EHSPortal.com - The Bankruptcy Of The United States Government Is Starting To Make Many People, Especially Our Creditors, Very Nervous. What's Coming Next?

February, 2010

The Bankruptcy Of The United States Government Is Starting To Make Many People, Especially Our Creditors, Very Nervous. What's Coming Next?

Opening Comments

In previous commentaries, I have indicated that the United States Government is, for all intents and purposes, bankrupt. Of course, a bankrupt entity can continue in business long after the bankruptcy becomes apparent, provided that it has continuing access to cash. Access to cash can come from a variety of sources with the following being the most prevalent:

sale of common stock in the entity. In the case of the United States Government, its common stock would be the U.S. dollar which can be, at least presently, printed "at will" by the United States;
sale of debt instruments in the entity. In the case of the United States Government, its primary debt instruments would be U.S. Treasury bonds, notes and bills;
sale of some of the entity's assets. The United States Government owns, among other things, vast tracts of land on which such valuable assets as lumber, water, gold, silver and various other minerals reside.

Current Financial Picture Of The United States Government

Recently, the United States Government released its financial figures for the fiscal year ended September 30, 2009. The 2009 figures, and those for fiscal years 2002 - 2008, are outlined below:

Fiscal Year	Formal Cash Based Deficit (Billions of $)	Net Worth Positive (Negative) (Trillions of $)	Total Federal Obligations (Trillions of $)
2009	1,417.1	(63.6)	70.7
2008	454.8	(59.3)	65.6
2007	162.8	(54.3)	59.8
2006	248.2	(53.1)	58.2
2005	318.5	(48.5)	53.3
2004	412.3	(45.0)	49.5
2003	374.8	(34.0)	39.1
2002	157.8	(31.0)	35.4

Even if you're not an individual who feels comfortable with numbers, the following should be obvious to you:

there was a deficit (as opposed to a surplus) in every year between fiscal 2002 and fiscal 2009;
the net worth of the United States Government became increasingly negative every single year between fiscal 2002 and fiscal 2009. This is an alarming trend;
the total federal obligations increased every single year between fiscal 2002 and fiscal 2009. Again, this is an alarming trend.

Financial Outlook For The Next Ten Years

The Obama Administration recently released figures which estimated that the United States Government would generate additional deficits (not surpluses) of $8.6 trillion over the next ten years. The non-partisan Congressional Budget Office (CBO) analyzed the Government's figures and increased the estimated deficits from $8.6 trillion to $9.8 trillion.

Simply put, a very bad situation as of today is expected to get increasingly worse over the next ten years.

Can The United States Government Get Its Financial House in Order Before It's Too Late?

The theoretical answer is "yes" while the practical answer is a resounding "no." Theoretically, if the United States Government was to immediately embrace a reasonable version of the many concepts advanced by Representative Ron Paul (Republican - Texas) and Representative Paul Ryan (Republican - Wisconsin), ranking member of the Budget Committee, who introduced legislation in 2008 entitled "A Roadmap for America's Future," the country would at least be headed in the right direction.

(Sidebar: I have voted for candidates from both parties in the last 44 years and voted for President Obama in 2008. My citing of work from Republican Representatives Paul and Ryan does not mean that I am a card-carrying Republican).

Practically speaking, I believe that it is too late for the following reasons:

most of the Washington, D.C. politicians are compromised in one fashion or another and are largely beholden to their Wall Street masters. They could care less about the concerns of the average American citizen and/or doing what is right for the country;
the average American has been slow in demanding "real accountability" from their Washington, D.C. politicians. Therefore, the politicians continue to do what is expedient and/or best for themselves as opposed to what is in the best long-term interests of the country;
so many Americans are now dependent on payments of one form or another from the United States Government that they are unlikely to push politicians to rein in spending on any programs that benefit them.

So Where Does The United States Government Go From Here?

The U.S. dollar is still, for the time being, the world's reserve currency which means that it (a) is held by many countries as part of their foreign exchange reserves and (b) is the international pricing currency for products traded on global markets such as oil, gold, silver, etc.

A reserve currency nation such as the United States can rid itself of its excessive liabilities (debt) in one of four ways:

reduce spending and/or increase taxes (emphasis on reduce spending);
pursue a policy of inflation by printing more currency;
devalue its currency;
default on its debt.

The United States Government lacks the political will to implement option #1, which is the soundest long-term strategy. Furthermore, our liabilities are now so high and our economy so fragile that implementation of this strategy would create immense short-term pain that would be politically unacceptable.

The United States Government is currently pursuing option #2. It is printing money at a torrid pace to fund all sorts of bailout and stimulus programs in the hopes that this excess cash can overcome the deflationary impact of all the bad loans which were made relating to residential and commercial real estate, derivatives of various sorts, etc. If they are successful, the United States Government will drive down the value of the United States dollar thereby permitting them to repay their creditors such as China, Japan, etc. with a "watered-down" less valuable currency.

If the United States Government is unsuccessful with option #2 (and the jury is still out), then option #3 - i.e. devaluation - will be next up. Under a devaluation, holders of "current U.S. dollars" would have a specified period of time to exchange their "current U.S. dollars" for a lesser amount of "new U.S. dollars." How much less would be the Government's decision, but, suffice it to say, the "hair cut" would be substantial in order for the Government to reduce its debt to its creditors (especially its foreign creditors).

Option #4 - default - is the least preferred option as it would mean the following for the United States:

elimination of the U.S. dollar as the world's sole reserve currency along with all the advantages attached to such a currency;
dramatically reduced ability to borrow money in the years to come along with much higher interest rates;
a dramatically reduced standard of living for the citizens of the United States.

What Do I Expect To Happen?

Irrespective of whether option #2, option #3 or option #4 prevails, I expect some or all of the items described below to occur. As readers of my previous Commentaries will note, most of these items were outlined in my July, 2009 and October, 2009 Commentaries. While they haven't happened as quickly as I had originally envisioned, I have seen no evidence in the intervening months that "the big picture" has changed one iota. The items are as follows:

the U.S. dollar's loss of status as the world's sole reserve currency;
a reduced (perhaps dramatically reduced) standard of living for the citizens of the United States;
extremely high prices and/or shortages for the basic necessities of life such as food, medicines, medical care, gasoline, oil, natural gas, propane, etc.;
a dramatic collapse in the value of U.S. Dollar denominated paper assets such as savings accounts, U.S. Treasury debt (bonds, notes, bills), U.S. Agency debt (Fannie Mae, Freddie Mac, etc.), corporate bonds, state and local bonds, etc.;
much higher prices for "hard assets" such as commodities, precious metals, etc;
continued deterioration in the prices of residential real estate and a STUNNING COLLAPSE in the prices of commercial real estate;
uncertainty with respect to the pricing of common stocks. In a normal hyperinflation, common stocks should skyrocket in price. In this case, any escalation in common stock prices might only accrue to companies involved with precious metals and, possibly, other commodities and energy;
much higher interest rates, possibly reaching the teens or higher;
additional bankruptcies of both large and small companies;
unemployment rates that exceed the 25% - 30% seen in the 1930's Great Depression;
outright collapse or substantial impairment of public and private pension plans such that individuals will not be able to count on the pension payments that they had expected in their "golden years;"
significant alterations to all entitlement programs funded by the U.S. Federal Government, especially Social Security, Medicare and Medicaid. The bottom line will be a substantial reduction in benefits for almost everyone;
a disproportionate negative impact on the "middle class," which is the backbone of an economically sound country;
secession movements by states which will be somewhat similar to the breakup of the Soviet Union in 1989;
increased protests, crime and violence, possibly resulting in the institution of martial law, as U.S. citizens become more desperate due to loss of jobs, homes, investments, pensions, etc;
increased reliance on various barter systems whereby like-minded individuals trade needed goods and services with each other;
a possible war (there are numerous flashpoints throughout the world) and/or swine flu outbreak which would serve to distract Americans from their dire economic circumstances;
a possible "bank holiday" in which all banks are closed for an undetermined time so that new bank rules can be imposed, weak banks can be closed, etc.

Actions That You Can Take To Defend Yourself And Your Loved Ones

Don't believe the "spin" that things are getting better! This will only encourage you to overspend and/or spend on the wrong items at a time when you can least afford to do so;
make sure you secure fixed (not variable) rates of interest on any debt you have. This will protect you from the coming higher rates of interest;
try to locate additional part-time opportunities to earn income as your full-time job just might evaporate in the months to come. Especially focus on part-time opportunities that have the potential to become full-time opportunities;
if possible, have a few months of cash available in a safe place outside of the existing banking system in the event a "bank holiday" is declared;
if possible, have a few months of non-perishable food supplies, medicines, and other necessities available in the event of any significant disruption in our "just-in-time" distribution system;
if you have any discretionary investment funds available, consider purchasing a few gold and/or silver coins from a reputable dealer;
lock in prices, wherever you can, for items such as heating oil, propane, natural gas, etc.;
establish relationships with like-minded friends and relatives so that you have a strong support group to see you through the difficult times;
be prepared to defend yourself and your family. Desperate people will do desperate things during desperate times;
above all, THINK FOR YOURSELF! Don't let anybody else think for you.

Closing Thoughts

In closing, I'd like to leave you with the words of Andrew Jackson, the 7th President of the United States, and a man who had a great deal of success in check-mating the monied elite and was a champion of working people's causes:

"The planter, the farmer, the mechanic and the laborer form the great body of the people yet they are in a constant danger of losing their fair influence in the Government. The mischief springs from the power which the money interest derives from a paper currency which they are able to control."