Is the United States Going Bankrupt?

“Come on little girl let your inhibitions run wild!”
Rod Stewart in Tonight’s The Night (Gonna Be Alright)

I’ve always admired that lyric. It’s not merely a malapropism, but it goes a step further. It means the exact opposite of what the songwriter intended. You have to admire that.
I think of this because of the latest academic paper making the rounds. Laurence J. Kotlikoff is wondering if the United States is going bankrupt in his paper called, “Is the United States Going Bankrupt?” I think you pretty much know his answer right now.
If you pay careful attention you’ll notice that the U.S. is perpetually going bankrupt. Yet strangely, financial crises always seem to happen somewhere else.
Dr. Kotlikoff makes the sound point that when looking at our financial health, we ought to focus on future liabilities instead of current debt or cash flow. That’s true. I can add an even better way to look at our financial health is to look at our credit-rating. While the credit rating agencies do examine our national debt, the ultimate rating agency does this every day—the free market. Think of the Treasury market as a national FICO score.
The markets judge America’s fiscal health in the pricing of government debt. Despite all the dire predictions of looming disaster, interest rates on U.S. Treasuries are still quite reasonable. Not that long ago, we would have thought 5% T-Bonds were an impossibility. Now we’re used to them. If we were really in serious trouble, wouldn’t that show up in Treasury prices? Maybe the market is just plain wrong. Yet investors all over the world are eager to lend us money, and that only makes our financial health even sounder.
Kotlikoff cites a study by Gokhale and Smetters that pegs our “fiscal gap” at $65.9 billion. He then writes: “This figure is more than five times U.S. GDP and almost twice the size of national wealth.” Wait a second. If that’s true, then our national wealth is 2.5 times our GDP. In other words, we’re generating a return-on-equity of 40%. (Of course, this is outlandish, but it’s not my numbers.)
If we have an ROE of 40% and we can borrow at 5%, doesn’t that mean the U.S. is dramatically underleveraged. Don’t tell Congress. I’d rather not even discuss their inhibitions.
These analyses usually focus on our looming debt, but they ignore the other part of the picture—our assets. This is what Gary Alexander wrote on this site earlier this year:

Household wealth refers to household assets minus liabilities. In the Doomsday press, all you read about is the near-$10 trillion in household debts, but have you heard anyone quote the $61 trillion in gross assets, six times the debt totals, resulting in net assets of $51 trillion (61 minus 10). In the 2.5 years since the 2003 tax cut, per capita net worth has increased 16%, and the average household is now 27% better off than in 1998, in the middle of the stock market bubble. And U.S. household wealth has almost doubled since 1995. That’s not counting business, which controls an $11 trillion “savings glut” of hoarded cash.

As for me, I’ll stick with the free market’s judgment.

Posted by on July 20th, 2006 at 11:55 am


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