The United States is effectively bankrupt

In case you failed to catch it in our previous articles this year, we thought we’d state it
outright for our readers this month: the United States Government is on a trajectory
to default on their obligations. In its current financial condition, it will not be able to
fund its forecasted budget deficits and unfunded Social Security and Medicare promises
on top of its current debt obligations. This isn’t official yet, and we don’t know when
the market will react to it, but there is no longer any doubt about the extent of their
trajectory. There simply isn’t enough taxing power, value creation or outside capital
willing to support its egregious spending.

Stating the obvious may be construed by some as fear mongering, ‘talking up our book’
or worse, but our view is not as severe as you might think. In the Federal Reserve Bank
of St. Louis’ Review from July/August 2006, Lawrence Kotlikoff stated that “partial-equilibrium
analysis strongly suggests that the U.S. government is, indeed, bankrupt, insofar as it will
be unable to pay its creditors, who, in this context, are current and future generations to
whom it has explicitly or implicitly promised future net payments of various kinds.” 2 He
went on to suggest that the US should immediately close the Social Security program to
reduce future liabilities (could you imagine?), use a voucher system for Medicare to limit
costs, and replace personal, corporate, payroll and estate taxes with a single federal sales
tax. All this, published in an article from 2006, well before the credit crisis and subsequent
meltdown had even begun!

Three years later, the financial condition of the US government is completely untenable.
The projected US deficit from 2009 to 2019 is now slated to be almost $9 trillion dollars.
How on earth does anyone expect them to raise this capital? As we stated in a previous
article, in order to satisfy US capital requirements, all existing investors would have had
to increase their US bond purchases by 200% in fiscal 2009. Foreigners, however,
only increased their purchases by a mere 28% from September 2008 to July 2009 – far
short of what the US government required.4 The US taxpayer can’t cover the difference
either. According to recent estimates, tax revenue from all sources would have to increase
by 61% in order to balance the 2010 fiscal budget. Given that State government income
tax revenues were down 27.5% in the second quarter, the US government will be lucky
just to maintain its current level of tax revenue, let alone increase it.

The bottom line is that there is serious cause for concern here – and don’t be
fooled into thinking this crisis will fix itself when (and if) the economy recovers.
Just how bad is it? Below we outline the obligations of the US Federal Government
from 2004 to 2009. We present two sets of numbers, as government accounting
can vary widely depending upon the source. In column A, we outline the
Total US government Obligations, using actuarial reports from the Social
Security Administration and the Medicare Trustees Reports. In column B we identify
Total Federal obligations according to GAAP accounting provided by Shadow Government
Statistics, calculated on a US fiscal year end basis with estimates for 2009. The
differences in the absolute amount of total obligations ($114.7 trillion vs. $74.6
trillion in 2009) are a function of timing, the calculation timeline for Social
Security and Medicare, and other obligations included under GAAP rules.
Either way we choose to calculate it, the total number is preposterously large.
From 2004 to 2009, US unfunded obligations increased by an average of almost 50%
over this six year period under both calculation methods, while US government
revenue increased by only 12%.6 No company or government can increase its liabilities
by more than four times the rate of its revenue and stay solvent for an extended period of time.

Dead Government Walking, Sprott Assett Management

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