US Government Is Bankrupt
on the US's Most Consistently Wrong-Headed Journalist
that the US government is bankrupt and has been for many years.
But I thought it might be instructive to see what its current cash-flow
situation actually is. At least insofar as it's possible to get
a clear picture.
As you know,
the so-called Super Committee recently tried to come up with a plan
to cut the deficit by $1.5 trillion and failed completely. To anyone
who understands the nature of the political process, the failure
was, of course, as predictable as it was shameful. What's even more
shameful, though, is that the sought-after $1.5 trillion cut wasn't
meant to apply to the annual budget but to the total budget of the
next 10 years a fact that is rarely mentioned.
the chattering classes talk about cuts, it's always about cuts over
the course of 10 years. Which is a dodge, partly because most of
the supposed cuts will be scheduled for the end of the period, but
also because new programs, new emergencies and hidden contingencies
will creep in to offset any announced cuts. So the numbers below
aren't a worst case; they're the rosiest possible scenario. People
have thought I was joking when, asked how bad the Greater Depression
was going to be, I answered that it would be worse than even I thought
it would be. But I haven't been joking.
To sum up the
situation, given its financial condition and the political forces
working to worsen it, the US government is facing a completely impossible
and irremediable situation. I'm going to try to illustrate that
here. But because I'm a perpetual optimist, not a gloom-and-doomer,
I'm also going to give you solutions to the purely financial problems
albeit with some good news and some bad news. The good news
is, there actually are solutions. The bad news is that there is
zero chance that any of them will be put into effect.
are one hundred percent caused by the US government, not by bankers,
brokers or the real estate industry although they have been
complicit. Recall what government is: an organization with a monopoly
of force within a certain geographical area. Its purpose is, ostensibly,
to protect the inhabitants of its bailiwick from the initiation
of force. That implies three functions: an army to protect against
aggressors coming from outside of its borders; police to protect
citizens from aggressors inside its borders; and a court system
to allow citizens to adjudicate disputes without resorting to force.
Assuming you're going to have a government, it's important to limit
it strictly, lest it get completely out of control it's got
a monopoly of force, after all and overwhelm the society
it's supposed to protect.
Here I want
you to distinguish government from society. They are not only two
totally different things, but are potentially antithetical to each
other. This is because the essence of government is force, not voluntary
cooperation. Everything that people think the government provides
(beyond some forms of protection) is really provided by society
or with resources the government has taken from society. It's critical
to understand this, or you won't see the slippery slope the US is
now sliding on.
Is there any
chance that the US government can reform and go back to a sustainable
basis at this point? I'd say no. Its descent started in earnest
with the Spanish-American War in 1898, when it acquired its first
foreign possessions (Cuba, the Philippines, Puerto Rico, etc). It
accelerated with the advent of the income tax and the Federal Reserve
in 1913. It accelerated further with World War I, when the government
took over the economy for 18 months. The New Deal and World War
II made the state into a permanent major feature in the average
American's life. The Great Society made free food, housing and medical
care a feature. The final elimination of any link of the dollar
to gold in 1971 ensured ever-increasing levels of currency inflation.
The Cold War and a series of undeclared wars (Korea, Viet Nam, Afghanistan
and Iraq) cemented the military in place as a permanent focus of
the government. And since 9/11, the curve has gone hyperbolic with
the War on Terror. It's been said that war is the health of the
state. We have lots more war on the way, and that will expand the
state's spending. But the Greater Depression will be an even bigger
drain, and it will likely destroy the middle class as an unwelcome
In all that
time, from 1898 to today, there have been no substantial retrenchments
of the US government, and the situation is getting worse, on a hyperbolic
curve. Trends in motion tend to stay in motion until a genuine crisis
changes them, and this trend has been gaining momentum for over
people into three classes rich, poor and middle class. Rich
people are going to be okay. They can bribe the politicians to change
the laws, hire the lawyers to interpret the laws, the accountants
to limit their liabilities, advisors to help them profit from distortions
and travel agents to get them out of Dodge. They may get eaten later,
but for the moment, don't worry about them.
The poor don't
have much to lose, and the government is going to keep throwing
benefits at them to keep them happy. That's a shame because it cements
them to the bottom as poor people but that's a topic for
The real danger
is to the middle class, and it's a serious matter because the US
is a middle-class society. These are people who try to produce more
than they consume and save the difference in order to grow wealthier.
That formula has worked well up to now but almost everybody
saves dollars. What happens, however, if the dollars are destroyed?
It means that most of what they saved disappears, and most of the
middle class will disappear with it, at least for that generation.
They'll be very unhappy, and they'll be up for some serious changes.
I'll come back to those later.
Take a look
at the following pie chart of US government spending. It's cut into
10 slices, by function. The government used to break down and report
its spending according to agencies Defense Department, so
much; Department of Agriculture, this much; FTC, that much. They've
de-emphasized that and now seem to prefer reporting by function,
because most of the agencies do many things. Actually, with thousands
of agencies, departments, divisions, bureaus, units and contractors,
it's impossible to figure out exactly who does what in the government.
It's so large, so irresponsible and so unmanageable that the only
solution is to abolish things wholesale. Bureaucracy naturally grows
unless it's pulled out by the roots; reform, or pruning it back,
is doomed to failure.
The chart shows
a tiny little yellow sliver, 2% of the pie, equaling $55 billion,
for administration of justice. That's the police and the courts
by far government's most important functions, but also by
far its smallest expenditure. That's a lot of money, but how much
of it is really necessary? Of the 2.3 million people currently incarcerated
and the tens of millions more who are ex-convicts, parolees or otherwise
"in the system," most are there because of victimless
crimes, mainly drugs. In the Constitution, only three federal crimes
are mentioned counterfeiting, piracy and treason. Dope isn't
there. Now there are over 5,000 categories of federal crime. Most
of them should be abandoned to the states. So the most important
function of the federal government could be cut back hugely.
This is the
red chunk, 24%, equaling about $850 billion. The very title of this
part of the budget is an Orwellian misnomer. Until 1946, there was
a War Department (for declared wars) and the Department of the Navy
(for miscellaneous foreign adventures). Regrettably, the Defense
Department doesn't defend the US so much as its own budget. By having
troops all over the world, they're actually attracting danger to
the US. As you know, the US spends more on so-called defense than
the rest of the world combined; in effect, it's bought a gold-plated
hammer that makes everything start to look like a nail. Are there
dangers in the world, and bad people? Absolutely. But bankrupting
yourself while developing new enemies isn't an optimal response.
A bit of perspective
is in order. World War II, by far the biggest war in history, is
said to have cost 288 billion 1940 dollars. Today that's only a
third of TARP. Of course, those were 1940 dollars, equal to perhaps
about 4.1 trillion of today's units. One other thought about the
military budget and where it's going: You may recall that, for a
while after the Soviet Union collapsed, there was talk about a "peace
dividend" of $50 billion. It seemed like a lot of money at
the time, but it evaporated like water on a hot skillet.
to love their military, if only because it's a part of the government
that seems to work (at least when cost is no object), and it doesn't
seem corrupt (at least below the level of the Pentagon). They'll
be loath to cut military spending and hard pressed to do so with
new wars clearly on the way. So it's likely to grow. That said,
90% of this piece of the pie should be eliminated before its
This is the
big blue chunk, at 20%, for about $706 billion. People who receive
it don't like to hear this, but Social Security is a classic Ponzi
scheme, where late entrants are essential to pay early entrants.
But it's worse than a Ponzi scheme because it's involuntary. It's
justified by alleging "it's for their own good." But that's
a lie, because it actually discourages saving on the part of the
poor in two ways. First, it makes many believe saving is unnecessary
because they figure they'll have Social Security to rely on when
they're old. Second, it takes 6.2% off the top of an employee's
pay, plus another 6.2% from his employer, up to $106,800 of earnings.
That's over $13,000 every year that can't be saved. Further, it
doesn't go into some mythical "lock box." It goes into
the government's general revenue, and payments come out of general
revenue. It's not somehow "set aside" anymore, as was
once the case, when it went to buy a special class of government
bonds. Even when that was the case, it was a fraud. Those bonds
never represented savings; they just represented future tax revenues
that would need to be extracted from future generations.
If the government
insisted on making citizens save itself a bad idea that I
don't have space to dissect here it should be in the form
of an individually owned IRA. Chile has had these for 30 years,
and as a result today the average Chilean has more net wealth than
the average American. They have real assets in the form of shares,
not a liability in the form of government debt.
is going to happen to Social Security? Right now, 12% of the US
population are 65 or over, therefore eligible for Social Security.
By 2030, that number is going to rise to 23%; about two workers
will be supporting each retiree. That's probably impossible, but
I doubt we'll have to confront the eventuality because the system
is unlikely to last that long. It's a real time bomb, however, because
few Americans any longer have sufficient savings to support them
in their dotage. So don't look for any cuts here. It's become an
item equals $624 billion, for 17% of the budget. It's a catchall
of many different programs from many different agencies that could
more accurately be termed "welfare spending." It includes
food stamps for over 45 million. Unemployment benefits for perhaps
12 million more. Housing assistance for millions more. Pensions
for federal employees and a myriad of other welfare benefits.
Can much of
this $624 billion be cut? I would say it should be cut to zero.
It's a morally corrupting influence and a financially bankrupting
one. But because unemployment is going much higher and the standard
of living is going much lower, there's not much chance of any cuts
here. People now fervently believe this is what government is for
entirely apart from the fact that the unemployed and the
poor are voters.
At $451 billion,
13% of the budget, this item is growing the most rapidly. What should
happen to Medicare? The answer, of course, is that it was the height
of hubris and stupidity for the government to have created this
cancerous monster but that doesn't address the current issue.
This isn't a question that lends itself to a technocrat's answer;
even more than other categories of spending, it's a philosophical
proposition. Let's address it from that direction.
have men done upon reaching a certain age, when the body starts
to desert you and you become an active liability to your fellows
as well as to yourself? In pre-industrial cultures, the honorable
course was to wander out into the wilderness (while you were still
able), make your peace with reality and die. Eskimos would step
out onto an ice floe and disappear. An especially loved or valuable
person would be cared for a good incentive to be loved and
of value. Only a coward, a degraded and despicable person, would
attempt to hold on to life at the active expense of others.
Of course we
now live in relatively rich industrial cultures. But, I submit,
the moral principles are the same. We now have savings, and if you
save up enough, and if you want to dissipate your assets by putting
yourself in a hospital bed, surrounded by strangers, with a tube
up your nose for ten years before you kick the bucket it's
your money. But you certainly shouldn't require other people to
do that for you which is what Medicare is about.
is to take care of yourself. If you think advances in technology
can keep you alive to age 200, save the money to pay for it. Assuming
you don't care enough for your progeny to leave them anything.
As with Social
Security, the demographics for Medicare are disastrous. Again, 12%
of the population now is over 65, but by 2030 it will be 23%, so,
everything being equal, spending is going vastly higher. But it's
much worse than that because of skyrocketing medical costs. Note
that there is no necessity, in a free market, for medical costs
to rise. Rather, they should be expected to fall, like the cost
of most technology. But as medicine becomes ever more regulated
and (theoretically) available to everyone, just the opposite will
happen. This is one reason the FDA should be renamed the Federal
Death Authority. By raising the prices of new drugs and devices
literally tenfold, it probably kills more people every year than
the Defense Department does in a decade.
At $369 billion,
10% of spending, this is another Orwellian misnomer. People are,
understandably, willing to pay most anything to preserve their health.
But the government's spending has almost zero to do with health.
Health is something you and only you are responsible for. You maintain
it by proper diet, exercise and general lifestyle plus a
dollop of good genes. It's inaccurate and deceptive to call medical
care health care. Medical care is needed for emergencies, but it's
a poor substitute for health care.
So where does
all this money go? Part of it is Medicaid, for people too young
to qualify for Medicare and too poor to pay their own bills. Many
are the morbidly obese types you've seen fighting for bargains at
the Black Friday sales at Walmart. Some funds go to buy a scooter
for an oldster you've seen the ads on TV, an excellent scam
for the companies marketing them. If health is what is wanted, the
answer lies partly in abolishing public housing and food stamps;
some people might actually go out and exercise. The whole thing
is corrupt from top to bottom.
Where is this
item going? If Obamacare goes into effect, vastly higher. Medicare
and Medicaid are exact templates for Obamacare.
training and social services
Here we have
$125 billion, but that's only 3% of the budget. Most of it is direct
school expenditures and school subsidies. Of course education
is a good thing, but I don't feel out of line saying that most
government schooling amounts to indoctrination or just day
care. It should be abolished and education left to parents (who
are more interested in their kids than any bureaucrat) and to communities,
churches and entrepreneurs.
Much of the
money is for higher education, most of which is doled out in places
where kids go to misallocate four to six years of time, pick up
bad habits, acquire destructive notions from professors and incur
a pile of debt that they can't get rid of. Between the bad ideas
and the debt, they graduate as serfs psychologically from
their classes, financially from having to pay for the experience.
Education, like health, is something every individual must acquire
on his own; throwing other people's money at schools to keep kids
sitting at desks is counterproductive. Taking a hard science, math,
medicine or engineering course in school is one thing; taking courses
in political science, English and gender studies is something else.
90% of the universities and colleges in the US should, and would,
go bankrupt without federal aid. But since it's anathema to cut
education funding, there's no help from this quarter.
per year, 3% of the budget, is a lot to spend for highways that
are falling apart; the interstate highway system should be privatized
and run as toll roads. The government railroads, Amtrak and Conrail,
are disasters; they, too, should be privatized. Air traffic control,
which the FAA provides with technology from the '50s, should be
the province of the airlines or of privately owned airports.
The TSA is
part of this slice, and it's expanding. It now has sixty thousand
employees providing "security theater" not just at airports
but bus stations, highways and NFL football games, where you have
to be examined at the gate.
Note the violet
slice labeled "other," for $119 billion, or 3% of the
budget. This catchall includes general science, space and technology,
natural resources, environment, agriculture, community and regional
development. Other than the police agencies, the military and the
courts, this category encompasses most of the government's traditional
which is not to imply necessary functions and services.
at a few random items, mostly for amusement, since it would take
a large book to even summarize the government's budget. It's a vast
array of miscellany, including flood insurance nobody else will
sell you because you chose to build your house on a flood plain.
It encompasses the $2.7 billion Bureau of Indian Affairs, which
has forever been the most corrupt agency in the government but still
exists 125 years after the frontier was closed. It includes the
FCC, with its $1.2 billion budget (a trivial cost relative to the
economic distortions it pays for). Although the agency serves no
useful purpose, its average employee makes $147,000 per year; but
then the average government employee makes $74,311 per year, which
itself is 40% more than the average private-sector employee. The
FDIC, which provides stickers on bank doors to bolster confidence
in failed institutions, has $3 billion of assets left to insure
over a trillion dollars in deposits.
Government slice also includes the national parks and administration
of the roughly one-third of the US that is directly owned by the
US government. Of course all that should be privatized; it's dead
capital. The US government should not be in the real-estate business
or any other business like the Post Office, which currently
runs an $8 billion annual deficit. Perhaps some of its employees
would "go postal" if its assets were sold off, but many
would qualify for a job at FedEx or UPS. It includes NASA, which
has devolved into just another turf-protecting bureaucracy, slowing
down the development of the private space industry. It should be
sold; I doubt they could get much for it, but that beats a $14 billion
expenditure every year.
The US government
made net interest payments of $196 billion, for only 5% of the budget.
It seems like a reasonable enough figure, financing so many laudable
projects, and small by comparison to other categories. As I've indicated
above, the other categories of spending are likely to grow
but interest will explode. I expect, in the next few years, it will
become by far the largest category of spending, possibly larger
than the next two largest put together, even while most of the others
grow like cancers.
is simple. Right now interest rates are at extremely low levels.
That's partly because few people want to borrow in today's uncertain
climate. But it's also because rates are being suppressed by the
government. They want to "stimulate" the economy with
low rates so people can borrow more and they can avoid default
for a while longer. And the US government is itself, by far, the
world's largest debtor. They have $15 trillion in official national
debt, on which they are paying $200 billion per year in interest.
Most of that debt is short term, with less than a year to maturity.
At some point very soon, they won't be able to roll over most of
that $15 trillion, in addition to floating $1.5 trillion of new
debt incurred each year, at anywhere near current interest rates.
At some point,
we'll see rates go to the levels of the early '80s, when The Long
Boom started. And probably even much higher. But even at 12%, the
interest cost alone would be $1.8 trillion per year a completely
unbearable amount. But it's also both inevitable and imminent.
corrupt and destructive as almost all of the federal budget is,
I suppose the government could get by for a good number of years
to come, on some basis. As Adam Smith accurately put it, there's
a lot of ruin in a nation. But as the current financial crisis in
Europe is illustrating, debt can bring it all to a head very quickly.
The US is only slightly behind the Europeans. The same is true of
China and even truer of Japan.
My point is
to make it very apparent that there really is no conventional solution
to the US government's financial crisis. It's reached a stage where
the government will have to start defaulting on some of its obligations.
You decide which. The only questions are political; the economics
are quite clear. Nothing will be done, as the Super Committee showed.
I believe they would have done something if they thought it possible
and knew how.
situation is much more serious than what I've briefly illustrated.
We've only discussed one aspect of the income statement, which itself
is enough to bring down the whole structure, and soon. We haven't
discussed the government's balance sheet. Estimates vary, but the
US government has direct and contingent obligations that go far
beyond its $15 trillion in accumulated borrowing. The present value
of its Medicaid, Medicare, Social Security, veterans, financial
insurance and numerous unfunded liabilities might be another $200
trillion. Nobody knows, and it's probably impossible to calculate.
So, the US
government will go bankrupt. That's not the end of the world. Lots
of governments have gone bankrupt, some of them numerous times
like almost all of them here in South America, where I am at the
In fact, there's
a temptation to look forward to it eagerly. After all, the state
is the enemy of any decent human. One might hope that when they
bankrupt themselves, maybe we will get to live in a libertarian
paradise. But that's not likely the way things will come down; rather,
just the opposite. Not all state bankruptcies are just temporary
upsets. Most of the great revolutions in history have financial
roots. Great revolutions are more than just unpleasant and inconvenient;
they're extremely dangerous.
Revolution of 1789 was brought on by the financial collapse of the
French government. It was a good thing to depose Louis XVI, but
things didn't get better they got much, much worse with Robespierre
and then Napoleon. In Germany, the destruction of the German mark
in 1923 set the stage for the Nazis and then the Depression
ushered them in. The collapse of the Czar's regime in Russia in
1917 seemed to be good news at first but then things got
worse, and they stayed worse for a long time.
The fact is
that when a government collapses, especially when the government
is providing all the things the US government does today, people
want somebody to fix it; they want their goodies back. It's well
known that over 50% of the US population are net recipients of state
largess. And the degree of state support and involvement in the
US is far, far greater than it was in France, Russia or Germany.
After a period of chaos, it's always the people who are most political,
who have the most rabid statist ideas who get the public's attention
and rise to the top.
It seems highly
likely that the US will get a savior, someone full of bravado, who
assures the booboisie that he can straighten things out if
he is given sufficient power. Perhaps it will be an arrogant windbag
like Gingrich, perhaps some general. The government won't wither
away; it will reassert itself. I don't see any way around it, actually.
We are already moving into a police state (evidenced most recently
by the Senate's Nov. 2 vote allowing the military to indefinitely
incarcerate anyone they accuse of terrorism). But at least it's
a police state with a fairly high standard of living, one with Walmarts,
McDonalds, and SUVs at least for the time being.
But rest assured
that if the situation evolves the way I expect, the standard of
living will drop steeply, financial markets are going to become
chaotic and the US will become a quite repressive place for some
time at least as long as the War on Terror lasts. I will
bet you money on this. In fact, I am betting money on it.
So what can
you do about it? Well, actually, there is nothing you can do about
it. At least as far as changing the course of history is concerned.
The best you can do is to speculate intelligently on further, new
distortions that will be cranked into the system, as well as others
that are inevitably going to be liquidated.
It seems to
me that this is a trend that can no longer be turned around. The
US government's budget is, in fact, the biggest thing in the world;
it won't be turned around, because it is like a gigantic snowball
rolling down a hill. It will only stop when it smashes into the
village at the bottom of the valley. The best thing you can do is
capitalize on it as well as you can and get out of its way while
If Doug is
right and this trend cannot be reversed, the time to start preparing
for what's ahead is right now.
This free investor briefing will help you get started.
Casey (send him mail)
a best-selling author and chairman of Casey
Research, LLC., publishers of Casey’s
© 2012 Casey
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