How did we get to this point and, more importantly, how do we get out of it?

(Daily Bail) — The U.S. government is insolvent. Who says so? Timothy F. Geithner, the U.S. Secretary of the Treasury. Geithner sent a letter to Congress on Jan. 6, 2011 asking for the debt limit to be raised. If it is not raised, he warned, the U.S. will default on its debt.

In his words:

  • “Never in our history has Congress failed to increase the debt limit when necessary.  Failure to raise the limit would precipitate a default by the United States.”

He didn’t say that the government will be inconvenienced. He didn’t say that the government would be forced to muddle through by delaying payments, raising taxes, and cutting non-obligatory programs and services. He said the government will default. This means that the government doesn’t have enough cash to pay its obligations to the many and sundry persons to whom it owes cash unless Congress authorizes an issue of even more debt.

After the government issues the new debt, its overall debt will be even higher than before. Unless its obligations that require cash payments are reduced, or unless it finds new sources of revenue, or unless the interest rates that it pays decline, the same situation will surely occur again and occur even faster because its overall debt will have risen. It will run short of cash to pay its obligations.

Suppose that you had a debt of $10,000 that required a payment of $500 in order to stave off your creditors’ seizing your assets. Suppose that you didn’t have the $500. One way out would be to borrow $500 from a new lender and use that $500 to pay off the old lenders. That buys you time. However, now you have debts of $10,500. You have to find ways of lowering this or else you will again be faced with an even worse situation.

You are approaching insolvency when you begin to run out of new lenders who are willing to add to your debt. The willing lenders dry up because they know that they have to get in line to get their promised payments while you continually seek out new borrowers, all the while making your situation worse and worse.

Knowing their precarious position, the new lenders are likely to demand rising default risk premiums.

That means they demand higher interest rates.

That means your cash payment obligations go up. That hastens your approach to insolvency. . . .

A few months back, Laurence Kotlikoff wrote that “The U.S. is bankrupt.” Using the government’s numbers properly labeled, he found that the U.S. fiscal gap, which is the difference between the present value of projected spending and revenues, is $202 trillion. An IMF study of the U.S. finances found that it would have to double taxes to close its fiscal gap. This is an impossibility. It would destroy the struggling economy.

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