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Treasury

The Government Is Bankrupt and Will Destroy The Economy

Most people don’t understand the unsolvable problem the US government has created for itself and its citizens. Sovereign default is beyond a likelihood; it is inevitable. When and which (possibly all) obligations are defaulted on are to be determined. Panicked political decisions, likely in the near future, will produce a complete financial and economic collapse. Hopefully that is the worst that will occur.

Official Government Debt

The official federal debt is $16 Trillion. This debt represents 100% of current GDP. Ken Rogoff and Carmen Reinhart studied countries with high levels of government debt. This Time Is Different: Eight Centuries of Financial Folly, their well-acclaimed book, contains their findings. The authors concluded:

In our study “Growth in a Time of Debt,” we found relatively little association between public liabilities and growth for debt levels of less than 90 percent of GDP. But burdens above 90 percent are associated with 1 percent lower median growth. Our results are based on a data set of public debt covering 44 countries for up to 200 years. The annual data set incorporates more than 3,700 observations spanning a wide range of political and historical circumstances, legal structures and monetary regimes.

Elsewhere, the authors state:

Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP.

The US has passed their danger point and recent US GDP experience conforms to their findings. The economy is growing at subnormal rates, despite unprecedented stimulus efforts. A recent Rasmussen survey found that only 27% believe the economy is improving.

Actual Government Liabilities

Debt problems in the US are worse than stated, much worse. Three areas shed light on the problem:

  1. The Glide Path
  2. Treasury Obligations
  3. Unfunded Liabilities
Each is discussed below.
1. The Glide Path
The glide path of expected spending and revenues indicates that

The Tragedy of Ben Bernanke

Sometimes a seminal event passes unnoticed.  Subsequent developments and hindsight eventually place it in proper perspective. Just such an event may have happened or be in the process of playing out regarding Ben Bernanke, Chairman of the Federal Reserve.

Ben Bernanke’s Warning

Mr. Bernanke expressed the following regarding the precariousness of our economic and financial situation (my emboldening):

By definition, the unsustainable trajectories of deficits and debt that the CBO outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit. One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will come as a rapid and painful response to a looming or actual fiscal crisis.

This statement could have been issued by innumerable internet pundits. Warnings like these are commonplace from so-called internet whack-jobs. But this one came from Ben Bernanke in recent remarks to Congress. Gentle Ben is not one to exaggerate (unless it is toward the positive). His track record for forecasting has consistently erred on the side of optimism, whether it was the housing crisis, the spread of financial contagion or the condition of the economy.

Something’s Changed

These comments differ so sharply from Bernanke’s past pronouncements that one must wonder what

How The Country Dies

Carefully read the following from Chuck Butler:

Did you know that in 2011, The Fed purchased 61% of the total net Treasury obligations that were issued?  Prior to 2008, the amounts that the Fed would purchase were negligible at best!

Deficits are not being reduced in the US. This year will be equivalent to last year. Future years are not expected to be any better. The world recognizes that the fiscal situation is out of control. Their confidence in our bonds is decreasing rather than increasing. If the Fed purchased 61% in 2011, it is likely to have to purchase even more in 2012. Mr. Butler continues:

So remember when people that should know better would spout off about how the rest of the world doesn’t care how much debt the US builds, because they buy all our debt?  Shoot, even former Fed Vice Chairman Alan Blinder said, “If you look at the markets, they’re practically falling over themselves to lend money to the federal government.”

Apparently Alan Blinder thinks our Federal Reserve is purchasing these Treasuries because it doesn’t want nasty foreigners to get such great investments. Surely it must be something like that or why would it be happening?

The reality is that the Federal Government cannot sell the debt it needs to sell at today’s interest rates in credit markets. Markets understand that the US is becoming a dangerous credit risk. Egan Jones, a credit rating service, just lowered the US credit rating again and has a negative outlook for the future.

The US government has reached the point where it cannot pay for its level of spending via tax revenues or market-based Treasury sales. There are only three courses of action available

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