only one sucker born every minute, and if you are a government you can run out of them, as several governments around the world have discovered.
    Governments can and do go broke, though at the moment small governments in debt to American banks are often vigorously assisted in wrecking their economies to see that the debts to American banks are paid off.

    Americans old enough to remember history will recall that metallic standard coinage routinely has had as much inflation as paper standard coinage, as demonstrated by the ancient Romans. The government by fiat changed the amount of gold in a denarius, and the currency inflated. The coins continued to be minted, but the government-fixed price of gold was altered.

    Also the real deficit is about $500 billion/year as witness the increase in the national debt.

  6. Fortunately, the LP is no longer the party of debt default. Since we actually talk about real spending cuts we have the potential to be credible on this issue.

    That is, if we hold off on the talks of federal tax cuts until AFTER we have gotten the debt problem under control. Otherwise we simply sound like debt-happy Republicans.

  7. Carl: The Republicans traditionally have libertarian rhetoric on economics when they claim tax cuts stimulate the economy. This is true. But you can’t give away your cake and eat it to, as they’ve been doing.

    Cut taxes back to a minimum level, but tie those tax cuts to fiscal restraint and spending cuts as well. That is the only libertarian way to get us out of this debt hole.

    I’m sure liberals will argue for raising taxes, but I don’t trust them to restrain spending once more money is coming in, so it’s a moot argument IMO.

  8. US Constitution, Amendment XIV, Section. 4.: The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. […]

    That’s right, fellas. This entire conversation is illegal. :)

  9. Stephen: Tax revenues are at an all time high. While I think spending cuts would be great, blaming tax cuts for the problem is a mistake.

    You did note though, that to classify the US as bankrupt, the good professor had to classify future welfare recipients as “creditors”?

  10. Taxes don’t go to pay for spending. That is a common misperception. Our taxes go to pay interest on the debt. We pay those taxes to legitimize the fiat currency system as well as create a demand for said currency.

    We could otherwise just inflate and pay no taxes at all.

    Ultimately as far as the academic definition of bankruptcy goes, yes, we will run out of greater fools. Carry trades are threatening to unwind right now. The reserve status of the dollar is threatened and it’s days are numbered. Foreign nations are looking to diversify their reserves because of all this.

    This is why I disagree with Bill Gross – which is probably a foolish thing to do generally. Interest rates are going to go higher than anyone presently beleives. They have to. There may be some pauses and hiccups between now and “then”, but they will go higher – much higher.

  11. According to the Bureau of the Public Debt (see link below),
    the national debt was $7.932 trillion on September 30, 2005 (the end of the fiscal year). On June 30, 2006, the national debt was $8.420 trillion.

    I have entered these figures into my super-computer and determined that the national debt has increased by $488 billion in just the first 9 months of this fiscal year. The national debt will be about $650 billion by Septemeber 30, 2006, assuming the government will continue to rack up debt at the current rate.

    SEE: http://www.publicdebt.treas.gov/opd/opdpenny.htm

  12. The US already declared bankruptcy, the day President Richard Nixon closed the gold window and the US could no longer honor its debts under the Bretton Woods Accord. Since then the only thing propagating the hegonomy of the US Dollar is the agreement made with the Saudis to price and settle for oil in dollars and get OPEC to go along with this accord (which also gave the U.S. Treasury authority to ‘re-invest’ Saudi oil profits). So long as the USD remains the global reserve currency, America can sell its debt, but as soon as this hegonomy is rejected and oil – the modern monetary standard — is priced and paid for in Euro or Roubles, then the dollar devalues and foreign USD creditors begin to redeem/sell their bond & equity holdings & whatever other collateral has been pledged to back the full faith & credit of the US Government. Meanwhile domestic USD creditors (like the SSA) are left holding worthless Treasury and Federal Reserve notes. A Word to the Wise: Follow the bankers!

  13. It would be nice if Libertarian candidates would use this issue in their campaigns. “We need to bring the troops home from Germany, Korea, Japan etc. because we cannot afford to keep them abroad any more. We need to get rid of corporate welfare because we can’t afford it any more.”

  14. Michael Wilson — that would work well saving only for one thing: The answer the common person would give would simply be: “Well, then, raise taxes!”

  15. IanC I don’t think you give the “common person” enough credit. Besides they don’t all think alike.

  16. Hey, wait a minute here. I’m a common person. I’ve been known to cuss and belch in public, and I won’t think twice about kicking a small dog in the head if it nibbles at my ankles. Because it is Saturday and I’m not going anywhere, I’m even an unwashed common person.

    And I say bring the troops home, cut corporate welfare, and reduce the Pentagon’s budget by 50% – all by next Wednesday, or even Tuesday.

    Michael is right – not all common people think alike. Common politicians are the ones who all think alike. They think common people can’t think.

  17. IanC since us common people are just belching, cussing and farting around let’s play with this for a minute or two. The DoD budget is around $440 billion not including Iraq and Afganistan and of that it is estimated that $100 billion is used to maintain U.S. troops abroad so the cost to you is about $300 annually. With G.M and Ford in trouble and since the concentration of troops out side of the U.S. is mainly in 3 countries that also happen to be our biggest autmotive competitors, Japan (48thousand troops) Korea (38K) and Germany with (80K) don’t you think that with the right approach a Libertarian candidate could sell bringing the troops home?
    And how much have we spent over the years $20 trillion maybe? Ho many kids could have gone to Harvard? How many four bedroom houses could we have built?
    We need to find the angle here that we can sell, of course we also need a candidate to do the selling.
    Whatever, just pass the gas.
    M.H.W. in Vancouver, WA