Unfunded Liabilities Past the Point of No Return
People often say that the US dollar is no longer backed because it is no longer backed by gold or silver.
The truth is that the US dollar is a promissory note backed by the ability and willingness of American taxpayers to pay the value of the dollar.
The currency value of the US dollar is the perceived value of the US government's ability to collect taxes and repay its debts.
This being the case, let's review the fundamentals of the US economy and dollar.
GOVERNMENT DEBT: DEBT TYPE DEBT AMOUNT Federal Government Sector debt - a record high in 2010.
$13.
4 Trillion State & Local Government Sector debt - a record high.
$3.
1 Trillion Un-funded Social Security contingent liabilities $17.
5 Trillion Un-funded Medicare/Medicaid contingent liabilities $89.
3 Trillion Total Government Liabilities $123.
3 Trillion The above summary calculates the current unfunded federal, state and local government liabilities to be 123.
3 Trillion.
I have seen several other estimates running as high as 200 Trillion; however this article will continue to use that figure.
If we take that $123 trillion in government liabilities and divide it by the 111 million households in the US we find that the average household liability to the government for its promises is $1,108,108.
In other words the average household would need to pay $1 million each in additional taxes in order to pay for the unfunded liabilities.
Government budgets are not currently balanced and are unlikely to become balanced as tax revenue declines during the recession.
However, assuming government budgets were balanced let's consider the following chart: Average Household Government Liabilities: $1,108,108 Average Household Income Before Taxes: $67,163 Average Household Federal Tax: $22,929 Average Household State and Local Tax: $6,783 Average Household Income After Taxes: $37,451 Income As a Percentage of Government Liabilities: 3.
4% Total household income in the US is roughly 3.
4% of total government liabilities already in place without future unbalanced budgets.
In other words, if everyone living in the US spent their entire income after taxes - without food, clothing, or shelter - they could pay the interest only on that obligation as long as the interest rate was less than 3.
4%.
This is a good argument for keeping interest rates low indefinitely.
Since people generally need food, shelter and clothing, let's look at household budgets to see how much more they can afford to pay the government: Given that the US savings rate of disposable income is hovering around 0%, it is clear that the average household already spends everything it earns buy its food, clothing, and shelter.
One problem is that while the government has indebted itself beyond the brink of physics, another problem is the average American household has done the same.
According to the Grandfather Economic Reports, the household sector has an additional $12.
8 trillion in its own debt - and the interest rate on that debt is much higher than the government's treasury interest rates.
It is often argued that the government can raise tax rates and increase its revenue.
Sounds like a great idea, but it once again defies physics.
Even assuming that households pay 100% of their income in taxes without any loss in GDP, the unfunded liabilities couldn't be paid.
In addition, the higher tax rates go, the lower tax revenues go and vice versa.
If the government reality wanted to increase its revenue it would have to lower tax rates.
As tax rates increase, taxpayers increasing turn to Fight, Flight or Fraud to avoid paying more taxes.
In the past, debts were manageable and households saved so the US dollar had perceived value.
Some of this perceived value still exists.
However, today it is clear that the US government will be unable to fulfill its obligations.
While people may perceive or believe in the US dollar and government, the truth is that both are insolvent.
It is only a matter of time before perception catches up to reality.
If the government diluted $123 trillion in obligations against the current M3 monetary supply of roughly $14 trillion in an orderly fashion, the dollar would fall in value to about 11 cents in today's dollars.
While the US is insolvent, it is not bankrupt.
Bankruptcy is the realization of insolvency.
As long as investors are willing and able to purchase and hold government bonds the liabilities can be refinanced.
It is only when these promises can't be delivered upon that participants will be forced to realize default and it may be possible to push this off for years.
The US is not the only country with unsustainable unfunded liabilities.
Both the US and Greece have unfunded liabilities exceeding 800% of GDP, The European Union's unfunded liabilities are 432% of GDP.
The US along with most other industrialized nations are undeniably past the point of no return on the path towards a historical renaissance.
There is no way out, but to go forward.
While many free market proponents are pushing for smaller government, balanced budgets, increased savings, and criticize the Federal Reserve for its inflationary policies, it makes much more sense to support the nation's current trajectory because it is much easier to go forward than back and it is too late to change inevitable outcomes.
The more intervention and liabilities taken on by the government, the faster the realization will become.
Despite fairy tale stories by the media and politicians, the laws of mathematics dictate that the dollar and the US economy will default either through the default of obligations or default of the currency itself through inflation.
The truth is that the US dollar is a promissory note backed by the ability and willingness of American taxpayers to pay the value of the dollar.
The currency value of the US dollar is the perceived value of the US government's ability to collect taxes and repay its debts.
This being the case, let's review the fundamentals of the US economy and dollar.
GOVERNMENT DEBT: DEBT TYPE DEBT AMOUNT Federal Government Sector debt - a record high in 2010.
$13.
4 Trillion State & Local Government Sector debt - a record high.
$3.
1 Trillion Un-funded Social Security contingent liabilities $17.
5 Trillion Un-funded Medicare/Medicaid contingent liabilities $89.
3 Trillion Total Government Liabilities $123.
3 Trillion The above summary calculates the current unfunded federal, state and local government liabilities to be 123.
3 Trillion.
I have seen several other estimates running as high as 200 Trillion; however this article will continue to use that figure.
If we take that $123 trillion in government liabilities and divide it by the 111 million households in the US we find that the average household liability to the government for its promises is $1,108,108.
In other words the average household would need to pay $1 million each in additional taxes in order to pay for the unfunded liabilities.
Government budgets are not currently balanced and are unlikely to become balanced as tax revenue declines during the recession.
However, assuming government budgets were balanced let's consider the following chart: Average Household Government Liabilities: $1,108,108 Average Household Income Before Taxes: $67,163 Average Household Federal Tax: $22,929 Average Household State and Local Tax: $6,783 Average Household Income After Taxes: $37,451 Income As a Percentage of Government Liabilities: 3.
4% Total household income in the US is roughly 3.
4% of total government liabilities already in place without future unbalanced budgets.
In other words, if everyone living in the US spent their entire income after taxes - without food, clothing, or shelter - they could pay the interest only on that obligation as long as the interest rate was less than 3.
4%.
This is a good argument for keeping interest rates low indefinitely.
Since people generally need food, shelter and clothing, let's look at household budgets to see how much more they can afford to pay the government: Given that the US savings rate of disposable income is hovering around 0%, it is clear that the average household already spends everything it earns buy its food, clothing, and shelter.
One problem is that while the government has indebted itself beyond the brink of physics, another problem is the average American household has done the same.
According to the Grandfather Economic Reports, the household sector has an additional $12.
8 trillion in its own debt - and the interest rate on that debt is much higher than the government's treasury interest rates.
It is often argued that the government can raise tax rates and increase its revenue.
Sounds like a great idea, but it once again defies physics.
Even assuming that households pay 100% of their income in taxes without any loss in GDP, the unfunded liabilities couldn't be paid.
In addition, the higher tax rates go, the lower tax revenues go and vice versa.
If the government reality wanted to increase its revenue it would have to lower tax rates.
As tax rates increase, taxpayers increasing turn to Fight, Flight or Fraud to avoid paying more taxes.
In the past, debts were manageable and households saved so the US dollar had perceived value.
Some of this perceived value still exists.
However, today it is clear that the US government will be unable to fulfill its obligations.
While people may perceive or believe in the US dollar and government, the truth is that both are insolvent.
It is only a matter of time before perception catches up to reality.
If the government diluted $123 trillion in obligations against the current M3 monetary supply of roughly $14 trillion in an orderly fashion, the dollar would fall in value to about 11 cents in today's dollars.
While the US is insolvent, it is not bankrupt.
Bankruptcy is the realization of insolvency.
As long as investors are willing and able to purchase and hold government bonds the liabilities can be refinanced.
It is only when these promises can't be delivered upon that participants will be forced to realize default and it may be possible to push this off for years.
The US is not the only country with unsustainable unfunded liabilities.
Both the US and Greece have unfunded liabilities exceeding 800% of GDP, The European Union's unfunded liabilities are 432% of GDP.
The US along with most other industrialized nations are undeniably past the point of no return on the path towards a historical renaissance.
There is no way out, but to go forward.
While many free market proponents are pushing for smaller government, balanced budgets, increased savings, and criticize the Federal Reserve for its inflationary policies, it makes much more sense to support the nation's current trajectory because it is much easier to go forward than back and it is too late to change inevitable outcomes.
The more intervention and liabilities taken on by the government, the faster the realization will become.
Despite fairy tale stories by the media and politicians, the laws of mathematics dictate that the dollar and the US economy will default either through the default of obligations or default of the currency itself through inflation.
Source...