Writing casually on this blog, I've said more than once that the United States is broke. As with all other issues, the question of whether we are broke has now become political. Upon opening the opinion pages of the Pittsburgh Post-Gazette yesterday, I was greeted by two columns on the subject of our bankruptcy. Dan Simpson, a former U.S. ambassador who is now an associate editor with the newspaper, gave his view that The U.S. Can't Fix Libya. The other column was a reprint of Washington Post writer E.J. Dionne's What If We're Not Broke?
bankrupt, beggared, bust, cleaned out, destitute, dirt poor, flat broke, impoverished, in Chapter 11, in debt, indebted, indigent, insolvent, needy, penniless, penurious, poor, ruined, stone broke, strapped, tapped out
The situation in Libya is heartbreaking. The crazy Colonel has regained the initiative, the rebels are in retreat. Yet, Dan Simpson's approach to the intervention problem is simple. He has no political axe to grind. Why can't we fix Libya?
America's problem in devising foreign policy at this stage is two-fold.
The first is that we are strapped financially, even though the American military-industrial complex continues to get away with asking for more and more money as budget cutters slice muscle and bone in education and infrastructure, pretending they are trimming fat. Just look at how much it would take to fix the mess in Wisconsin, or in Pennsylvania, or even Detroit, as opposed to the $2 billion per week that we spend on the war in Afghanistan.
The second is that there seems to be a frightful lack of coordination within the Obama administration regarding the Middle East and North Africa, and the Libya affair has cast a harsh spotlight on the problem...
If the rebels have the will and firepower to get rid of Mr. Gadhafi, so be it. If he is able to hold on, lamentable as it would be to see him join the ranks of President Robert G. Mugabe in Zimbabwe, President Alexander Lukashenko in Belarus, Thein Sein in Myanmar and other distasteful leaders who maintain power by force of arms, it's a mean world out there and Americans are by no means obliged to try to fix all of its injustices, particularly when we are broke.
We can skip the "frightful lack of coordination" part, that being exactly what we would expect. We can't fix Libya because we're broke. We can't afford another military adventure, no matter how noble the cause. This conclusion is straightforward—there's no confusion here! Thus do great Empires decline.
Simpson's view echoes Niall Ferguson's assessment and my own. But now we are going to enter the political world, a world of complexity, obfuscation and confusion. I am going to ignore Dionne's opinion piece because it is actually based on David J. Lynch's Bond Market Shows Why Boehner Saying We’re Broke Is Only Figure of Speech, published by Bloomberg on March 6. Here is the bone of contention—
House Speaker John Boehner routinely offers this diagnosis of the U.S.’s fiscal condition: “We’re broke; Broke going on bankrupt,” he said in a Feb. 28 speech in Nashville...
“If an American family is spending more money than they’re making year after year after year, they’re broke,” said Michael Steel, a spokesman for Boehner.
At this juncture, I am going to ask the almost impossible from you, the reader: ignore Boehner's hidden political agenda, which mostly involves impoverishing you and bulldozing money toward the rich. After all, that's what wealthy interests pay him to do. But ignore all that. Just consider Steel's assertion that if a family is spending more money than it's taking in year after year, that family is broke.
It is impossible to disagree with Steel's statement. This family is in a debt trap. In terms of income, debt and expenditures, it is easy to see that if credit were no longer available, or only available at exorbitant rates of interest, this family would eventually not be able to pay its bills. There would be no choice other than to decrease expenditures if income could not be increased, the impossibility of which was presumably the reason the family borrowed money in the first place. If expenditures—on essentials like food, fuel, shelter—can not be lowered, including interest payments on the current debt, this family can only be viewed as effectively bankrupt.
Yet, many contend that what applies to our hypothetical family does not apply to the United States.
“The U.S. government is not broke,” said Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co. in New York. “There’s no evidence that the market is treating the U.S. government like it’s broke.”
The U.S. today is able to borrow at historically low interest rates, paying 0.68 percent on a two-year note that it had to offer at 5.1 percent before the financial crisis began in 2007. Financial products that pay off if Uncle Sam defaults aren’t attracting unusual investor demand. And tax revenue as a percentage of the economy is at a 60-year low, meaning if the government needs to raise cash and can summon the political will, it could do so.
A person, company or nation would be defined as “broke” if it couldn’t pay its bills, and that is not the case with the U.S. Despite an annual budget deficit expected to reach $1.6 trillion this year, the government continues to meet its financial obligations, and investors say there is little concern that will change...
“I think it’s very misleading to call a country ‘broke,’” said Nariman Behravesh, chief economist for IHS Global Insight in Lexington, Massachusetts. “We’re certainly not bankrupt like Greece.”
“You are never broke as long as there are those who will buy your debt and lend money to you,” said Edward Altman, a finance professor at New York University’s Stern School of Business who created the Z-score formula that calculates a company’s likelihood of bankruptcy.
Here we encounter one of the greatest confusions of our times: credit equals income. As with our hypothetical family, the United States is in a debt trap. But that's really not the case according to the muddled reasoning of Edward Altman as quoted above. As long as credit is available at any reasonable any rate of interest, the United States is not broke.
Thus according to Altman, being broke is a relative thing. As long as the bond market is not treating us as if we're broke, we're not broke. We could only be considered bankrupt if there is an exogenous shock in the debt market. That's what happened to Greece. Until then, there is no debt trap.
Or as David J. Lynch said, a person, company or nation would defined as “broke” if it couldn’t pay its bills. You see, it doesn't matter how you pay your bills as long as you can pay them. Credit equals income. Of course, this line of reasoning, if followed to its logical conclusion, goes right off the deep end—
George Magnus, senior economic adviser for UBS Investment Bank in London, says the U.S. dollar’s status as the global economy’s unit of account means the U.S. can’t go broke.
“You have the reserve currency,” Magnus said. “You can print as much as you need. So there’s no question all debts will be repaid.”
Talk about confusion! Here, printing money equals income.
Is the United States broke? Of course it is! One confusion lies in the assumption that current credit conditions will always obtain. This is typical human shortsightedness. It then follows that the current Ponzi Scheme arrangement is sustainable, at least for several years to come.
In short, it's like the old joke about the man who jumps off a 100-story building. He's in free fall, and upon passing the 50th floor on his way down, is asked how things are going. His response?
So far, so good!