The U.S. Government: Adding Illiquidity to Insolvency

[The following post is by Managing Director of Windrock Wealth Management Christopher P. Casey, CFA®]

Nobody believes that the states will eternally drag the burden of these interest payments. It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract.

- Ludwig von Mises, Human Action (1949)

U.S. bankruptcy code (Sec. 101 (32)) defines insolvency for businesses as the “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at fair valuation.”  

Although the federal government’s $18.2 trillion debt is commonly compared to U.S. GDP of only $17.4 trillion, a far more appropriate debt comparison would be to compare it to assets possessed by the U.S. federal government (since, after all, the “economy” is not obligated to pay the national debt).  The values of such assets, liquid or otherwise, are inherently difficult to ascertain – some are unknown (e.g., real estate, mineral rights, offshore oil deposits) while others are of suspect value (e.g., student loans, U.S. Postal Service).  

Most reports estimate such assets at well below $4 trillion, so the net worth of the federal government would be negative $14 trillion.  The Federal Reserve is a bit more optimistic: it estimates the U.S. government’s net worth at negative $12 trillion.  Either way, the federal government is clearly insolvent under its own law, if it were a business.

The U.S. bankruptcy code contains another definition of insolvency; one which is in fact specific to government (municipalities). Read More...

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