From the archive, originally posted by: [ spectre ]
FROM ST. LOUIS FEDERAL RESERVE WEBSITE
The United States is Insolvent
December 17th, 2006
“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
combined federal deficits 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
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 dreadful 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.
1) 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
US net SS positions
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 any of the deficit
projections presented, $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).
2) 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.
3) Every government facing this position has opted to “print its way
out of trouble”. 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 latter 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?”
Dr. Chris Martenson
Bernardston, MA USA
martenson [at] drmss [dot] com
GAO Chief Warns Economic Disaster Looms
Saturday October 28
By Matt Crenson, AP National Writer
GAO Chief Takes to Road, Warns Economic Disaster Looms Even As Many
Candidates Avoid Issue
AUSTIN, Texas (AP) — David M. Walker sure talks like he’s running for
office. “This is about the future of our country, our kids and
grandkids,” the comptroller general of the United States warns a packed
hall at Austin’s historic Driskill Hotel. “We the people have to rise
up to make sure things get changed.”
But Walker doesn’t want, or need, your vote this November. He already
has a job as head of the Government Accountability Office, an
investigative arm of Congress that audits and evaluates the performance
of the federal government.
Basically, that makes Walker the nation’s accountant-in-chief. And the
accountant-in-chief’s professional opinion is that the American public
needs to tell Washington it’s time to steer the nation off the path to
From the hustings and the airwaves this campaign season, America’s
political class can be heard debating Capitol Hill sex scandals, the
wisdom of the war in Iraq and which party is tougher on terror.
Democrats and Republicans talk of cutting taxes to make life easier for
the American people.
What they don’t talk about is a dirty little secret everyone in
Washington knows, or at least should. The vast majority of economists
and budget analysts agree: The ship of state is on a disastrous course,
and will founder on the reefs of economic disaster if nothing is done
to correct it.
There’s a good reason politicians don’t like to talk about the nation’s
long-term fiscal prospects. The subject is short on political theatrics
and long on complicated economics, scary graphs and very big numbers.
It reveals serious problems and offers no easy solutions. Anybody who
wanted to deal with it seriously would have to talk about raising taxes
and cutting benefits, nasty nostrums that might doom any candidate who
“There’s no sexiness to it,” laments Leita Hart-Fanta, an accountant
who has just heard Walker’s pitch. She suggests recruiting a trusted
celebrity — maybe Oprah — to sell fiscal responsibility to the
Walker doesn’t want to make balancing the federal government’s books
sexy — he just wants to make it politically palatable. He has
committed to touring the nation through the 2008 elections, talking to
anybody who will listen about the fiscal black hole Washington has dug
itself, the “demographic tsunami” that will come when the baby boom
generation begins retiring and the recklessness of borrowing money from
foreign lenders to pay for the operation of the U.S. government.
“He can speak forthrightly and independently because his job is not in
jeopardy if he tells the truth,” said Isabel V. Sawhill, a senior
fellow in economic studies at the Brookings Institution.
Walker can talk in public about the nation’s impending fiscal crisis
because he has one of the most secure jobs in Washington. As
comptroller general of the United States — basically, the government’s
chief accountant — he is serving a 15-year term that runs through
This year Walker has spoken to the Union League Club of Chicago and the
Rotary Club of Atlanta, the Sons of the American Revolution and the
World Future Society. But the backbone of his campaign has been the
Fiscal Wake-up Tour, a traveling roadshow of economists and budget
analysts who share Walker’s concern for the nation’s budgetary future.
“You can’t solve a problem until the majority of the people believe you
have a problem that needs to be solved,” Walker says.
Polls suggest that Americans have only a vague sense of their
government’s long-term fiscal prospects. When pollsters ask Americans
to name the most important problem facing America today — as a CBS
News/New York Times poll of 1,131 Americans did in September — issues
such as the war in Iraq, terrorism, jobs and the economy are most
frequently mentioned. The deficit doesn’t even crack the top 10.
Yet on the rare occasions that pollsters ask directly about the
deficit, at least some people appear to recognize it as a problem. In a
survey of 807 Americans last year by the Pew Center for the People and
the Press, 42 percent of respondents said reducing the deficit should
be a top priority; another 38 percent said it was important but a lower
So the majority of the public appears to agree with Walker that the
deficit is a serious problem, but only when they’re made to think about
it. Walker’s challenge is to get people not just to think about it, but
to pressure politicians to make the hard choices that are needed to
keep the situation from spiraling out of control.
To show that the looming fiscal crisis is not a partisan issue, he
brings along economists and budget analysts from across the political
spectrum. In Austin, he’s accompanied by Diane Lim Rogers, a liberal
economist from the Brookings Institution, and Alison Acosta Fraser,
director of the Roe Institute for Economic Policy Studies at the
Heritage Foundation, a conservative think tank.
“We all agree on what the choices are and what the numbers are,” Fraser
Their basic message is this: If the United States government conducts
business as usual over the next few decades, a national debt that is
already $8.5 trillion could reach $46 trillion or more, adjusted for
inflation. That’s almost as much as the total net worth of every person
in America — Bill Gates, Warren Buffett and those Google guys
A hole that big could paralyze the U.S. economy; according to some
projections, just the interest payments on a debt that big would be as
much as all the taxes the government collects today.
And every year that nothing is done about it, Walker says, the problem
grows by $2 trillion to $3 trillion.
People who remember Ross Perot’s rants in the 1992 presidential
election may think of the federal debt as a problem of the past. But it
never really went away after Perot made it an issue, it only took a
breather. The federal government actually produced a surplus for a few
years during the 1990s, thanks to a booming economy and fiscal
restraint imposed by laws that were passed early in the decade. And
though the federal debt has grown in dollar terms since 2001, it hasn’t
grown dramatically relative to the size of the economy.
But that’s about to change, thanks to the country’s three big
entitlement programs — Social Security, Medicaid and especially
Medicare. Medicaid and Medicare have grown progressively more expensive
as the cost of health care has dramatically outpaced inflation over the
past 30 years, a trend that is expected to continue for at least
another decade or two.
And with the first baby boomers becoming eligible for Social Security
in 2008 and for Medicare in 2011, the expenses of those two programs
are about to increase dramatically due to demographic pressures. People
are also living longer, which makes any program that provides benefits
to retirees more expensive.
Medicare already costs four times as much as it did in 1970, measured
as a percentage of the nation’s gross domestic product. It currently
comprises 13 percent of federal spending; by 2030, the Congressional
Budget Office projects it will consume nearly a quarter of the budget.
Economists Jagadeesh Gokhale of the American Enterprise Institute and
Kent Smetters of the University of Pennsylvania have an even scarier
way of looking at Medicare. Their method calculates the program’s
long-term fiscal shortfall — the annual difference between its
dedicated revenues and costs — over time.
By 2030 they calculate Medicare will be about $5 trillion in the hole,
measured in 2004 dollars. By 2080, the fiscal imbalance will have risen
to $25 trillion. And when you project the gap out to an infinite time
horizon, it reaches $60 trillion.
Medicare so dominates the nation’s fiscal future that some economists
believe health care reform, rather than budget measures, is the best
way to attack the problem.
“Obviously health care is a mess,” says Dean Baker, a liberal economist
at the Center for Economic and Policy Research, a Washington think
tank. “No one’s been willing to touch it, but that’s what I see as
front and center.”
Social Security is a much less serious problem. The program currently
pays for itself with a 12.4 percent payroll tax, and even produces a
surplus that the government raids every year to pay other bills. But
Social Security will begin to run deficits during the next century, and
ultimately would need an infusion of $8 trillion if the government
planned to keep its promises to every beneficiary.
Calculations by Boston University economist Lawrence Kotlikoff indicate
that closing those gaps — $8 trillion for Social Security, many times
that for Medicare — and paying off the existing deficit would require
either an immediate doubling of personal and corporate income taxes, a
two-thirds cut in Social Security and Medicare benefits, or some
combination of the two.
Why is America so fiscally unprepared for the next century? Like many
of its citizens, the United States has spent the last few years racking
up debt instead of saving for the future. Foreign lenders — primarily
the central banks of China, Japan and other big U.S. trading partners
— have been eager to lend the government money at low interest rates,
making the current $8.5-trillion deficit about as painful as a big
balance on a zero-percent credit card.
In her part of the fiscal wake-up tour presentation, Rogers tries to
explain why that’s a bad thing. For one thing, even when rates are low
a bigger deficit means a greater portion of each tax dollar goes to
interest payments rather than useful programs. And because foreigners
now hold so much of the federal government’s debt, those interest
payments increasingly go overseas rather than to U.S. investors.
More serious is the possibility that foreign lenders might lose their
enthusiasm for lending money to the United States. Because treasury
bills are sold at auction, that would mean paying higher interest rates
in the future. And it wouldn’t just be the government’s problem. All
interest rates would rise, making mortgages, car payments and student
loans costlier, too.
A modest rise in interest rates wouldn’t necessarily be a bad thing,
Rogers said. America’s consumers have as much of a borrowing problem as
their government does, so higher rates could moderate overconsumption
and encourage consumer saving. But a big jump in interest rates could
cause economic catastrophe. Some economists even predict the government
would resort to printing money to pay off its debt, a risky strategy
that could lead to runaway inflation.
Macroeconomic meltdown is probably preventable, says Anjan Thakor, a
professor of finance at Washington University in St. Louis. But to keep
it at bay, he said, the government is essentially going to have to
renegotiate some of the promises it has made to its citizens, probably
by some combination of tax increases and benefit cuts.
But there’s no way to avoid what Rogers considers the worst result of
racking up a big deficit — the outrage of making our children and
grandchildren repay the debts of their elders.
“It’s an unfair burden for future generations,” she says.
You’d think young people would be riled up over this issue, since
they’re the ones who will foot the bill when they’re out in the working
world. But students take more interest in issues like the Iraq war and
gay marriage than the federal government’s finances, says Emma Vernon,
a member of the University of Texas Young Democrats.
“It’s not something that can fire people up,” she says.
The current political climate doesn’t help. Washington tends to keep
its fiscal house in better order when one party controls Congress and
the other is in the White House, says Sawhill.
“It’s kind of a paradoxical result. Your commonsense logic would tell
you if one party is in control of everything they should be able to
take action,” Sawhill says.
But the last six years of Republican rule have produced tax cuts,
record spending increases and a Medicare prescription drug plan that
has been widely criticized as fiscally unsound. When President Clinton
faced a Republican Congress during the 1990s, spending limits and other
legislative tools helped produce a surplus.
So maybe a solution is at hand.
“We’re likely to have at least partially divided government again,”
Sawhill said, referring to predictions that the Democrats will capture
the House, and possibly the Senate, in next month’s elections.
But Walker isn’t optimistic that the government will be able to tackle
its fiscal challenges so soon.
U.A.E. to sell dollars for euros
By Matthew Brown Bloomberg News
Published: December 27, 2006
ABU DHABI: The United Arab Emirates plans to convert 8 percent of its
foreign-exchange reserves to euros from dollars before September, the
latest sign of growing global disaffection with the weakening U.S.
The U.A.E. has started, “in a limited way,” to sell part of its dollar
reserves, the governor of the country’s central bank, Sultan Bin Nasser
al-Suwaidi, said in an interview. “We will accumulate euros each time
the market appears to dip” as part of a plan to expand the country’s
holding of euros to 10 percent of the total from the current 2 percent.
The Gulf state is among oil producers, including Iran, Venezuela and
Indonesia, looking to shift their currency reserves into euros or sell
their oil, which is now priced in dollars, for euros. The total value
of the reserves held by the U.A.E. is $24.9 billion, Suwaidi said.
The dollar has fallen more than 10 percent this year against the euro.
Part of the reason for the decline is the outlook for slower U.S.
growth, which makes the dollar a less attractive investment.
But fears that the dollar’s level is unsustainable because of the heavy
indebtedness of the United States to other countries is also behind the
weakness this year, analysts said.
The shift to euros underscores its growing role as a reserve currency
nearly eight years after its establishment. Central banks often keep
the details about their currency holdings a secret.
The move by the U.A.E. central bank “is hard evidence that
diversification is happening,” said Shaun Osborne, chief currency
strategist at TD Securities in Toronto. “This is negative for the
dollar in a broad sense as it reflects falling confidence in the
Central banks in Russia, Switzerland and New Zealand are also
diversifying away from the dollar and into yen after the Japanese
currency reached a 10- month low against its biggest trading partners
Gulf Arab energy producers will earn as much as $500 billion from oil
sales this year, the International Monetary Fund forecasts. The
region’s central bank reserves represent a fraction of the currency
holdings of state-owned investment firms like the Abu Dhabi Investment
Authority, which is estimated to have more than $500 billion under
But the signal that such a move sends to financial markets is a
“It is a recognition of the vulnerability of the dollar over the coming
year,” Simon Williams, an economist with HSBC Holdings, said by phone
The euro rose to $1.3123 from $1.3098 after Suwaidi’s comments were
“This is not confined to the U.A.E. There’s a general awareness across
the Gulf of the benefits of diversifying currency holdings,” Williams
The U.S. current account deficit widened to $225.6 billion in the third
quarter. Oil producers in the Middle East and Central Asia will run a
surplus of $322 billion for all of 2006, according to the International
Total foreign holdings of U.S. Treasury securities – which generally
support the dollar – increased to a record $2.16 trillion in
September, just under half of the $4.34 trillion outstanding.
“Realistically what we hope to accomplish through the fiscal wake-up
tour is ensure that any serious candidate for the presidency in 2008
will be forced to deal with the issue,” he says. “The best we’re going
to get in the next couple of years is to slow the bleeding.”
Volatility threatens us all
Published: 30 November 2006
To understand why we should be concerned about the plunging value of
the US dollar on the international currency markets, it is first
necessary to appreciate why it is happening. A significant factor
behind the decline is a recent hint from China that it may begin to
diversify some of its foreign currency holdings out of dollars. The
merest suggestion of a change in policy from Beijing has helped send
the mighty American dollar reeling. What this shows us is how finely
balanced – and potentially volatile – the world’s economy is at the
Of course, a weaker dollar is good news for any tourists visiting the
US. Britons crossing the Atlantic for some Christmas shopping will find
some goods, in effect, half price. But the potential wider consequences
of its fall could be a considerably less attractive for all of us.
At the heart of the problem is the fact that Asian countries – China in
particular – have a long-standing policy of holding vast foreign
currency reserves in dollars to keep their own exchange rates down and
boost their exports. This hoarding has financed the huge balance of
payments deficit the US has accumulated in the past six years. The
International Monetary Fund fears this imbalance has the potential to
derail the entire world economy.
In one sense, the falling value of the dollar is a natural corrective
to the US balance of trade imbalance. International finance markets are
taking matters into their own hands by forcing the dollar’s value down.
A slightly weaker dollar is not in itself a bad thing, given that it is
The real danger is a disorderly fall. A rapid hike in the price of
imported goods in the US could lead to domestic inflation and
recession. Foreign companies derive an increasing proportion of their
sales and profits from the US market. They would be hit by falling
demand for their exports. So dominant is the US economy and so
globalised have our economic relations grown that a recession in
America would rapidly spread around the world.
Some will argue that none of this is anything new. A similar currency
imbalance resulted from the massive Japanese economic expansion of the
1980s. Two decades ago, the US and Japan managed to get their central
banks to work in concert and succeeded in managing an orderly descent
in the value of the dollar. It is a moot point whether a similar deal
will be possible this time.
Yet this hints at a solution. The global economy grows ever more
sophisticated each year, but lacks any real international co-ordination
of currency policy. This must be put right. The present potential for
volatility is in none of our real interests – not even transatlantic