Copyright by John T. Reed

The U.S. national debt is $11.9 trillion.

The U.S. Gross Domestic Product was $14.3 trillion in 2008.

Total U.S. tax revenue was $2 trillion for 2008.

Projected additional deficits for the next ten years are $11.7 trillion.

The President of the Dallas Federal Reserve Bank, Richard Fisher, said, “We at the Dallas Fed believe the total [current unfunded liabilities of the U.S. government] is over $99 trillion.”

Unfunded liabilities are debt the U.S. government owes or will owe for federal employee pensions and benefits, social security, Medicare, and Medicaid. Corporations are required to state them on their balance sheets. The federal government is not.

The sum total amount is: current national debt of $11.5 trillion + projected additional deficits over next ten years of $11.7 trillion + unfunded liabilities of $99 trillion = $122.2 trillion.

Total world financial assets are $178 trillion. Since the U.S. government is almost certainly underetimating our national debt and unfunded liabilities, the amount we owe is probably closer to $178 trillion. In other words, it is literally true that all the money in the world is not enough to pay our national debt and social security, Medicare, and so on.

The total market capitalization of all U.S. stocks is $15 trillion; all the stocks in the world, about $40 trillion.

The total value of all the assets in the world is about one quadrillion dollars; in the U.S., about $110 trillion. That’s all assets, not just financial assets, that is, your car, jewelry, furniture, real estate, gof clubs, and so on. In other words, if we sold the entire U.S. and everything in it to someone, it would not be enough to pay off our national debt and all the social security, Medicare, and so on that we have pledged to pay.

If we were to pay that debt off over the next 30 years at 5% interest the annual payments will be $7.9 trillion. To get the tax money to pay that much per year, we would have to raise taxes by $7.9 trillion ÷ $2 trillion current annual tax revenue = 400%. For example, if you paid $50,000 in taxes last year, you would have to pay $200,000 a year for the next 30 years to cover the debt obligations of the U.S. government.

The American people cannot pay such taxes and would refuse if they could.

Total wealth of all U.S. residents and entities: $55 trillion

Net worth of the population of the U.S. according to Federal Reserve Consumer Balance Sheet figure quoted in a 2005 book: $40 trillion

The alternatives are:

A. default on some or all of those obligations
B. inflate the dollar which has the effect of lowering the real (after inflation), value of all debts, bonds, CDs, life insurance, annuities, and savings accounts
C. cut spending by $6 trillion a year which is impossible because the total annual outlays are only $3.9 trillion

Obviously, the government will do B, inflate the currency, because it is the only choice that holds out the hope that the politicians can deflect blame to someone else, namely, retail merchants. Inflating the currency wipes out the real (after inflation) values of dollar-denominated assets like those listed above in B.

The government will probably also “means test” Social Security and Medicare. That is, they will reduce, in many cases to zero, the Social Security and Medicare benefits that affluent people receive.

The over $1 trillion per year of planned deficit spending over the next ten years requires that someone lend the U.S. government that much each year. Thus far, U.S. citizens, pension funds, banks, and foreigners have been making those loans by buying U.S. Treasury bonds. As inflation heats up, they will stop buying those bonds and will try to sell them. That will force the U.S. government to offer higher and higher interest rates to entice someone to buy the bonds. Foreigners will also refuse to accept dollars for their exports and will run on all the banks where they hold dollar-denominated accounts to convert those dollars into gold or other hard assets or currencies.

This will be the equivalent of forcing the U.S. government into involuntary bankruptcy. There is no precedent for what that means. Normally national defaults are handled by the International Monetary Fund and World Bank. IMF offers highly leveraged loans to poorer countries. They are not big enough to bail out the U.S. The World Bank is similar. No international organization is big enough to bail out the U.S. Furthermore, the rest of the world is so tied to the U.S. financially, that they will need their own bailing out as a result of the U.S. bankruptcy.

Could economic growth cover the additional $6 trillion per year we need to pay these debts? The non-partisan and respected Congressional Budget Office already assumed some growth in their projections of deficits over the next ten years, so the answer is not. Economic growth from a recovery is already factored into these numbers.

What should you do? I am writing a book on inflation and deflation right now that will make a variety of recommendations for individuals to save themselves as much as possible. Basic ideas are buying things you will need in the future now as much as possible, pay off recourse debt, favor hard assets rather than dollar-denominated ones, make sure you have sufficient liquid hard assets like precious metals to avoid forced sales of illiquid hard assets like stocks or real estate, hedges, and so on. The recommendations are fairly technical not some simple one-step formula like buy real estate. The research on past episodes of inflation and deflation are scary. But the ancient observation “This too shall pass” applies. The typical hyperinflation or deflation has lasted one to 12 years. But those who configured their assets and liabilities wisely before it hit came out well or reasonably well. Those who did not, suffered far longer than the national hyperinflation or deflation period itself.

I appreciate informed, well-thought-out constructive criticism and suggestions. If there are any errors or omissions in my facts or logic, please tell me about them. If you are correct, I will fix the item in question. If you wish, I will give you credit. Where appropriate, I will apologize for the error. To date, I have been surprised at how few such corrections I have had to make.