We’ve had some debates about the long-term financial prospects of the United States government. I’m aware that the federal government cannot go “bankrupt” according to the dictionary definition. It can, however, get into a situation where there isn’t enough money to pay its debts. If that happens, history tells us what to expect. The government will allow the currency to inflate drastically, the buying power of the American people will plunge, and there will be prolonged economic malaise.
So the question is, how likely is that to happen? I don’t know and nobody else knows, but I’ve stumbled across a thought-provoking analysis that calculated the credit-worthiness of the federal government. They find that the government’s FICO score is 645, which is a “Fair” score. For the most part the score is dragged down by the size of the national debt, which is four times the government’s income. Now certainly a family that earns $100,000 per year but has $400,000 in debts in generally agreed to be in bad shape. Why should the government be viewed any differently?
The government has massive assets. Just selling off a chunk of National Forest land could pay a lot. During the housing bubble the Navy base on Coronado island was worth a ton as well. Look at any given Navy base on the water and think about what a developer would pay for it.
The government has the ability to increase its income through taxation - much easier than a company can just raise revenue by increasing prices.
The analysis does sort of suggest this. To the extent it does, it isn’t a FICO analysis. FICO scores are not based on income–at all. Income is not part of your credit report and FICO scores are generated from the credit report. http://www.myfico.com/Downloads/Files/MyFICO_UYFS_Booklet.pdf
Over the long term, it isn’t viewed any differently. Banks (creditors) eventually realize that the family is unable to pay its debts and will stop loaning them money. Same goes for USA – foreign govts+investors (creditors) will eventually realize that USA debt is unattractive and won’t offer any more loans.
What makes the analysis tricky is that it the decline from AAA credit status to bankruptcy takes place over several generations of citizens. Since the citizens in their lifetime only see a “window” of that credit-rating decline, their view is distorted into thinking that their credit-worthiness will last forever. “We’ve had deficit spending and debt increase before, don’t worry, we’ll be fine.” Foreign investors will not be fooled forever – they will catch on.
In the same light that Algher posted, I, myself, think the assets of the USA are probably in the single digit quadrillions.
The USA will never be at the point to not be able to repay debts, what with all the oil, coal, uranium, trees, shorefront property, confiscated Humvees, indentured servitude via a harsh tax code, patents, nuke threats on wimpy countries… etc.
It is not a matter of “unable to pay” but more of a matter of “feels like paying at any given point in time”.
The canary in the coal mine is Japan, who has no natural resources… and to a slightly lesser extent the UK who are in the same resource-less boat (minus moss), but boast more local allies with local natural resources.
I think what Algher and Madgolf has shown is that the phrase “unable to pay” is relative to the circumstances.
If the govt becomes desperate enough to confiscate citizens’ property, tax all of them 90%, institute Martial law, etc then the people will revolt. Political instability scares away foreign investors from investing in USA’s debt. Some could say the USA at this point is “unable to pay” but others could still insist that’s not technically true since…
… the USA could certainly sell pieces of itself to pay for debt. But then you’ve enlarged the scope of debt-repayment to self-cannibalism. Is it proper to include these drastic actions for evaluating a country’s credit-worthiness? Maybe…
Imagine a family with a new infant. The husband lost his job, savings are depleted, and the car (debt) is about to be repossessed. Is he “unable to pay” his debts? In one sense yes. However, technically, he’s not bankrupt yet because he’s still able to do creative things like pimp out his wife for prostitution, sell his baby on the black-market for $10,000, and offer up one of his kidneys for a fee. He could certainly cannibalize his whole family to pay the debt on the car. So, is this repayment scenario realistic or is it just an interesting intellectual exercise?
More important to me, though, is that people actually start THINKING about what else is worth something other than arbitrarily printed money.
I am gonna puke if I hear one more person whine about the M3 when we have 290 trillion dollars of coal in Pennsylvania alone… which happens to kind of belong to no one in particular.