As of this month, California is insolvent. It does not have enough money to pay its bills and has resorted to covering its expenses by issuing IOUs to creditors. Washington is also insolvent. by Kenn Jacobine
(libertarian)
Monday, July 13, 2009
It has been for a long time since at least 1971 when Richard Nixon defaulted on America's debts by closing the gold window to foreign creditors. The only difference between the two entities of course is that Washington can simply print more money, as much as it needs and then some, to keep the federal gravy train also known as the welfare/warfare state rolling. California cannot. Anyway you look at it, both California and Uncle Sam are in the same boat and it's headed for the poor house.
I know, this is just more hyperbole by a bitter, resentful, much maligned for his political and economic views blogger. That is the beauty of the internet. Millions of people like me can vent online about the stupid choices American voters make when they pull the lever every election day. Agreed, many American voters are hoodwinked by the so called "mainstream media" and political advertisers during campaigns. We have all heard the same nonsense spewed each cycle about how the American political system is a two party system and a vote for any minor party is a wasted vote. Then there are the exclusion tactics of the Republicrat Establishment. These include archaic ballot access laws, no debate inclusion for those outside their exclusive club, and downright illegal conduct.
But, it is no wonder that a society that has personally spent itself into oblivion would elect similarly irresponsible representatives that have bankrupted them nationally. This current financial depression was initially brought on by the defaults of individual subprime borrowers. Plain and simple, many people that already had bad credit, encouraged by "easy money" from the Federal Reserve, entered into mortgages and other loans that they inevitably could not afford. The fact of the matter is that Uncle Sam is no different than these subprime borrowers.
Generally speaking, bank regulators classify subprime borrowers as those with:
a foreclosure or charge-off in the past 24 months;
two or more 30-day delinquent payments in the past 12 months;
any bankruptcy in the last 60 months;
qualifying debt-to-income ratios of 50 percent or higher; and
a limited capacity to pay monthly living expenses
Uncle Sam meets each criterion. Because Washington allows the Federal Reserve to simply print money to meet current expenses essentially means the government has been foreclosed on, been delinquent in its payments, and has a limited capacity to meet its monthly expenditures. According to the Peter G. Peterson Foundation, the total federal debt of the United States is really $56 trillion. This figure includes the official $11 trillion debt plus $45 trillion in unfunded future obligations through Social Security and Medicare. If Uncle Sam had a conventional mortgage at 5 percent for thirty years his yearly payment would be $3.6 trillion per year. Given that he collects about $2.5 trillion per year in taxes his qualifying debt to income ratio is way more than 50 percent at 140 percent! What this means is that no respectable bank would give Uncle Sam any future loans given his deadbeat borrower status.
That's the point. The United States' government is broke propped up only by a cabal of legal counterfeiters. The politicians tell us on a daily basis that the debt is not what is important right now, that stimulating the economy must come first. They say that without their interference the economy would have imploded a long time ago. But, how do they know that? There is no empirical evidence to support their belief. As this blogger has maintained all along, none of their spending will work. And in fact, after trillions have been injected unemployment continues to rise, foreclosures, and bank failures continue, and the latest Fed induced bubble since March the stock market is popping as I write. These policies didn't work during the Great Depression and only an unread person would believe they will work today.
So, why should we be concerned that our federal government is a subprime borrower? At some point creditors will be less inclined to buy its debt; the rates on Treasury bills have already begun to rise. As the value of our dollar falls against other currencies the rest of the world will no longer be willing to sell us their goods in exchange for our debt. With our own goods increasing in price because of the Fed inflating the dollar our standard of living will fall. Lastly, as the dollar is replaced as the world's reserve currency Washington's credit will dry up further forcing the politicians to raise taxes to finance their largess. With tens of trillions in debt, grab your wallets because if inflation doesn't do you in taxes will.
Kenn Jacobine teaches internationally and maintains a summer residence in Haywood County, North Carolina. Visit his blog site online at: The View from Abroad.
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