Is America Going Broke?

Is the United States going broke?

Many would roll their eyes at this notion; they would tell you that the country has never defaulted on its debt that its long-term interest rates are historically low; that the dollar is the world’s reserve currency; and that China, Japan, and other countries have an insatiable demand for U.S. Treasuries.

Others would argue that the official debt reflects taxonomy, not fiscal essentials; that the total of official and unofficial liabilities is enormous (The costs of hurricanes Katrina and Rita alone could easily total $200 billion over the next few years); that federal spending and medical expenditures are exploding, and that the United States has a history of defaulting on its official debt by means of inflation.

On the other side of the coin is China; China is saving and growing at such astonishingly high rates that it can potentially provide the United States, the European Union, and Japan with huge quantities of capital. Some would suggest that China could serve as America’s savior provided China is permitted to invest massive sums in our country (assuming they would want to).

The massive debt looming over the country has ominous implications for our children and grandchildren. Leaving our $65.9 trillion bill for today and tomorrow’s children to pay will roughly double their average lifetime net tax rates (defined as the present value of taxes paid net of transfer payments received divided by the present value of lifetime earnings). [Gokhale, Kotlikoff, and Sluchynsky 2003].

Times are bleak for the U.S. consumer. The average household owes 20 percent more than it makes each year. The personal savings rate is in negative territory. Record numbers of Americans are losing their homes to foreclosure, and millions more are struggling to keep up with their monthly bills and obligations.

The House and Senate have passed economic stimulus packages that include rebates to taxpayers, which the government is encouraging them to spend, which seems like an irresponsible message for taxpayers who have debt or no savings.

Bankruptcy, once regarded as a shameful and humiliating failure, has become an everyday fact of life: More Americans filed for bankruptcy last year in the United States than in the entire 1960’s.

Speaking just hours after the Federal Reserve helped to engineer a rescue loan for investment bank Bear Stearns, Bush said that, although times are tough, the economy is resilient. The country has endured tough times before, he said. “Every time, this economy has bounced back better and stronger than before,” Bush said, expressing his optimism in the future of the country.

Bush rejected several proposals being offered in Congress, including the purchase of boarded-up homes by cities and states, changes in the bankruptcy code to allow mortgages to be discharged in bankruptcy, and extending federal loan guarantees to more homes once lenders have accepted their losses. Markets need time to correct, he said. “Delaying that correction would only prolong the correction.”

So as a Realtor, Investor, and an American, I do hope the correction comes, and comes soon.

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