Let's talk about the US being declared insolvent.... - Belle of the Ranch

[TexasTowelie]

Well, howdy there Internet people. It's Belle again. So, today we're going to talk about the US being insolvent.

Okay, so a viral claim has been made and it's gotten a lot of traction. Interestingly, it ties into something we just talked about. The claim goes like this. The Treasury has declared the US insolvent. That's quite the claim.

First, what does insolvent mean? The most common definition, and the one I would imagine most people jump to, is something along the lines of the inability to pay debts as they fall due in the usual course of business. Another lesser known definition is something like having liabilities in excess of assets.

First, let's be clear. The Treasury did not declare the US insolvent. It put out a balance sheet. The US is not currently seeing an inability to pay its debts. But it does have liabilities in excess of its assets.

The claims say that currently the US has assets of about $6 trillion and more than $47 trillion in liabilities. That's true. So sure by that definition the government is insolvent.

Is it something to worry about that will lead to economic calamity tomorrow? Not even a little bit. The US has fit that definition for years and years. I'm not even sure when the last time the US government had assets in excess of liabilities. I'm guessing sometime in the 1800s.

So here's the thing. The government is not a business. A business doesn't set monetary policy, employ taxation, regulate commerce and currency, and so on. The report actually kind of notes this. You can't run a government like a business, nor should you want to, as we recently talked about. That being said, I'm not going to trash the source of the claim because at its heart, the core message is that the US can't continue to spend more than it brings in forever. And that's true enough.

I wouldn't look at assets and liabilities to determine the health of an economy or the solvency of a government. I'd look at a debt to GDP ratio. A good ratio for growth and to make certain all debt stays serviceable is generally viewed as around 60%. The exact numbers of what is acceptable vary from source to source and good ones acknowledge a good debt to GDP ratio really depends on a bunch of things including whether you're talking about developing or developed economies and so on.

But it doesn't matter for the sake of this conversation. The high end of the range is about 75%. In fact, the World Bank has indicated that once you go above 77% for a developed economy, you start impeding growth.

What's the US debt to GDP ratio? More than 120%. It's not the highest we've ever had, but if you exclude the period after World War II, it is.

The claim carries the message of, "Hey, we've got to decrease spending and increase revenue." To me, that would mean stop making DoD blow through hundreds of billions of dollars just so a failing president can change the headlines. And we need to tax the rich. But that's a policy debate. What isn't up for debate are the numbers. Our fiscal health isn't good, but we aren't insolvent by the definition that most people use.

Anyway, it's just a thought. Y'all have a good day.