How do we get out of this?

If the U.S. and our government were a business, we would already have been declared insolvent. Here’s why:

On our 2009 P/L (profit & loss) statement, our annual Federal expenditures amounted to about $3.5 trillion, against revenues (tax receipts) of $2.1 trillion. If history is guide, the $1.4 trillion gap between revenues and outlays will increase rather than decrease in subsequent years. Mind you, this is only at the Federal level…we haven’t included state and municipal financials, which add more black crepe to an already dismal picture.

How much could government revenues be expected to increase in order to plug this gap? The traditional conservative approach has been to grow the economy, using incentives: more growth = more profits = more tax revenues. The traditional Liberal/Left approach has been to increase taxes: more taxes = more government spending = more economic growth (!?).

In my view, we have traveled to a point far, far beyond these arguments: neither approach suffices.

The U.S. Gross Domestic Product (GDP), or “gross sales revenues”, is approximately $15 trillion.
If the U.S. operated as a business, national disposable income (meaning, after-tax income, or “net income” on the P/L statement) approximates $10 trillion, according to [].
This is the total money available to be recycled back into the economy by the private sector, either through direct purchases (income-stimulating reinvestments) or capital formation (savings and investments).
Now, to close the Federal revenue gap would in the most basic of terms require taking an additional $1.4 trillion (14%) -PLUS out of our national disposable income in the form of taxes. Why “plus”?
Because government isn’t efficient: any monies taken in by the Federal government are inevitably depleted as they cycle through various government agencies before they can reach their target.  Unlike electronic transfers between bank accounts, only a small fraction of tax receipts go to their intended target. The rest is lost through government overhead and waste (I repeat myself).Thus, it will take considerably more than $1.4 trillion in tax revenues to close a $1.4 trillion budget gap.
In response to the obvious question this raises: yes, we could borrow this, but all borrowing does is defer payment of this sum at a stiff price (i.e., interest).
Eventually, payments must come from disposable income.
Let’s consider the national balance sheet:

A first-rate article by Kevin Williamson in the National Review (June 21, 2010) catalogued our country’s debt obligations as follows:

1) National Debt – $14 trillion (Williamson argues that this is vastly understated due to “funny money” accounting by the government)

2) State and Local Debt – $2.5 trillion (which the Feds will ultimately absorb). According to some, we already face massive impending municipal bond failures.

3) Unfunded government worker pension funds (federal, state and local) – $3.0 trillion. In large part, these are “unfunded” because governments expropriated their assets by borrowed against them, my corrupted state of Illinois being a prime culprit. Directly or indirectly, this cost will eventually be absorbed by all taxpayers.

4) Unfunded liabilities for all of our nation’s “we care about you but want someone else to pay for it” programs  (i.e., Medi/Obamacare, “Pharmacare”, Medicaid and Social Security) – $106 trillion (using Present Value). According to Williamson, this is more-than twice the total private net worth of the U.S. Even if we all individually sold-off all of our belongings (assets), we still couldn’t cover these obligations.

So, in sum, we have a “business” (USA Inc.) with negative-$1.4 trillion in net revenues and a balance sheet debt of $125.5 trillion. Williamson adds in a few more odds and ends to round-up the value to $130 trillion. And we haven’t even touched corporate and consumer debt.
Hmmm…how about some perspective?
According to a McKinsey & Co. report, world financial assets in 2008 (prior to two subsequent years of asset deflation) totalled $178 trillion.

I’ve looked long and hard for this number because it is admittedly “fuzzy math”, but the best estimate that I could come up for the total estimated tangible asset (book) value of the United States economy is $188 trillion. These are, for the most part, non-liquid assets…they cannot be simply sold off for cash-in-hand.


In sum, USA, Inc. long ago exceeded its debt capacity.

As a bond holder of USA, Inc., would your next step be to:

a) invest in USA, Inc.

b) ask for a bankruptcy court to reorganize the corporation and restructure its debt obligations

c) liquidate and auction off its assets to cover its debt obligations to bond holders?

Ergo my conclusion: we are insolvent! There is no way that we will ever find the money to pay off these obligations. It just doesn’t exist, not within the U.S and not in the world economy. I anticipate option (b) — reorganization of debt. Of course, in this scenario, the shareholders (citizens, taxpayers) get left with crumbs (or “haircuts”, in financial parlance).

According to Democrat thinking processes, we should raise taxes. However, even doubling our total Federal, state and local tax receipts wouldn’t cover our income shortfall and debt service obligations, especially in the face of rising interest rates. Moreover, this  would crush the economy, ergo our ability to generate future tax revenues. It would kill the golden goose. In the meantime, the solution appears to be…print huge sums of money and get us into even more debt.

Looking at the Republican approach, growing the economy by lowering tax rates buys time, but I don’t see how we could possibly grow the economy enough to dig us out of this hole…or is my imagination too limited? Brazil’s economy grew about 10% last year, but then their starting base was much lower. Maybe Rep. Paul Ryan sees it differently.

Which leads me to the inescapable conclusion: the large majority of us will end up absorbing significant haircuts to our asset holdings as part of our inevitable national  and economic debt restructuring. My vote for the most likely targets of restructuring are: a) public employee pension funds; b) social security and Obamacare benefits; c) bond holders, via a national default a-la-Argentina…all inclusive. Bernanke’s QE2 movement  signals that massive inflation is already in the works.

Each of these steps spells disaster. In my view, it’s not a question of “if” but “when”.

So, as we begin this New Year, what are your ideas as to how we can climb out of this hole?

Do we invest Rep. Paul Ryan (R., Wis.) with dictatorial powers in order to implement his road map? Is that enough? (note: this is tongue-in-cheek, for those of you that don’t know me).

What do you think will happen if public employee pension fund obligations are shaved to 25% or less of current obligations? Do we become another UK, France or Greece and descend into anarchy? How do we prevent this from happening?

Many of us Bookworm Room aficionados, from comments gathered over the years, are either in retirement or seriously planning retirement….how will we / should we and others of our generation react to massive cuts in Social Security and ObamaCare? I note that some 25-30% of adults approaching retirement age have supposedly accrued virtually no retirement savings and individual net worth is likely to continue to decline in tandem with housing values. Plus, leading members of the Democrat regime have already made it known that it would like to strip me and thee of any anticipated inheritance incomes. What is to happen to them (us)?

What happens if the U.S. defaults on its bond obligations?

Or, am I all wet in my analysis? Although I do boast a corporate-finance-related degree, I do not pretend to be anything other than a hobby economist. Please, oh please, convince me that I am totally wrong in my analysis.

For balance, I do not think the prognosis is all doom and gloom, although I believe that we are in for a very rough ride. Our country faced similar difficulties early in our history and we got through them. I think the party is over, but I also think we have the wherewithal to climb out of the mess all of us have created, even if we cannot yet discern the way out. I am trying to understand how best to weather the storm.

Either way, please share your thoughts.

Forewarned is forearmed.