One of my readers ask me the other day “Could the United States go bankrupt?”
The short answer is: Absolutely. Yes. The United States defaulted on some or all of its debt in 1790, 1833, 1861, and 1979.
The long answer is: Yes, No, Not really, But yes.
As of this writing, the United States is, or holds $34,569,585,071,672 (over 34 trillion, 569 billion) of debt.
The distinction here is that some of that debt is its own debt that it owes to itself. You read that right. The US government has a habit (and a bad one) of borrowing money from itself.
Currently, the US is over $34 trillion in debt; it pays $1 trillion in interest for that debt every year; and the US government spends $3.6 to $3.8 trillion per year. The absurdity of those numbers alone is not only mind numbing, it represents a fiscal cliff that is breaking off from the rest of the mountain that holds it all together.
So if we take these numbers and represent them in a different light, it’s easy to see that the US is in serious trouble; the question being “how long before the US becomes bankrupt?”
To calculate, we once again break out our trusty calculator from the dollar store to find out how long it would take for the United States to become bankrupt, considering the interest on the debt, we need to incorporate the interest payments into our analysis.
Let’s denote:
DD as the total debt (34 trillion dollars)
SS as the annual spending (3.8 trillion dollars)
II as the annual interest on the debt (1 trillion dollars)
RR as the annual rate of increase in debt, including interest
The annual rate of increase in debt including interest (RR) can be calculated as:
R=(D+I)/SR=(D+I)/S
Using the given values:
R=(34 trillion dollars+1 trillion dollars)/3.8 trillion dollars per yearR=(34 trillion dollars+1 trillion dollars)/3.8 trillion dollars per year
R≈9.24 yearsR≈9.24 years
This means that the debt, including interest, increases by approximately $9.24 trillion dollars each year.
Similarly to the previous analysis, if the debt continues to increase at the same rate without any changes, the United States would theoretically become bankrupt when the debt reaches a level where it cannot be serviced anymore.
So what does it mean “debt reaches a level where it cannot be serviced anymore.” It simply means that the GDP and tax receipts of the country are no longer able to withstand the burden of the debt.
It’s easy for one to argue that “since the money it borrowed is in its own currency, (US Dollars) then in theory, the US government could just print money to pay its debt and all would be kumbaya, except it doesn’t work that way. Printing $34 trillion dollars would essentially make the US dollar worthless and I do mean…Completely worthless! This has been proven many times before in the history of the United States.
Printing large amounts of money to pay its debts would cause hyperinflation, thereby destroying the currency itself, wiping out US debt holders with inflated worthless money; thereby gaining the same practical result as actual outright default and destroy the personal and corporate savings of every single American in the process. If the US ever has to outright print money to redeem its bonds it could very easily destroy and wipe out all savings, everywhere in the American economy. So the fact that the government can print money should be of no comfort to anyone.
Now for another big monkey wrench to be thrown into the mix. The US would not go bankrupt like one would think. The US can never “go bankrupt” insofar as the bankruptcy proceeding is a civil, legal procedure. Since the US is a sovereign nation, it can’t really be hauled into court and made to “go bankrupt” the same way a corporation or person could be; so in a legal sense, the US can never “go bankrupt.”
US debts are honored via the constant support of US law. Congress could, at any time, revoke this pledge and simply not honor its debts. In fact, this has come very close twice in the last 5 years, relating to the debt ceiling debates, where the US came close to default.
While others may froth at the mouth, saying all sorts of legal or constitutional arguments about how and why this can’t happen, etc, but the fact is, when meltdowns happen the safeguards can be circumvented; all these types of things were “illegal” in Wiemar Germany, Argentina, modern Greece, etc; you only get payment when there’s will to pay, if there’s no national will to pay, then the laws will be changed or interpreted to avoid payment.
So what’s the answer?
The US Congress has to get it’s head out of it’s butt, stop flapping it’s lips and significantly reduce the amount of money that it is allowing the government to spend.