I have a question for you. Letâ€™s say youâ€™re driving down the road, at night, along a busy highway, 10 miles from the next exit, and the oil warning light suddenly blinks on. What do you do? Are you the sort that pulls over or keeps on driving? If youâ€™re the sort that keeps on driving, upset mainly because you donâ€™t have any black tape to put over that pesky red light, then you might as well stop reading right now because weâ€™re about to pull over.
First a set of definitions; when liabilities exceed assets by an amount that cannot be serviced by any conceivable future revenue stream, then one is said to be â€˜insolventâ€™. When current cash flow cannot service current debt payments, then we say an entity is technically bankrupt. And finally, when a debt payment is missed, then a default has occurred, the entity is actually bankrupt and all sorts of legal machinery kicks into high gear.
In my last article I wrote about the fact that United States budgetary and fiscal officials revealed to us that in order for the United States government books to net out to zero there would need to be $53 trillion in the bank, today, earning interest. Of course there isnâ€™t any public money of that sort, or any sort, in the bank.
SCREEEECH! Thatâ€™s the sound of this article pulling over to the side of the road
Stop. Why is this not our #1 topic of debate in Washington DC? If we suspect that we are insolvent as the Comptroller and Treasury Secretary have indicated, then itâ€™s questionable as to whether it does us any good to debate, say, the finer points of federal education reform or a new flag burning amendment. As noted above, insolvency precedes bankruptcy and bankrupt nations cannot afford to do anything so why talk about anything else? We have a bright red oil light lit up on our national dashboard yet the Democratic and Republican leadership continue to drive on bickering about who should have brought the black tape to put over the warning light.
What would it mean if our nation went bankrupt? A good analogy would be New Orleans. The city is bankrupt; itâ€™s a mess, and can only rebuild with federal (outside) assistance. New Orleans completely lacks the ability to rebuild on its own because it doesnâ€™t have the funds and its economy is pretty much destroyed. But if the US goes bankrupt, who will help us rebuild? If the answer is â€˜nobodyâ€™, then you might want to take a trip down to The Big Easy to see for yourself what this country is going to look like in a few years.
The good news is that because the problem only grows more intractable with every passing day, our dithering politicians will have fewer options to chose from when the crisis hits thereby making their jobs that much easier. The bad news is that the more time we spend in denial, the less time remains for us to get busy and do something about it. There is even the danger that if we wait too long, we will face a potentially unfixable problem on the scale of what the Soviet Union experienced â€“ catastrophic economic failure.
During my time as a consultant, I had ample opportunity to witness a very clear phenomenon. If the person at the top of an organization was ethical, for the most part so were all the rungs and layers beneath them. Conversely, an unethical leader usually presided over an unethical organization. As a social animal, we tend to take our cues from above.
Our federal government is now several decades into a reckless love affair with unrestrained profligacy. Because weâ€™ve lacked any clear, moral leadership for so long, it is easy to find reflections of this behavior peering back from every corner of society.
Consider the evidence:
- State pension shortfalls running towards a trillion dollars
- Municipal pension shortfalls in the hundreds of billions of dollars
- Corporate pension and healthcare deficits of one-and-a-half trillion dollars
- 401K savings of only $53k per 55 year old worker
- A national savings rate that has steadily eroded since the early 1990â€™s falling from 10% to negative 1.5%, a condition last seen at the depths of the great depression in 1933
In summary, the list above indicates that at the federal, state, municipal, corporate, and personal levels nobody is saving for the future. I could probably tick off a few more but since Iâ€™m out of fingers on my non-typing hand letâ€™s agree that pretty much covers it. We are not saving for our future, we are all in this together, but it will take leadership to get us out.
It is imperative that we return to our heritage of saving and investing for the future. Somehow weâ€™ve forgotten that a period of living beyond your means must always be balanced by an equal amount of living below your means. The belief that debts can be compounded forever is dangerously naive as it merely shuffles the bills off to the future as though they could be forever hidden by time.
Leaving aside the obvious moral parallel between this behavior and the fable about The Ant and the Grasshopper, this insolvency issue, large though it appears, is merely a symptom; an effect rather than a cause. At the root of it all is our monetary system, which we need to understand before we can begin to posit solutions.
Let me be clear â€“ I think that while it was operating well, our monetary system was a great system, one that fostered incredible technological innovation and advances in standards of living. But every system has its pros and its cons and our monetary system has a doozy of a flaw.
It is run by humans.
Oh, wait, thatâ€™s a valid complaint but not the one I was looking for.
Here it is: Our monetary system must continually expand, forever.
Which means it has a math problem in the same way that a beached whale has a breathing problem. In each case we have a massive organism that was optimized for a very different set of conditions than those in which it currently finds itself.
This will be the topic of our next article.
In the meantime, be on the lookout for DC politicians seeking to buy black tape.
Copyright, C. Martenson, 2006Â©