(…continued from this post)

Which brings up the question of, what if the Federal Reserve runs out of money (i.e. has negative equity, or if that’s not convincing enough then the absolute worst case when all the assets it holds on its balance sheet become worthless)? Is that the bankruptcy event that needs the “full faith and credit of the US Government” to bail out? And if the US Government (which is in debt itself) had spent all current revenue, would not or could not issue more debt to raise more money, and had no federal assets to sell? At that time, there would be few choices for the US Government, some seemingly more palatable than others but really all the same:

• it could seize private property, otherwise known as raising taxes;
• it could renege on obligations, otherwise known as defaulting on outstanding bonds or cutting programs like Social Security;
• or it could inflate by directing the Federal Reserve to create the needed money in its account outright (might be just what is needed if there is insufficient debt creation) — this is most like printing money and the accounting trick is simply for the Federal Reserve to “agree” to “buy” worthless assets like new government bonds that nobody else wants and for the government to turn right around to “fund” the Federal Reserve with the new money it got.

And that brings the final question: Is the United States bankrupt?

The answer is of course, yes, pretty much. Look at the balance sheet:

• assets: $80 trillion in national wealth;
• liabilities: $48 trillion in total debt, grows at more than 8%/yr nominal rate, mostly from new debt (inflation-adjusted interest is relatively cheap);
• net production: $13 trillion/yr in GDP, grows at about 5.7%/yr nominal rate, depending on inflation;
• consumption: $9 trillion/yr in private consumptive expenditure, grows at about 6.6%/yr nominal rate, depending on inflation;
• …about $2 trillion/yr in federal government expenditure;
• committed expenditures: $37-$65 trillion in long-run fiscal gap, depending on what you count;

So currently, there’s $32 trillion in net equity (assuming all assets can be pawned off); there’s a yearly $2 trillion (and diminishing) in disposable income. That seems still “fine.” Unfortunately, there’s a bill for $65 trillion coming due in the forseeable future. Oops.

I bet the world as a whole is technically bankrupt, too. We just don’t see it because, after all, you can always borrow against the infinite future. And you can expect to borrow against the future, because you expect people to keep producing and to keep lending into the future. So to pierce that bubble and cause global collapse would require, as mentioned in the paper, for a significant portion of the world either to refuse to work, or, to refuse to lend. Although… the article holds out hope that China, which is among few in the community of nations that actually has a positive “savings account,” will bail out the developed world in the future by doling out loans — hehe, probably will be high interest loans.