http://www.financialsense.com/fsu/editoria.../2006/1217.html

A short extract follows


THE UNITED STATES IS INSOLVENT
by Dr. Chris Martenson
The End of Money
December 17, 2006


Prepare to be shocked.

The US is insolvent. There is simply no way for our national bills to be paid under current levels of taxation and promised benefits. Our federal deficits alone now total more than 400% of GDP.

That is the conclusion of a recent Treasury/OMB report entitled Financial Report of the United States Government that was quietly slipped out on a Friday (12/15/06), deep in the holiday season, with little fanfare. Sometimes I wonder why the Treasury Department doesn’t just pay somebody to come in at 4:30 am Christmas morning to release the report. Additionally, I’ve yet to read a single account of this report in any of the major news media outlets but that is another matter.

But, hey, I understand. A report this bad requires all the muffling it can get.

In his accompanying statement to the report, David Walker, Comptroller of the US, warmed up his audience by stating that the GAO had found so many significant material deficiencies in the government’s accounting systems that the GAO was “unable to express an opinion” on the financial statements. Ha ha! He really knows how to play an audience!

In accounting parlance, that’s the same as telling your spouse “Our checkbook is such an out of control mess I can’t tell if we’re broke or rich!” The next time you have an unexplained rash of checking withdrawals from that fishing trip with your buddies, just tell her that you are “unable to express an opinion” and see how that flies. Let us know how it goes!

Then Walker went on to deliver the really bad news:

Despite improvement in both the fiscal year 2006 reported net operating cost and the cash-based budget deficit, the U.S. government’s total reported liabilities, net social insurance commitments, and other fiscal exposures continue to grow and now total approximately $50 trillion, representing approximately four times the Nation’s total output (GDP) in fiscal year 2006, up from about $20 trillion, or two times GDP in fiscal year 2000.

As this long-term fiscal imbalance continues to grow, the retirement of the “baby boom” generation is closer to becoming a reality with the first wave of boomers eligible for early retirement under Social Security in 2008.

Given these and other factors, it seems clear that the nation’s current fiscal path is unsustainable and that tough choices by the President and the Congress are necessary in order to address the nation’s large and growing long-term fiscal imbalance.

Wow! I know David Walker’s been vocal lately about his concern over our economic future but it seems almost impossible to ignore the implications of his statements above. From $20 trillion in fiscal exposures in 2000 to over $50 trillion in only six years? What shall we do for an encore…shoot for $100 trillion?

And how about the fact that boomers begin retiring in 2008…that always seemed to be waaaay out in the future. However, beginning January 1st we can start referring to 2008 as ‘next year’ instead of ‘some point in the future too distant to get concerned about now’. Our economic problems need to be classified as growing, imminent, and unsustainable.

And let me clarify something. The $53 trillion shortfall is expressed as a ‘net present value’. That means that in order to make the shortfall disappear we’d have to have that amount of cash in the bank – today - earning interest (the GAO uses 5.7% & 5.8% as the assumed long-term rate of return). I’ll say it again - $53 trillion, in the bank, today. Heck, I don’t even know how much a trillion is let alone fifty-three of ‘em.

And next year we’d have to put even more into this mythical interest bearing account simply because we didn’t collect any interest on money we didn’t put in the bank account this year. For the record, 5.7% on $53 trillion is a bit more than $3 trillion dollars so you can see how the math is working against us here. This means the deficit will swell by at least another $3 trillion plus whatever other shortfalls the government can rack up in the meantime. So call it another $4 trillion as an early guess for next year.

Given how studiously our nation is avoiding this topic both in the major media outlets and during our last election cycle, I sometimes feel as if I live in a small mountain town that has decided to ignore an avalanche that has already let loose above in favor of holding the annual kindergarten ski sale.

The Treasury department soft-pedaled the whole unsustainable gigantic deficit thingy in last year’s report but they have taken a quite different approach this year. From page 10 of the report:

The net social insurance responsibilities scheduled benefits in excess of estimated revenues) indicate that those programs are on an unsustainable fiscal path and difficult choices will be necessary in order to address their large and growing long-term fiscal imbalance.

Delay is costly and choices will be more difficult as the retirement of the ‘baby boom’ gets closer to becoming a reality with the first wave of boomers eligible for retirement under Social Security in 2008

I don’t know how that could be any clearer. The US Treasury department has issued a public report warning that we are on an unsustainable path and that we face difficult choices that will only become more costly the longer we delay.

Perhaps the reason US bonds and the dollar have held up so well is that we are far from alone in our predicament. In a recent article detailing why the UK Pound Sterling may fall, we read this horrifying evidence:

Officially, [UK] public sector net debt stands at £486.7bn. That's equal to US$953.9bn and represents a little under 38% of annual GDP. Add the state's "off balance sheet" debt, however – including its pension promises to state-paid employees – and the total shoots nearly three times higher. Research by the Centre for Policy Studies in London says it would put UK government deficits at a staggering 103% of GDP.

If we perform the same calculations for the US, however, we find that the official debt stands at $8.507 trillion or 65% of (nominal) GDP but when we add in our “off balance sheet” items the national debt stands at $53 trillion or 403% of GDP.

Now that’s horrifying. Staggering. Whatever you wish to call it. More than four hundred percent of GDP(!). And that’s just at the federal level. We could easily make this story a bit more ominous by including state, municipal and corporate shortfalls. But let’s not do that.

Here’s what the federal shortfall means in the simplest terms.

I knew that was coming, but nobody seems to care here in the U. S. We are a rapidly aging economic power, rapidly running out of economic options. The Chinese in contrast, are an aging developing power with one single window of opportunity to make the right economic choices for their future before that window shuts down on them. It seems like the world economies as a whole are scheduled to meet with reckoning sooner or later; our turn is just sooner than that of the Chinese. But theirs is coming too. And then what? The pigs in power, the ones who can do something about it, are not lifting a finger to address the issue (assuming anything can be done, which I don't know if it can); they're too busy walloing-up in the fruits of their plunders. Too busy sending out military machineries to foreign lands to fight enemies that are already here. At the cost of innocent lifes and billions of badly needed money here at home.
Hang on to the edge of your seat because the show hasn't even started yet. Watch for the DOW indicator to drop to 4000 point in the next few years. And then watch for the all-American spoiled pig standar of living to become a thing of the past. We're going down the hole and taking everybody with us. The question is how deep the hole and how heavy the weight. Which will in turn affect how big the long term damage to other world economies and how rapidly they will recover.

He's good at getting one scared. The other stories about are that the world is under an illusion that the world will not feel the impact of a US decline so hard. I can't find the link for that now.

On the other hand, along with Iran's announcement that they're
switching their assets from dollars to Euros, many oil producing
nations are planning to at least switch a percentage to Euros.
http://www.aljazeera.com/me.asp?service_ID=12635 (excuse the
propaganda at the end of the article) and
http://www.gulf-times.com/site/topics/arti...48&parent_id=28

A bit like the HeyHey household. There is simply no way for our household bills to be paid under current levels of income with no benefits. I heard a call that my fish fingers are ready, so I'm off for a while ....

Ok whos idea was it in the first place to mix business and capitalism? Restricting business and free trade will surely lead to economic destruction. When did the idea of survival of the fittest get kicked to the curb?

No comprende one word of what you're asking. Explain your question better, if you would.

ECONOMICS, ONE OF MY FAVOURITE TOPICS
Economics. For many people, this is a topic which is a lot like the weather; it is something we all love to talk about. However, most of us have the uncomfortable feeling that there is really very little we can do about it. For better or for worse, we are faced with having to take it and deal with as it comes. Some will survive; some won't. So be it.

ECONOMICS, UNLIKE THE WEATHER, IS, IMO, CONTROLABLE
I beg to differ. I happen to feel that, unlike the weather, what happens to us, economically, is well within our reasonable control.

This is why I am somewhat bothered by the vague generalization made by Dr. Chris Martenson, The End of Money, December 17, 2006.
The following statement, at the end of his article, telsl me nothing of real value. He writes: Surely he must be smart enough to have some kind of an answer. He appears to be a gold-bug. Why did he not tell us, why?
As he admits:

What I mean to say, is that capitalism is not a dirty word. The consumer has the ultimate power--if they do not want to buy a product they don't have to. The company with the best business model wins, simple as that, and it is up to their competitors to step up and creat some new innovation and improve their products to compete. The government should have no hand in regulating business; that is the job of the consumer. Why do small businesses hate Wal-Mart? Because their companies suck thats why. As one television maker stated, "we can buy glass from China for less than we can produce it ourselves". This television maker said that it was not fair that China was producing the same quality products for less and filed a lawsuit against Walmart and the Chinese government--and he won...Now that is the stupidest thing I have ever heard. Just because this individuals sucks at what he does, the rest of the world is penalized.

Flex writes Flex, will you please pardon my edit of your communication? If it fails to meet with your approval and does not make clear to all what you meant, please let me know.

Meanwhile, I agree with you. For your age, I feell that you are very perceptive.

However, may I ask: In your opinion, Is there only one kind of capitalism? I so, what is it?

I have no objections to your editing I think that there is only ONE form of capitalism~ I guess you could call it democratic capitalism, as you put it in your edit, in the sense that your dollards can be seen as a vote. For instance, I support Chipotle's food with integrity program, but the only free range meat they sell is pork, so I only buy their pork burritos. If there is enough of a demand for a product, companies will conform. There is a reason why the car market is switching to hybrids, and alternative fuel sources--the success of the Prius has shown that there is a demand for environmentally friendly products, and now other companies are forced to follow their lead to remain competitive.

I agree with you on everything you said. But my post was a comment in response to Culture's article which centers around the pitfalls of macroeconomics (along with a stern warning about the consequences of the US government fiscal mismanegement of the last few years). Capitalism has proven to be the best economic policy of the last 100 years. But globalization, or macroeconomics of the new millenium, is proving to be a serious challenge for capitalism. And, some goverments are having a tough time dealing with these new chalenges, while others are flourishing in the process.
Unfortunatelly for us in the west, our economies have no room for growth, as we live in economically developed nations (North America and Western Europe). This puts us at the wrong end of the emerging globalization order. But even more unfortunate is the fact that the US goverment is not taking the necessary measures to adjust to the new rules of the game. In fact, they are intentionally ignoring it, at the cost of grave consecuences in the not so distant future.
I thought that's what the article was about, and therefore my response to it.

CB, you write, "Unfortunatelly, for us in the west, our economies have no room for growth..."

CB, may I disagree with you?

There is all kinds of room for growth, if we have the imagination to expand our understanding of the nature and function of money. Just as we the people, at the risk of our lives, took political power away from the political power brokers, the next step is for us to take the creation of our money supply away from the autocratic priests of our economy.

Tell me, of what real value is the right to vote for those who make our laws, without the right to have decent employment; without the opportunity to earn the dollars we need to buy the necessities of life? No wonder so many people are cynical about our so-call "democractic" political system and don't bother to vote.

I am not a egalitarian socialist, but there is something wrong with our economic system when so many of our people, especially members of our First Nations, on this North American continent--so rich with all kinds of resources--have to live the way that they do.

To understand the point I am making here, take a look at the following. It is a must read for those who want to understand how we can make money serve us, and our needs, and not the other way round--as in autocratic capitalism.

DEMOCRATIC CAPITALISM
http://www.odemagazine.com/article.php?aID=4147
Not too long ago, the Toronto Star reproduced this whole article.

Using a complementary community currency (CCC) system there is a practical way we can democratically monetize what I call moral capital, social capital and knowledge capital. We must get rid of our dictatorial money system, based on the monopoly of credit, which allows the almighty dollar to push people around.

How many are aware of and have been following the CCC movement?

I have been thinking more about this. Everyone knows the US social security system is running on empty. It uses the earnings of today's working people to pay today's retirees, and a few decades hence, there will be too many old people and not enough working people. Simple problem. Want to see a real scare? Take a look
at Europe.

Of course, the Democrats who've just taken over Congress did everything in their power to block serious social security reform. It seems they think more taxes will easily solve the problem of "protecting social security". They're wrong. That net present value could be infinite, depending on how far into the future you project the shortfall.

If I recall correctly Clinton administration's plan was to create a surplus well in advance of the 2008 baby boomers retirement bomb, at least reducing the over $3trillion future problem considerably. The Bush administration blew that, big time.

Clinton also suggested reforms similar to what Bush is talking about
now, including private accounts.

Thanks for the link, Lyndsay. Let me take a stabb at it and get back with you on it. And no, you may not disagree with me!

Any links to support this claim? Thanks, Culture.

CB comments: " And no, you may not disagree with me! "

If you are serious, I WILL, any way! So there!