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US Bankrupt?

Glenn posts this:

WHO WILL BAIL OUT UNCLE SAM? “The United States of America is bankrupt. Don’t believe it? Consider this: Federal obligations now exceed the collective net worth of all Americans, according to the New York-based Peter G. Peterson Foundation. Washington politicians and bureaucrats have essentially mortgaged everything We the People own so they can keep spending our tax dollars like there’s no tomorrow.” If these numbers are accurate, it’s very bad news.

They’re not accurate:

The foundation’s grim calculations are based on Sept. 30 consolidated federal statements, which showed that Americans’ total household net worth, diminished by falling stock prices and home equity, is $56.5 trillion. But rising costs for unfunded social programs like Medicare, Medicaid and Social Security increased to $56.4 trillion – and that was before the more recent stock market crash, $700 billion bank bailout, and monster federal deficits chalked up in October and November.

They palmed a card, actually two cards: the first one is they’re using household net worth … but that leaves out corporate net worth, so they’re ignoring, eg, Exxon.  The second is that they’re comparing future obligations to pay with current assets, so it’s like saying you’re “bankrupt” because the total of your expected future living expenses exceeds your net worth.

I wrote about the same comparison in PJM early in the year — can’t link it usefully, PJM has hosed something — making the correct comparison of total US assets per person versus total US obligations per person, and it was about $300K assets vs $160K obligations, or over the whole population, about $90 trillion versus $48 trillion.  Most of that wealth is real stuff — land, houses, factories, etc — and hasn’t gone away in the last year.

The point is, we’re not bankrupt — we’re more like a homeowner with a mortgage.  We have to keep working to make the payments.

Then, note that a lot of the actual bailout is being done with *new* money, instead of debt, and the comparison gets even more silly.  But the monetary model for inflation says that when you’re deflating, money supply is too small — and we’re deflating at about an annualized 18 percent per year, there’s room for new money.

Update: Thanks for the link, Glenn. Whole new audience here, so let me “revise and extend” a touch. This isn’t me claiming that there aren’t problems — hell, I’m out of work myself. But “bankrupt” has a meaning, and this argument abused the terminology dreadfully. But everyone with a horse to beat will be beating it, from announcements of the US devolving to complete socialism, to assertions that this is finally the dempnstration of the complete collapse of capitalism. A lot of them will include misleading arguments about how bad things really are, because after all you can’t get a really radical solution unless there are really radical problems. So this is a really good time to read even more carefully and critically than usual.

Except, of course, me: I’ll always be just right.

{ 9 } Comments

  1. NukemHill | 2008-Dec-17 at 09:09 (@423) | Permalink

    Coupla things:
    1) If the government were making a serious effort to pay down the existing debt, and zero out the annual deficits, then I think your point would be completely solid. We’d be meeting the new obligations as they come up, and the unfunded liabilities would end up being funded. But that’s simply not the case. So eventually, the actual debt will be reaching proportions where, even if we have more solid assets than the debts being incurred, we’re still looking either an enormous tax increase (both one-time, as Trump has advocated in the past, and ongoing, in order to meet future obligations), or simply declaring bankruptcy. Either of which completely nukes our economy.
    2) That “new” money is still being financed by our debt. In order for us to print that money, we have to sell short- and long-term debt to finance it. Now, the interest on the debt is ridiculously low, right now. So we can keep floating the debt by reselling the bonds. But that won’t last forever. And as the interest on the bonds starts to increase, the overall debt increases with it.

    I’d be glad to see you punch holes in my logic. I’d like nothing more than to be really wrong about this. But I think the basic idea is solid. Would love to see your comments on it.

  2. NukemHill | 2008-Dec-17 at 09:12 (@425) | Permalink

    Oh, and your comment about the deflationary pressures we are facing is spot on. Won’t last forever, but “Helicopter Ben” doesn’t have to worry about inflation for a couple of years, at least.

    We do have to worry about whether or not deflation will pull us into a Depression. That was one of the primary factors behind the Great Depression going as deeply as it did. And this is why Bernanke is doing what he’s doing.

  3. Charlie | 2008-Dec-17 at 09:37 (@443) | Permalink

    Thanks for commenting.

    (1) is true, but not very significant to the argument that the US is currently bankrupt. Say you go out and buy a used car, for $10,000 cash. So that one day, your expenses are running at a rate of at least $365,246 a year. If you make $250,000 a year, by this argument, you’d be currently bankrupt.

    Of course that doesn’t mean that you won’t eventually be bankrupt if you keep spending at that rate.

    (2) That’s not necessarily so: when Treasury sells T’s to finance debt, that doesn’t really create new money, it just reuses dirty old used money. (This isn’t 100 percent true, as it has the effect of creating new money from the interest, but to a first approximation.) When the Fed makes a “liquidity injection”, though, that’s brand spanking new money. “Created from nothing” as they say, but that’s not a good analogy either.

  4. NukemHill | 2008-Dec-17 at 10:08 (@464) | Permalink

    1) Ah. So you’re arguing about their languaging. That’s completely reasonable.
    2) Hmm. I’m going to have to think about this one. Everything that I’ve read (or claim to understand!) points to the liquidity injection requiring financing by Treasury. Maybe I’m missing something fundamental here. I’m still trying to get my head around monetary policy. There continue to be nuances that escape me.

  5. Opinionated Vogon | 2008-Dec-18 at 12:29 (@562) | Permalink

    I think there is something else you missed besides Corporate net worth. What’s being done here is single entry accounting. If you look at the debt of the Federal Government – its liabilities – then don’t you also have to count its assets?

    What does a fully trained and battle hardened military cost? Can you put a price tag on a carrier group? What would it cost to build one if you had to? Whats the price of our nuclear arsenal? How about our interstate highway system? What would the cost be to build that today? How about the value of our national parks and their resources? What is the price tag on our monuments and federal buildings?

    It appears more than two cards were palmed :)

  6. coliva | 2008-Dec-18 at 16:17 (@720) | Permalink

    I may be missing something, but isn’t corporate net worth actually a subset of household net worth? When you own stock, you own the book value of a company’s assets + a “good will” fudge factor. That makes all stock-issuing companies owned by families and private companies are also owned by families and are part of their net worth. After all, Bill Gates’ billions are a reflection primarily of his current ownership stake in Microsoft.

    Foreign stockholders own a percentage of American companies, so that percentage of the companies stock value doesn’t belong to Americans anyway.

    So going back to the original point, I think that it really *is* accurate to say that they US is now a net debtor country, not just negative trade and negative federal spending balance.

  7. Charlie | 2008-Dec-18 at 16:28 (@727) | Permalink

    No, because not all stock is owned by households, either. Consider, for example, the stock held by the Bill&Melinda Gates Foundation: they don’t own it any longer, it’s not part of Bill’s net worth, and the Foundation isn’t “owned” by anyone, it’s a corporate entity on its own.

    If you want to make this argument, how about some links?

  8. jkline | 2008-Dec-18 at 21:06 (@921) | Permalink

    Sigh. I can’t believe what I’m reading. Look at a graph of US debt vs. GDP. Then look at a graph of the diminishing returns on the economy for each new dollar of debt. It is simple mathematics– we’re screwed: the gubmint can either inflate or reneg, and it’s trying to do the former but losing. If we are lucky we will get a Great Depression; my money is we will get an 1872/3 depression, which was much worse. But hey, take heart, you’ll be needed in Obama’s CCC– that will be your social security, chumps.

  9. Charlie | 2008-Dec-18 at 21:53 (@953) | Permalink

    Well, if you’re disbelieving, consider my position. I just wrote a whole thing — actually I’ve written three or four things now — making the point that comparing debt to GDP is comparing a balance sheet item to an income statement item, and some damn fool comes along and makes the very same comparison in a comment. I tell you, it makes me despair for the American education system. Now, it turns out that the article I wanted was one that I put up on here after publication at PJM; here’s the link.

    But, on the off chance you’re trainable, let’s try it once more. If you want to make a valid comparison here, you need to compare total assets to total debt. When you do so, you find that the US has right around 2x assets as debt. Ergo, not bankrupt.

    What a deficit indicates is that income is outrunning expenses. While we certainly have a deficit, comparing the deficit to the debt doesn’t make any sense either. What does make sense is to compare the deficit to the total net worth; right now, we’ve got a trillion dollar deficit. But we also have something like 45 trillion dollars in net worth; it follows that we wouldn’t spend that down to bankruptcy for about 45 years at the current rates.

{ 3 } Trackbacks

  1. [...] Chas Martin explains: They palmed a card, actually two cards: the first one is they’re using household net worth … but that leaves out corporate net worth, so they’re ignoring, eg, Exxon. The second is that they’re comparing future obligations to pay with current assets, so it’s like saying you’re “bankrupt” because the total of your expected future living expenses exceeds your net worth. [...]

  2. [...] WELL, THAT’S A RELIEF: Charles Martin says the United States isn’t bankrupt. [...]

  3. [...] US Bankrupt? | Explorations Then, note that a lot of the actual bailout is being done with *new* money, instead of debt, and the comparison gets even more silly. But the monetary model for inflation says that when you’re deflating, money supply is too small — and we’re deflating at about an annualized 18 percent per year, there’s room for new money. [...]

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