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The US is Insolvent (and headed toward bankruptcy)



July 22, 2009 – Comments (11) | RELATED TICKERS: USA , DEA , D

It's not like that title would come as a surprise to any Fools out there : ) Here is Chris Martenson's latest take on this national crisis. Link and excerpt:

The US is Insolvent (and headed toward bankruptcy)


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.


11 Comments – Post Your Own

#1) On July 22, 2009 at 11:42 PM, jatt22 (63.38) wrote:

u  said  it  exactly  rite  , totaly   agreed    ( unfortunately )

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#2) On July 22, 2009 at 11:53 PM, starbucks4ever (69.03) wrote:

"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."

There is no need for Biden to share that secret because Madoff already did. 

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#3) On July 23, 2009 at 1:05 AM, binve (< 20) wrote:

Another good article by Chris, thanks JGus!

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#4) On July 23, 2009 at 1:32 AM, jhenry2307 (< 20) wrote:

You can either Lease or buy a new car to use the cash for clunkers program. It has to be new vehicles and not used ones.


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#5) On July 23, 2009 at 1:47 AM, jesusfreakinco (28.15) wrote:

You have to admit that Biden doesn't know when to shut up.  How irresponsible for a sitting VP to say this, even if it is true.


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#6) On July 23, 2009 at 4:29 AM, Jimmy2008 (< 20) wrote:

Biden DOES know when to talk and when to shut up. Remember: he does NOT work for US, and he works for HIMSELF.

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#7) On July 23, 2009 at 8:33 AM, Bojac3728 (< 20) wrote:

Quotes from two very smart men. " We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle."- Winston Churchill. " A government which robs Peter to pay Paul can always depend on the support of Paul."- George Bernard Shaw. Congress should take it's time and get health care reform right before jumping in with both feet. We don't need to copy Canada and England. Obama should reach across the aisle as he promised and use some of the ideas the Republicans have proposed.

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#8) On July 23, 2009 at 10:48 AM, leohaas (30.06) wrote:

"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."

Talking about jaw-droppingly inane...

It is this kind of simpleminded comparison that is jaw-droppingly inane. Anybody making it simply does not understand the difference between macroeconomics and microeconomics.

As an individual, I am not able to spend myself out of bankruptcy. That much is true. However, for a government that is not hostage to some kind of artificial limitation (like the gold standard or a legal requirement to come up with a balanced budget), things are very different.

Here is how this is supposed to work:
 1) Economy slows down.
 2) Government provides incentives (tax cuts, subsidies, bail outs, stimulus, whatever they call it, as long as it is temporary). Increased spending and lower tax income lead to significantly increased debt level.
 3) Incentives lead to more spending. In other words, economy recovers.
 4) Government removes incentives. Decreased spending and higher tax income lead to significantly decreased debt level.

Note that I say that this is how it is supposed to work. I am not sure it will. If we stick to this approach, we will find out over the next couple of years whether or not it does.

I can understand there are many out there who simply do not believe this will work. But anyone comparing government behavior with the behavior of individuals could do with a Macroeconomics 101 course.

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#9) On July 23, 2009 at 11:59 AM, davejh23 (< 20) wrote:


I think everyone understands that this is how it is supposed to work.  However, we are seeing huge declines in tax revenues, and huge increases in government spending.  This isn't a mild recession where tax revenues dip slightly and the government runs a modest deficit to keep things going.  The spending that is included in the deficit is alarming.  The Fed's printing of money is not included in the deficit and will end up being multiple times our entire GDP.  This goes beyond the steps you outline in your post.  Do you think our largest creditors would be openly saying that they will not be investing in the US and our dollar if this was just normal policy?  There is zero chance that this ends well.

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#10) On July 23, 2009 at 2:01 PM, SnoopyDancing (< 20) wrote:

It's all about the jobs that have been exported to China once its currency was tied to the dollar about a decade ago, making it cheaper to push manufacturing overseas.   

And, it sounds like China knows that US currency may well be worthless soon, which explains their recent push to have their companies "expand overseas" by buying foreign assets.  We may be able to keep China from buying our ports, but look at companies such as EEE and find that their technologies were sold out to the Chinese by company management -- not to mention products and technologies "reverse engineered" -- over the past decade.

We keep buying foreign-made goods with borrowed dollars because of fewer jobs that actually make anything.  Until net US exports improve, China continues to stockpile minerals, deeds to farmland, and companies (read: jobs) in the US and around the world. 

Is there enough time let to learn Mandarin?  Okay, maybe that's a bit of a stretch, but somebody please tell me why trillions held by China will not be spent to buy strategic technologies in our country?  Imagine an Apple iphone equivalent made by a Chinese would change the balance of power (money) from the newest gadgets.

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#11) On September 04, 2009 at 10:49 AM, 119862913 wrote:

I think we're dropping the BOM on the rest of the world. The Black Swan is that this will carry on for a LONG time...

PS - A BOM (Bill Of Material) is the basis for any manufacturing outfit


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