The US is Insolvent (and headed towards bankruptcy)

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Last night, in Boulder Colorado, I had the honor to present a one-hour mini version of the Crash Course to an audience that I estimate to be in the vicinity of 300+. Sponsored by Transition Colorado, who did a remarkable and professional job of organizing and managing the event, this talk was attended by more young people than any other talk I have given.

This was extremely heartening.

Dr. Albert Bartlett was in attendance, which was a great honor for me, although I confess to being nervous at the thought of covering exponential growth with him in the audience. It seemed kind of like giving meditation advice to the Dali Lama. Nonetheless, I now have a picture of myself with a man who I am sure will be recognized through time as being both right and unwavering in his views on exponential growth and population.

At the talk, I necessarily had to gloss over some important details, and one of those concerned the statement that “The United States is Insolvent.” 

I originally wrote about this unpleasant fact back in 2006 in a Martenson Report entitled The United States Is Insolvent.  And today, unfortunately, the situation has only deteriorated. I want to revisit that topic because there is really nothing more onerous to the future prosperity of a country than going bankrupt. If you care about the future prosperity of the US, you need to understand this situation.

Yesterday, my jaw literally dropped when I read this statement made by Vice President Joe Biden:

“We’re going to go bankrupt as a nation,” Biden said.

“Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said. “The answer is yes, that's what I’m telling you.”

What surprised me was not the admission by a sitting US Vice President that the nation is headed towards bankruptcy.  I suppose that's pretty clear to everybody by now, so why not just tell it like it is?  What got me was that the statement, as expressed, displays an unbelievable ignorance of finance and economics. The claim boils down to the idea that the way to avoid bankruptcy is by spending money.

If this is somehow possible, I sincerely hope that Mr. Biden sees fit to share the secret with the millions of people that entered bankruptcy this year. Otherwise, it will have to stand as a jaw-droppingly inane comment.

But it clues us in to the mindset of at least some of the DC leadership and gives us some sense of how much faith we should place in their efforts to centrally manage everything from car companies to secretive trillions handed out to untrustworthy bankers.

Instead of blind faith, we might prefer to trust in our own ability to look at the data and ask, “How is this going to work?”

This morning I finally read an exceptional document put out by Sprott Asset Management (Toronto, Can.) which exactly and precisely lays bare the magnificent funding problems that DC has created for itself. Titled “The Solution…Is The Problem”  it opens with a statement of fact, “In fiscal 2009, the United States must find buyers for almost three times the debt that was issued last year.”

Three times, or 300% more debt sales by the US government this year compared to last year. How will that happen? Rather than just sort of assume that this will somehow get done, this report breaks down the potential purchases of US debt by specific classes of purchasers and provides a mid-year report card on how each one is doing in their quest to buy 300% more than last year.

The results are not encouraging.

We begin with the largest buyers of debt outside of the United States – ‘Foreign and International Holders’ (#2). This group accounts for the largest source of external capital for US debt purchases and represents a very important group to float the deficit. They collectively purchased $564 billion last year, and the US will require them to increase their purchases to $1.6 trillion in 2009. Thus far, they have only purchased $465 billion to March 2009, which is halfway through US fiscal year - and well behind the pace needed to triple last year’s purchases. Current data does not bode well for further purchases either. In fact, April Treasury data revealed that ‘Foreign and International Holders’ were net sellers of US debt from March to April 2009. This is not surprising given the public comments from officials in China, Japan, Russia and Brazil concerning the level of debt issuance by the United States and its potential impact on the US dollar.

The report continues on covering all ten classes of purchasers and it turns out that only one, “Other Purchasers” is on track to triple their purchases over last year. The other nine?  Most are well off of the pace needed to cover up a massive gap.

How will the shortfall be covered? In reality there is only one option, and it is the reason I own gold. As the Sprott paper concludes:

As we hope the breakdown above has revealed, the future solvency of the United States as a nation state is currently in jeopardy. It is in far deeper trouble than the mainstream press cares to admit. There are simply not enough new buyers of debt on this planet to support the spending programs of the United States government - and it appears that current holders of debt are beginning to sell. Because it is impossible to balance the budget from outside sources of capital, the only source of funds left for the US, in all reality, is continued money printing.

Such money printing represents a breach of the public trust required to operate a fiat money system. We trust that they will operate the money machine responsibly and they trust that we will go about our daily lives and be productive. Instead the Fed is aiding and abetting the largest printing operation in history and is steadfastly refusing to be audited in any way shape or form. If confidence and transparency are required elements for the sustainable continuation of a fiat money system, the US dollar is in for a rough ride.

While the short term wiggles and jiggles of the markets, and their attendant mouthpieces in the media, do their best to confuse us, it is the larger trends that will illuminate the way.

There can be no doubt that the US government is financially insolvent. While we may not know the exact timing (this year, next?) or the exact mechanisms (Raise taxes hugely? Renege on entitlement benefits?), we can be sure that past profligacy will translate into future hardship and reduced prosperity.

And the shame of it all is that it did not have to be this way. History is thoroughly unambiguous on this matter; spending beyond ones means inevitably ends in tears. No exceptions.  How did we manage to forget this?

As I probe further into this country’s recent past, the time of my grandfather and great-grandfather, I am reading of people who understood that prosperity resulted from a combination of productivity and living well within ones means. I wonder what changed.  I wonder how we so completely forgot the lessons of the (very) recent past that today it is possible for a Vice President of the United States to assert that spending is the key to avoiding bankruptcy and then walk out of the room with his head held high.

This is a companion discussion topic for the original entry at https://peakprosperity.com/the-us-is-insolvent-and-headed-towards-bankruptcy-2/

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Chris:
It was a pleasure to meet you and here your presentation last evening. I was wildly pleased with the turnout as well.

I liked how you started the talking thanking the audience for "giving up" such a beautiful evening to come and here you speak. Don’t tell anyone, but that is pretty much how every summer evening looks in Boulder.

And you did look visibly nervous when you got the exponential growth part of the talk, but your comment about the Dali Lama was priceless. BTW, did you know Dr. Bartlett was going to attend the talk? If so, how much notice did you get?

I also liked how the seminar this weekend is available on a daily basis. As a member for almost a year, you didn’t want to spend the $ for the first day as I already understand the Crash Course concepts, but I will be there Sunday.

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Thanks Chris.
Everything you say in this report can be applied to the United Kingdom as well. I’ve long been trying to deduce what the impacts on the UK will be if the worst comes to the worst in the US. But in actual fact it hardly matters because we are in exactly the same situation. The UK is insolvent. The only difference is that we do not have the bold men of vision such as your self, Peter Schiff and Ron Paul (to name a few) that the US is blessed with. When I raise the very real concerns that you articulate, transcribed for a British audience, no one seems bothered. It really is amazing how much we live on the margins in the ‘developed’ anglo-saxon world. So long as the water still comes out of the tap, the lights remain on and there is just enough cash left after the bills are paid to have a beer and watch the football, no one cares. No one plans, no one is bothered. Bread and Circuses. We are now right up against the line. It won’t take much to fall over it and then things will unravel at a frightening pace.

Thanks again, I use your website as a window on the state of America. Very informative.

Hugh

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Chris
Of course you are right …

However, as an independent small businessman,  I’ve found myself in a financial pickle on numerous occasions over the course of my life. In each case I have   deluded myself into the belief that if I only had more money my problems would be solved. If only I could get that extra million or more from the bank or an investor, I would show the world how to make real money. I don’t know if it is human nature or just me, but when there are bills to be paid and no money to pay them, the immediate problem is to find money, and, then the original business plan could be continued and profits would come pouring in – problem solved. Somehow there is a tendancy to be blinded by the reality that the original business plan was plain wrong in the first place. My brain seems to lock onto a vision that what I am doing is the right and only way to proceed – A good thought process if you are on the right track, but horrible if you are not.

I think it is fair to say that we are on a similar track as an entire country that has worked for several generations heading increasingly farther off course and cannot see reality

Jim Pitre

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Chris,

On a street level view where I live, I think we have reached a social tipping point, paradigm shift or whatever you call it. The people are transforming rapidly into informed and active citizens – the most effective tools that our forefathers built our government machinery for. I can now discuss ideas presented here with people I meet day to day without running into the ignorance or just plain denial that was so common even 9 months ago.

True, many have negative emotions. But they are entirely appropriate.

Fear keeps people alert, informed and aware. Anger keeps them motivated and sparks direct action to vote and take part in our government.

Humans have enormous capacity for change.

Thanks for leading the way Chris.


 

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"Jubilee" anyone?

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Glad your first day went well, great insights.

Actually, I am extremely surprised a politician would admit we are heading toward bankruptcy. And what politician would state something just because everyone else knows it already?  Our politicians continually avoid the obvious truths we all know when they are things that will require sacrifice and hard choices, and most of all the possibility of loss of political contributions or political support.

The truly sad thing is that most Americans are clued in and, though they might not like hard choices, are willing to accept changes that make sense.

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Or how about this one: "Got jubilee?"

Actually that’s my new bumper sticker. Ha!

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 Chris,
Thanks for your astute observations, as usual.

The question we should be asking is, why and how we got here.  We need to figure that out to dig our way out. 

One of the prime issues we are dealing with is finger pointing.  There is a lot of it to go around.

Who is to blame?  Government? Profligate spenders? Homeowners who bought oversized houses?

It seems that a lot of the blame here and on other similar sites points to one of two things: our oversized government, and/or defective individual behavior.  I have come to the view that these two are nice scapegoats for the real underlying cause: we’ve been sold out as a country by wealthy, corporate interests.  They have bought our government, and they have bought our minds (through advertising). 

I will not argue against a viewpoint that says government is too big.  Nor will I argue against a viewpoint that says that many individuals spent well beyond their means.  But what I will do is ask why and how our government has been hijacked by corporate interests to become the bloated cow that it is, and our population convinced that they are "consumers" first and foremost, citizens second.

For example, few will debate that our entitlement payouts are unsustainable.  How did they get that way?  Some conservatives like to point at "welfare moms" and the like.  But it is not welfare moms that are bankrupting government.  It is the fact that there are no longer decent-paying jobs for middle class folks in America.

Why not?  Because all the jobs have moved to China and places like that.  In order for the system to continue functioning while all the jobs were outsourced, american "consumers" had to have a source of money to keep buying.  That source of money was debt.  Cheap credit and lots of it flowed… for many years.  And even those of us who never felt right about getting in debt, were certainly tempted.

Now the credit has stopped flowing.  There is no other source of money, because Americans have stopped producing.  But it is not like we don’t want to.

I am trying to get production going of a US-made electric bike.  But it will likely cost 2 times as much as a Chinese made one (at least - look at the Optibike - a $9,000 bike made in the US).  I can’t pay people $2-$4/day like they do in China.  Plus we have regulations to follow here that the Chinese don’t, which add expense.  But, Reagan and Clinton both bought the mantra of "free trade".  So while countries like China and Japan won’t buy our products, we happily buy theirs, because they are "cheap".  Penny wise and pound foolish, we are.

Henry Ford understood this well.  He actually paid his employees very well, because he knew that they would use that money to buy cars.  But a nation of McDonalds and WalMart employees can’t afford much of anything… unless it is on credit.  Once the credit runs out, then what?  Ooops, it is running out.  The result is stuff like this:

http://www.youtube.com/watch?v=MoAyBb8D5GU

We’ve forgotten to take care of our own citizens first.  We’ve been trained that buying a cheap piece of Chinese-made plastic at WalMart is our number one goal in life - even if that puts millions of american workers out of jobs.

Our economy will not restart until we actually figure out how to start doing things for ourselves again.  This is not so simple as it seems, because there are entrenched, wealthy interests that like the status quo.  Eric Jantzen of iTulip and Michael Hudson both call it the "FIRE" economy: Finance, Insurance, and Real Estate.  These sectors have grown way out of proportion with historical norms, and have become "the" economy, rather than a little slice of the economy.  They are like a bloodsucking leech, growing ever fatter and needing ever more blood to sustain themselves.  But our economy has no blood left.  It has been drained out and sold off. 

Out of control government spending is only a symptom of the problem.  The real problem is that we have nothing else besides government spending to keep us afloat as a nation.  First we lost our industry (beginning in earnest during the Reagan years), and began living on credit.  Now the credit is drying up, so we are attempting to live on the government dole.  The attempt will probably fail.  When it fails, the question is, what next?

I believe the only non-doomsday scenario is to actually bring back industry to the US.  Industry in areas like clean energy, biofuels, rail transport, and so on.  And with that industry, creating jobs.  If we don’t do something like that, I think we will just slide off into oblivion. 

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Is this a fair distillation of where we are now?

  1. US is insolvent as the day is long.

  2. A contracting or flat global economy.

  3. A burgeoning US annual budget deficit/total debt.

  4. The need to sell an ever increasing amount of bunk paper (US treasuries) to countries who are ever increasingly wary of everything the US does and stands for. And, by the way, they really don’t have the wherewithal to do this anymore – one of the keys in Chris’ above presentation.

  5. The US economy has probably entered into permanent decline to never return again – except perhaps in a radically redesigned way. This means that the insolvency/bankruptcy crisis is irreversible barring some kind of debt jubilee or economic miracle on par with – to borrow from Gerald Celente – the discovery of fire or the invention of the wheel.

I mentioned on another thread that I’ve been particularly doomerish as of late, so talk me down here if you can. How does all of the above not add up to a global financial crisis (one that would make the fall of ‘08 look like nothin’) in the next 24 months?

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You’ve made my day, my friend. Thank you. Thank you. Thank you.

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‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said. “The answer is yes, that’s what I’m telling you.”
Let’s take ‘Windsock Joe’ – our nation’s highest-ranking invertebrate – at his word.

Spending money when you’re bankrupt is not difficult, when you’re a counterfeiter. As MadDog Ben Bernanke has said, ‘We’ve got a technology called the printing press.’

What I consider deplorable is Joe’s vain fantasy that he dreamed up this road to ruin himself. No, Joe. Acknowledge your intellectual debt to the great Robert Mugabe. He’s already spent more trillions than you’ve ever seen in your life – all on behalf of the Zimbabwean people that he loves so much.

Rock on, Windsock Joe. You’re our favourite gerbil.

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The quote below is from and AsiaTimes article that appeared on July 1. It is discussing some ideas presented in a book by Robert Allen titled The British Industrial Revolution in Global Perspective . It is worth checking out and thinking about the implications for the current crisis and how the wealth and industrial/technological progress were generated that lead us toward the world we occupy today. The thesis presented suggests that perhaps one reason technological progress did not continue to build upon itself in the Roman world was the availability of cheap labor, mostly in the form of slaves. Technological marvels like the Antikythera mechanism [http://en.wikipedia.org/wiki/Antikythera_mechanism] remained toys for the wealthy class rather than being incorporated and utilized for the production of labor-saving devices.
In addition to the importance of a population limited to a level below the carrying capacity of the landscape, the availability of cheap energy in the form of coal (and later oil) was also critical.

Limits to population, cheap energy (through some technological innovation), and a adequately-fed, well educated populace, effective inter-regional trade, and competition that leads to innovation… looks like some rough times ahead from this perspective.

http://www.atimes.com/atimes/Global_Economy/KG01Dj01.html

[quote]
To take the causes roughly in chronological order, happy sheep were the result of the 1348 Black Death, which wiped out a third of England’s population and resulted in the restoration of much good agricultural land to grazing. As a result, English sheep, fed on richer diets than previously, grew longer coats, from which were created the "new draperies", finer in quality than competitive textiles and hence market-dominant.
The depopulation of the Black Death also caused wage rates to rise and, in England, reproductive patterns to change, producing a decline in fertility. England’s lower fertility ensured that the impoverishing 16th and 17th centuries were less impoverishing than elsewhere in Europe and wages remained relatively high. One of Allen’s more startling discoveries is that real wage rates in Vienna in 1825 were a quarter of their level 400 years earlier; in England, this immiseration did not happen.
Imperialism, next, added both to the wealth of the country and to its urbanization (which increased returns to agriculture, thus further increasing rural wage levels). Extensive trade in exotic goods and the construction of large merchant and naval marines both provided high-wage urban employment and generated large amounts of capital. The safety valve of North American emigration worked against any Malthusian fall in rural wages, ensuring that new generations were adequately fed and at least modestly educated.

There are nevertheless a number of modern policy lessons that can be learned from Allen’s analysis. First and most obvious, trade is essential to rapid economic development. By allowing rapid arbitrage between high cost areas and low cost areas, it generates capital accumulation, which lubricates other economic activity. A world in which trade becomes bureaucratized and atomized lessens the possibilities of new wealth generation both directly through placing barriers to economic system optimization and indirectly through lessening the accumulation of capital.
While rapid arbitrage of goods through free trade is highly desirable, rapid arbitrage of labor through free migration is not. No society where unskilled labor is in excess supply has ever been able to use that labor to improve its wealth. Undifferentiated low-cost human labor has been in excess throughout the vast majority of humanity’s experience; it is only labor scarcity and skill that have raised mankind’s living standards above the Malthusian level. Low-skill, undifferentiated labor does not pull up its own living standards, though if its supply is limited, its living standards may be raised by the efforts of others.
There is thus a huge distinction between trade policy, in which the maximum possible freedom is desirable, and immigration policy, in which complete freedom of migration produces an excess of unskilled labor that drives down wages for the unskilled to Malthusian levels. This is not only the case in high-wage economies such as the United States. In low-wage economies such as pre-1980 China, India and Africa, the first requirement for economic growthis to reduce the birth rate sufficiently that the society can afford to educate the majority of its young people, and not leave them as a pool of intermittently employed surplus unskilled labor driving down living standards and causing disturbances. [/quote]

 

 
 
 
 
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Machinehead is back!

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machinehead said:
Let’s take ‘Windsock Joe’ – our nation’s highest-ranking invertebrate – at his word.

I thought that was his boss.

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What is simply remarkable is how casually Mr. Biden speaks…
A catastrophe is waiting in the wings and he utters nonsense.

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As Zappa says…
 "The illusion of freedom [in America] will continue as long as it’s profitable to continue the illusion. At the point where the illusion becomes too expensive to maintain, they will just take down the scenery, they will pull back the curtains, they will move the tables and chairs out of the way and you will see the brick wall at the back of the theater."

Yet the markets are still going up and up and up…

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 Try this from The Big Picture…
wh-monthly-715

How much of this is beyond the economy tanking (20% versus ~6%)…people increasingly losing faith in our government?

How much more will people question need to pay taxes?

Any doubts?

Those who don’t think we are in the early stages in the process of a "Crisis in Confidence" as we accelerate toward financial oblivion of bankruptcy, I submit are delusional.  This has happened in history and is part of human nature.

There’s more to occur than Bankruptcy and hyper-inflation; how about collapse(s) of governments at multiple levels, disorder…unfortunately also mayhem?

Maintain this will accelerate the remainder of this year.

Is everyone ready?

 

Nichoman

 

 

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Elizabeth S.,

At least he’s consistently idiotic. :wink:
Scary thing is, some times some of them sound really smart, and people really like what they hear.

'Ole Joe Biden… not very often.

Cheers,

Aaron

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Thanks for the quote, MM. FZ’s one of my favorite musicians and social critics.