Is America Insolvent?

April 18, 2016 - Posted by: admin - In category:

taxes - No Responses

Is America on the verge of financial collapse? That depends on who you ask and what information you choose to believe.

James Grant recently published an article in Time titled “The United States of Insolvency”, which paints a very bleak and alarming picture of the financial standing of the Unites States.  According to Mr. Grant, the national debt (federal government debt) equates to about $43,000 for every man, woman and child. The more you read his article, the more you are likely to feel uncomfortable and worried.  It would seem that the sky is indeed just about to fall (at least from an economic perspective). Further, given how central the economy is to just about every aspect of our lives, this does not seem like a remote or minor issue to any of us. However, before you start running around like Chicken Little, let me point you towards another helpful article and source of information.

Anthony Scaramucci, Harvard Law graduate, formerly at Goldman Sachs and now at SkyBridge Capital (i.e. someone who works in the finance industry and who is very qualified to speak on the subject) posted an article on LinkedIn today which rebuffs most of what is written by James Grant in his Time article.  As you may not have access to LinkedIn, let me quote a few of the lines from Mr. Scarmucci below.

“TIME ran a piece this week by economist Jim Grant titled “Make America Solvent Again.” The cover exclaimed that in order to pay off our $13.9 trillion national debt, every American needs to chip in $42,998.12. The alarmist headline likely accomplished its goal of selling magazines in grocery store checkout lines, but the underlying premise of the article is inane.

Let’s start with the definition of insolvency. An entity is insolvent when debts exceed assets. First off, the U.S. government owns hundreds of trillions worth of assets. The Institute for Energy Research (IER) estimated in 2013 that fossil fuel-related assets owned by the federal government are worth more than $150 trillion, more than ten times the national debt. Add in things like land, real estate and military equipment, and the government’s assets are likely well in excess of $200 trillion. In addition, current U.S. gross domestic product (GDP) is around $18 trillion, on which the government has taxation authority.

Another inconvenient fact is that not all U.S. debt is due at the same time. U.S. debt obligations are highly variable in maturity, ranging anywhere from a few days to 30 years. The average dollar is owed by the government in just under six years. By comparison, at current rates the average American worker pays the government income taxes of $43,000 every five years. And income taxes are only less than half of government revenue. Total tax receipts in 2015 were $3.25 trillion.

Also, only $5 trillion of U.S. debt is held by foreign creditors. If the world declared economic war on the U.S. and ceased buying Treasury bonds (a far-fetched scenario that would mean mutually assured destruction) our obligations would be a fraction of the headline national debt figure. Even if we were forced to pay it all back at once, it would be possible to do so.”  CLICK HERE TO READ MORE OF THIS ARTICLE

So, what are you to glean from all from all of this palaver?  Who is right in this discussion? Where is the truth to be found? I will leave you to make your own determinations, but here are a few of my own personal observations.

  1. Consider the sources.  James Grant is a journalist writing for Time. What is the objective of the journalist and the magazine?  Answer–to get attention and sell magazines and subscriptions (paper or electronic).  Which is a better attention-grabber, a message that sounds like we are on a cliff and ready to fall over or a message which states that things are basically in order and as they have been for a very long time?
  2. Consider the sources part 2.  James Grant, as a journalist, I am sure has done some research and read lots of books.  However, I tend to believe that Anthony Scaramucci’s education, training and current occupation put him in a very different position than Mr. Grant, including (in my view) a position where he is better qualified to analyze the economic state of our federal government. Anthony is not selling magazines, he is paid to analyze the economy and position his client’s money accordingly. If James Grant is wrong, who cares, you have already purchased his magazine. If Anthony is wrong, in a significant manner, he is out of a job.
  3. As in all things, you should gather as much information as possible from reputable sources and then review the information, while considering where it comes from, use your own logic and come up with your own conclusions.

I tend to lean toward Mr. Scaramucci’s perspective.  Just the fact that the majority of our national debt is held by our citizens (in the form us U.S. Savings Bonds and other debt instruments) is a fact rarely considered. In other words, what is the likelihood that every U.S. citizen holding a debt obligation of the U.S. government would get together at the same time and “call the loans”?  Remember also that most of such debt instruments are, by their terms, long term loans which cannot be called until maturity. In short, the more you consider the details and understand such details, the more you come to realize that things are not quite as alarming as what certain media outlets would have us believe.  But again, panic and alarm get attention and that is what the media is in the business to accomplish.

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