February 04, 2004

"Yes...We're Insolvent...But Not, You know...Really Insolvent"

Spent an hour today with Mr. Daily Reckoning, Bill Bonner, discussing the possibility of a default by the U.S. government. Does the dollar standard end with a bang or a whimper? With deflation or inflation? And if everyone wants to sell U.S. bonds, who's going to buy and at what price? Lots of people find it hard to believe the government could go bankrupt...become insolvent. They might be surprised to find out the government already IS insolvent. Of course, in defending its balance sheet, the government says appearances are deceiving. I haven't made any comment on the government's defense of its balance sheet. It speaks for itself. But I did highlight what I thought were some extraordinary statements...extraordinarily arrogant. If you want to see a PDF image of the balance sheet itself, fedbalancesheet.jpg From "Analytic Perspectives" on the FY 2005 Budget: Table 12-1 seems to imply that the Government is insolvent. Is it? No. Just as the Federal Government's responsibilities are of a different nature than those of a private business, so are its resources. Government solvency must be evaluated in different terms. What the table shows is that those Federal obligations that are most comparable to the liabilities of a business corporation exceed the estimated value of the assets actually owned by the Federal Government. The Government, however, has access to other resources through its sovereign powers. These powers, which include taxation, allow the Government to meet its present obligations and those that are anticipated from future operations even though the Government's current assets are less than its current liabilities. The financial markets clearly recognize this reality. The Federal Government's implicit credit rating is the best in the world; lenders are willing to lend it money at interest rates substantially below those charged to private borrowers. This would not be true if the Government were really insolvent or likely to become so. Where governments totter on the brink of insolvency, lenders are either unwilling to lend them money, or do so only in return for a substantial interest premium.


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