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Thursday, May 15, 2008

"The US Government is Bankrupt" - What does that Mean?

I liked this post on George Washington's blog.

phrases like "bankruptcy" and "future" trigger all portions of a person's brain (logical, emotional, and survivalist) and so are very persuasive.

Let's play Overcoming Bias' "taboo your words" game with "bankruptcy". What do we mean by "The US government is bankrupt".

The US government has made future promises in the form of Social Security and Medicare that cannot possibly be kept. In that sense, the US government is bankrupt.

The US government has a debt of $10 trillion that cannot ever be repaid. This is only technically true. If the US government had a debt of 10 trillion euros, then it would be very bankrupt. However, the US government is the issuer of dollars. If Congress wanted, it could amend or repeal the Federal Reserve act, and directly print and spend $10 trillion to pay down the debt. The US government is *NOT* bankrupt because of its $10 trillion "national debt". With fiat money, the "national debt" is a legal fiction. The national debt is merely an excuse to transfer money/wealth to a certain group of people in the financial industry.

The US government has defaulted on its promise that $20 is redeemable for an ounce of gold. In this sense, the US government is very bankrupt. If a person did the exact same thing, they would be in bankruptcy court. However, governments are not subject to the same accounting rules as people.

So there are 3 different definitions of "bankrupt" that are commonly used:

If by "bankrupt", you mean "made future promises that cannot possibly be kept", then yes, the US government is bankrupt.

If by "bankrupt", you mean having a nominal debt in a currency the US issues, then the US government is NOT bankrupt. Congress can always raise the national debt ceiling. The Federal Reserve can create as many paper dollars as it chooses.

If by "bankrupt", you mean having defaulted on a big promise in the past, then the US government is VERY bankrupt. The default on the gold standard is very serious. Technically, the US government has been bankrupt since it defaulted on the gold standard. The default on the dollar is the BIGGEST CREDIT DEFAULT in history, yet people say "The US government has a perfect credit rating". The US government has a perfect credit rating because it can ALWAYS print more dollars to pay off its debt.

The default on the dollar is not 100%, because it still has some purchasing power. The rate of default is 6%-30% per year, depending on what measure of inflation you use.

1 comment:

cRavias said...

[If by "bankrupt", you mean having a nominal debt in a currency the US issues, then the US government is NOT bankrupt. Congress can always raise the national debt ceiling. The Federal Reserve can create as many paper dollars as it chooses.]

Wrong. Read it again. By this definition the US is very bankrupt.
You wanted to write: - " If you mean US is bankrupt because it has a nominal debt, - then US is not bankrupt, because it's debt is in the currency it actually issues itself."

Take care

This Blog Has Moved!

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