U.S. Bankruptcy would mean big trouble for Washington

Within the next 12 months, the United States Treasury must refinance $2 trillion in short-term debt, yet massive deficit spending continues.

AT WHAT POINT DO WE GO BANKRUPT?

Frankly, I’m worried for our nation and for the state of Washington.

Within the next 12 months, the United States Treasury must refinance $2 trillion in short-term debt, along with additional deficit spending, estimated at $1.5 trillion.

This is simple economics: The Treasury can’t borrow $3.5 trillion in only one year. That’s nearly 30 percent of our entire Gross Domestic Product! Where will the money come from?

Typically, to minimize its interest burden, the Treasury borrows for short durations and then “rolls over” the loans when they come due. In theory, as long as they can extend the debt, there’s no problem. And that has led to ever greater amounts of debt for ever shorter durations at ever lower interest rates.

PAYDAY IS SOMEDAY

Sooner or later, creditors start asking themselves: What are the chances I will ever actually be repaid? And that’s when the trouble starts. Interest rates soar. Funding costs skyrocket. And bankruptcy is certain.

In fact, economists Alan Greenspan and Pablo Guidotti created a formula to accurately predict when a country will go bankrupt, or “default.” The Greenspan-Guidotti Rule is simple: If a country does not have enough in reserves (savings) to cover all of its foreign short-term debts when they become due, it will default.

When this happens, we become a terrible credit risk, and speculators target our bonds and currency, making it impossible to refinance the debt. Then default is certain. Using this scale, the U.S. has reached guaranteed default.

BIG DEBT, LITTLE SAVINGS

The U.S. holds 8,133.5 metric tons of gold worth about $300 billion, 725 million barrels of oil reserves worth roughly $58 billion, and $136 billion in foreign currency reserves. Altogether that’s about $500 billion of reserves.

Foreigners own 44 percent of our debts, which means we will owe them at least $880 billion in the next 12 months – an amount far larger than our reserves. With $1.5 trillion more of deficit spending slated for this year, our total funding requirements will top $3.5 trillion.

As the United States continues to move closer to defaulting, creditors hesitate to buy our bonds knowing the value of the payback is uncertain. If the U.S. defaults, our state’s ability to borrow and our businesses’ ability to borrow and grow local economies will also be at risk.

We will only become solvent again when the government stops spending – both at the state and federal level.

Sincerely,