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What are the Chances the U.S. Government Goes Bankrupt?

Tuesday, September 19th, 2017

Last week we did a social media post about Bitcoin, one of our most controversial posts of the year. A major theme which stood out was the concern people have about the full faith and credit of the United States government. There are concerns our government is on the brink of bankruptcy. Those lacking knowledge and understanding of financial statements are missing the strength of the United States government based on their balance sheet. It is similar to one’s personal financial statement, taking your assets minus your liabilities gives you your net worth. People fail to understand the United States government also has assets, liabilities, and a net worth. The debt you hear about is the equivalent to one having a credit card with a large balance which rises each year. It is not a good thing and it does hurt your net worth but it will not cause you to go into bankruptcy. So, in today's newsletter I thought I would share with you the items which make me feel comfortable and not panic over the media's debt hype and give you a good understanding of the United States government's assets, liabilities, and their net worth.

The United States government has well over $100 trillion in assets which is never brought out when I hear a discussion of the $19 trillion debt. When looking at a financial formula known as the debt to asset ratio, the government has a ratio of 10 to 1. To put this into perspective, it would be equivalent to a person being a million dollars in debt yet having assets of $10 million, which would put them in a very comfortable position.

Here are some of the assets on the government’s balance sheet, over 900,000 separate real assets covering 3,000,000,000 square ft. Mineral rights held on and off shore, covering 2.515 billion acres of land, which is more than the total surface land of Canada. There are many vacant buildings sitting in the United States, last count was over 45,000 buildings with an operating cost of about $1.7 billion per year. And let's also not forget the government has oil and gas resources on and off shore which alone could be worth $60-$75 trillion. The government also holds about half trillion dollars of gold and there is an expense, a large expense for keeping that gold safe year after year. Since our currency is no longer backed by gold, there's no need for the government to hold gold. It may feel good but it does nothing financially for the government. If the government needed to raise capital they could sell this gold. Lastly, the student loan program you hear about is actually an asset the government holds. When you owe your bank money for your mortgage, your mortgage is a liability to you but it is an asset to the bank. The government could sell these loan portfolios to a financial institution. Financial institutions buy and sell loan portfolios all the time.

Another measurement showing the debt is not out of control is a ratio called debt to GDP, it currently stands around 77%. This may sound high but back in 1946 it was 108% and obviously the government continued. There is a non-partisan government organization called the Congressional Budget Office and they project the debt as a percentage of GDP will rise from 77% to 86% in the year 2026, which is still manageable.

Another reason people think the debt will continue to rise is rising rates resulting in higher interest payments. As treasury notes and bonds come due from 10 to 30 years ago, even with the rising interest-rates these notes and bonds will actually be at lower rates than 10 to 30 years ago. I went back 10 to 30 years and noticed rates on the debt were between 7 and 9%. Even if rates rise by 2% which is a lot, 10-year treasuries would be renewing at around 4.3% and 30-year bonds would be renewing around 5%. This would still be a good savings on interest payments for the government. 

If the government were to completely pay down its debt this could turn the financial markets upside down. Why, you may ask. When an investment needs a guaranteed return of interest and principal, the best investment to use is a treasury note or a long-term bond issued by the United States government. Therefore, many countries and pension plans buy US government debt for the guaranteed interest and return of principal. Removing that option from the financial community could cause a disruption with unforeseen consequences.

So, just like that high balance credit card you may have or had, you do want to get that paid down, if not paid off? The same holds true for the government but by no means will this $19 trillion or $20 trillion debt place the United States government into bankruptcy. The term backed by the full faith and credit of the United States government still carries a lot of weight. Do not let anyone tell you any different. If they do, then they do not understand financial statements or the balance sheet of the United States government.

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