Am I insolvent?

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mariusm98's picture
mariusm98
Status: Bronze Member (Offline)
Joined: Jun 16 2011
Posts: 25
Am I insolvent?

I am trying to scale down the US insolvency to see if I can agree. An NPV liability in the order of 4 GDPs is assumed to make the US government(?) insolvent.

I earn 100 000 a year. I have agreed to pay an allowance to my ex-wife of 25 000 a year for all eternity. To never think about this again, I could deposit 500 000 at fixed 5% interest and let her have the interest directly. I consider the NPV of my liability to be 500 000 -five times my income.

It will be tough to handle this liability, but I do not consider myself insolvent.

Travlin's picture
Travlin
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Joined: Apr 15 2010
Posts: 1322
Insolvent?

Mariusm98

in sol vent

–adjective

not solvent;  unable to satisfy creditors or discharge liabilities, either because liabilities exceed assets or because of inability to pay debts as they mature.

http://dictionary.reference.com/browse/insolvent

I’m not an accountant, but I’ll take a stab at this.  Create a balance sheet.  Add up everything you own (assets) and subtract everything you owe (liabilities).  If you owe more than you own your net worth is negative.  But, if your income is adequate to service your debt payments you are still solvent.  When you can’t make the payments, through lack of income, or assets to sell, you become in-solvent and declare bankruptcy to discharge the debts.

Banks are held to a higher standard.  If their net worth drops below about 7% they are supposed to be dissolved by the regulators if they can’t correct the situation reasonably soon.  Unless they have the unfair advantage of being “too big to fail”.

The federal government is a law unto itself and can do whatever it wants as long as it can borrow more money, even if this means its friends at the Federal Reserve bank are creating the money out of thin air to buy US bonds.

I hope this helps until someone more knowledgeable comes along.

Travlin 

 

mariusm98's picture
mariusm98
Status: Bronze Member (Offline)
Joined: Jun 16 2011
Posts: 25
Is the US government insolvent?

Thanks for your reply.

My approach was that Chris seems to consider the US government insolvent simply because it has liabilities exceeding 4 GDPs. He did not show us that its income is inadequate to service its debt payments.

Travlin's picture
Travlin
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Joined: Apr 15 2010
Posts: 1322
Correct but no cigar

mariusm98 wrote:

My approach was that Chris seems to consider the US government insolvent simply because it has liabilities exceeding 4 GDPs. He did not show us that its income is inadequate to service its debt payments.

Mariusm

You are correct technically, but in other writings Chris, and others, have shown that the US Government is clearly insolvent by any realistic assessment.  At this point it is living off its credit cards.  It can still make current payments, but it is too deep in the hole to ever pay them back in dollars of comparable value.  The likely outcome is that it will inflate and devalue the dollar so bonds will be technically “paid”, but the holders will find the money worth less, or worthless, compared to what they loaned the Gov.  A sovereign government makes the rules so it can always manipulate and change them in its favor.

GDP in the US is about $14 Trillion per year.  The US Government deficit (the amount it “officially” borrows in one year) is over 10% of that!  The “official” debt (total of all unpaid deficits) is now over $14 Trillion.  The Federal Government is borrowing over 40% of what it spends every year.  It can only do that because the Federal Reserve Bank is buying a huge amount of the US Government bonds at artificially low interest rates, since not enough other parties will buy them.  At real market interest rates the debt payments would consume the budget..

Using generally accepted accounting principals (GAAP), as businesses are legally required to do, the real government liabilities are estimated from $80 - 200 Trillion.  This includes Social Security, and Medicare.  The Gov taxed us to pay for them, spent the money in the trust funds, and will not be able to pay the benefits it promised in dollars of comparable value.  It will have to default on these obligations, so realistically it is insolvent.

The video I.O.U.S.A does an excellent job of explaining this and is available from Netflex.  http://movies.netflix.com/WiMovie/I.O.U.S.A./70084134?trkid=2361637

Ditto for this article by Laurence Kotikoff.  http://www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html

Here is a formal report that explains the problem in more detail.  http://budgetreform.org/sites/default/files/Red_Ink_Rising.pdf

The Bank for International Settlements shows the same pattern in nations world wide.  http://www.bis.org/publ/work300.pdf?noframes=1

Chris explains this all clearly in past articles and in his book.  Many other observers have confirmed what Chris says.  The evidence is overwhelming if you study it.

Hope this helps.  I’ll be back online Monday.

Travlin

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mariusm98
Status: Bronze Member (Offline)
Joined: Jun 16 2011
Posts: 25
Travlin wrote:  The

Travlin wrote:

The evidence is overwhelming if you study it.

Travlin

I read Kotlikoff and I leafed through BIS, and also, finally, finished the Crash Course.

To me, the evidence is overwhelming that the market (i.e. people and institutions with loads os money) believes that most western governments, including the US', will sort this out somehow. Otherwise we should have seen a marked increase in the interest rate on long term government bonds.

A very important point made by BIS is that one solution to future government liabilities is to raise retirement age. This is definiteliy quite a political challenge, but it is viable.

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