Is The United States Going Bankrupt?

Renowned economic historian Niall Ferguson is usually even-keeled with his predictions. That was not the case about a month ago when he warned that the United States could be nearing a sudden collapse:

“I think this is a problem that is going to go live really soon. In that sense, I mean within the next two years. Because the whole thing, fiscally and other ways, is very near the edge of chaos. And we’ve seen already in Greece what happens when the bond market loses faith in your fiscal policy.

…By combating our crisis of private debt with an extraordinary expansion of public debt, we inevitably are going to reduce the resources available for national security in the years ahead. Because as a debt grows, so the interest payments you have to make on it grow, even if interest rates stay low. And on current projections, the federal debt is going to be absorbing around 20 percent — a fifth of all the taxes you pay — within just a few years.

…I’ve just come back from China — a two-week trip there — and the thing I heard most often was, ‘You can’t lecture us about the superiority of your system anymore. We don’t need to learn anything from you about financial institutions and forget about democracy. We see where it has got you.’”

Niall Ferguson: Economic Badass

If the United States goes the way of Greece, there’s no one big enough to bail us out. Ferguson did at least say he thinks the situation isn’t inevitable and I would hesitate to predict a Soviet Union-style collapse. What I do see on the horizon is a long Japanese-like malaise, or very possibly a prolonged 70’s style stagflation and a slow downward spiral of a Britain-esque imperial decline. Unfortunately, I almost hope for that since an all out Rome-like implosion is within the realm of possibility.

And as the West fades and the East ascends, it is worth noting what they are saying about us and our long term outlook. Guan Jianzhong, the chairman of Dagong Global Credit Rating, the largest credit rating agency in China, had the following to say:

“The western rating agencies are politicised and highly ideological and they do not adhere to objective standards. China is the biggest creditor nation in the world and with the rise and national rejuvenation of China we should have our say in how the credit risks of states are judged… The US is insolvent and faces bankruptcy as a pure debtor nation but the rating agencies still give it high rankings. Actually, the huge military expenditure of the US is not created by themselves but comes from borrowed money, which is not sustainable.”

Indeed Professor Ferguson, the former lecturer is getting a nice talking to. Still, we shouldn’t get carried away, even Dagong Global Credit Rating concluded the United States’ debt was the 13th safest investment in the world. But U.S. debt had been considered far and away the safest investment for my entire life and probably everyone else out there reading this blog. And even Moody’s has warned of downgrading the U.S. from a triple-A rating.

The long term outlook is even more problematic. While the $1.5 trillion dollar deficit in 2010 is clearly unsustainable, the $107 trillion in unfunded liabilities puts the United States on even shakier ground. While that number sounds huge, it doesn’t mean anything until you actually break down what kind of growth and tax revenue we’d need to pay for it. Former comptroller general of the GAO, David Walker, estimates it will require over 10% growth from now until the end of time; something that has never happened, will never happen and is little more than a pipe dream.

This all means that the United States will have to raise taxes and cut entitlements (while we’re in the midst of increasing them) during a drawn out recession that very well could linger in a decade-long malaise or disco itself into a decade-long stagflation. Whatever we do (and we have to do something) it will simply compound our economic problems.

Even before the financial crisis shrank tax receipts and national productivity, close analysis showed the United States was on an unsustainable fiscal path. In August of 2006, Laurence Kotlikoff, writing in the Federal Reserve Bank of St. Louis Review came to the conclusion that the United States was, for all intents and purposes, broke.  He did so with a lot of fancy math, using equations such as the following:

Yay for math. Anyways, the conclusion is certainly nothing to laugh at, especially since it preceded the meltdown:

“Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives. It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of U.S. fiscal institutions is essential to secure the nation’s economic future.”

He goes on to recommend privatizing social security while simultaneously installing universal healthcare; a very interesting recommendation likely to garner support from absolutely no one. But the paper is sound and quite disturbing. Take this paragraph, updated and elaborated upon by yours truly:

“The Gokhale and Smetters measure of the fiscal gap is a stunning $65.9 trillion [now around $107 trillion]! This figure is more than five times [seven times] U.S. GDP and almost twice [thrice] the size of national wealth. One way to wrap one’s head around $65.9 trillion 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 [that kind of economy-wrecking increase would actually lower tax receipts, see the Laffer curve]. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits [I'd bet the AARP opposes this option]. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143 percent [a guy can dream can’t he?].”

So are we nearing the end of Pax Americana? Is the sun setting on the American Empire? Have we crossed the Rubicon? While I would like to see our quasi-imperial presence come to an end, I hope we can do so in a peaceful, non-collapsing fashion. Nonetheless, it is unmistakable that the long term fundamentals of our economy look awful.

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15 Comments

  • Scam


    Great post. Why is it that when economies decline people assume it must be because of capitalism and greed, and when economies grow it must be because the state is doing a good job of managing it? The more China opens it’s markets the more prosperous they become, and the more the US tries to manage it’s markets, the worse off we all become. It’s frustrating to see people not able to learn from history and not be able to comprehend current trends. I can’t say that I agree with Niall on a sudden collapse of our economic system. You have to remember that even with Keynesians and socialists controlling government, we do still have a lot of economic freedom in this country, tho it is dwindling. Things are obviously heading in the wrong direction, and it’s hard to see any drastic changes coming in the near future that will brighten the path we are on.

  • Andrew


    It makes sense that in a “capitalist” country, if things go wrong then it’s “capitalism’s” fault (even if we have something much more akin to corporatism). And I guess it seems like the government is helping because they are “giving” money to infrastructure projects, states, workfare programs, the unemployed, etc. It’s simplistic thinking run amok.

    And I agree, I don’t think the U.S. will collapse either… just a long malaise or stagflation. But I can’t say collapse is out of the question.

  • Jimmy


    A

  • Jimmy


    America was built on $20 a barrel oil. Oil is now $80 a barrel. If there is another cantarell situation in one of the major fields and/or china decides to buy up as much capacity as is available, then an all out implosion is quite possible, and is what happens when you do not diversify your energy sources, and allow monopolists to kill off competition. If oil went to $148 again, can anyone afford it?

    The warnings were there, but they have been ignored. No-one cared when things were going the wests way eh? Thats how empires fall.

  • Radical


    What economic system would you replace your current one with that would guarantee that this type of corruption could or would not happen again? IE power corrupts and ultimate power corrupts ultimately. Star Trek speak of a economy that has also been described as a utopian socialist society. The Federation is described as stressing, at least nominally, the values of universal liberty, equality, justice, peace, and cooperation. Non monetary, for money is a form of control. Does this system exist now anywhere? How could we change our current system? Capitalism is not in the constitution so why do we live by it? When we can live by any system we want. In this hypothetical system you could be anything you want for education is free for all and most necessary. I have asked if a perfect system exists? And have never seen one just mixed and modified systems or ways to control the masses. We here in America are ripe for a Dictator and I fear this new kid on the block will come on like a lion offering to abolish mortgages and it will look like manna from heaven and we will jump at it, I believe that is exactly how the spider might trap the fly. I agree that some have been crushing our system our country and have made sure that our factories are stripped on their infrastructure and jobs. This reminds me of post war Germany, and when Hitler jumped up and told the starving Germans “Hey lets get the rich guys” well it was an easy sale right, it worked. How do we fire congress and the senate? They only represent themselves right. How do we redo everything? How do we make sure that we do not repeat this horrible mess? By replacing one system with just another mess that falls apart and is infiltrated by outside sources? The USA is incorporated (inc) and the IMF holds the title, look it up if you do not believe me. They hold all the titles to our national parks, farm land, homes etc this is not made up look into it. If or when it does go down they will collect everything, they are not part of the USA and I feel that if those who we trusted to lead us let them do this well then they committed treason right? Why are they not in jail? This signal is mixed and confusing to say the least. They will make the USA extinct, are you just sitting back and watching it on TV? While they build their castles in safe countries so they have a nice back door when the turd sinks. Wake up people we can not just kick back, well we have been doing that for a while. I could not believe that we just sit back and watched them bail out first the savings and loans (Bush SR) than 800 billion banks and credit cards and then 900 billion Wall street, then billions more GMC etc on and on, Do you not think when the Tax man cometh for you and your children that we wont be slaves? Do you not think that you are a slave now? What do you truly own? This uneducated lack of abilities scares me, spineless sheep you have become. Allowing other to stick their necks out and get them cut off. Stand up and rise to the occasion least you all be ground into dust. It is our children and our children’s children that will pay for your lackadaisical uninvolvement. I really do not get it, do you? If this happened in the 40′s bang they would have a problem, but now have we been so overwhelmed with foreigners that they don’t care they are here for a free ride and ride it till it crashed and find another? Tell me what is it that was a question, why do we sit back and let this happen? Of course the nay sayers will do their best to distract from reality for they can not focus on solutions just pick at reality and offer no answers. Time is the essence in which we burn and we people are on fire. There is no time, why do we wait, we are free to make changes correct? Lets fix everything now, right here the line begins right here.

  • aaron


    The only snowballs chance in hell we have is getting rid of the far reaches of the federal government by electing the right person. I say its Ron Paul in 2012!

    End the Fed!

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  • Canada


    To all Americans, if you do not elect Ron Paul and keep on the same spending path, you will lose everything to China. You all better learn how to plant rice.

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