Wednesday, September 1, 2010

What Happens If the United States is “Insolvent”?

Since the United States started running up large budget deficits when the Great Recession started, there has been some talk by some groups that our debts are "unsustainable" and the United States risks being "Insolvent" and forced into bankruptcy(see herehere, and here).
So let's say that the deficit levels stay at the level they are and the economy remains bad and it causes the Unites States to become "Insolvent", then what happens? The answer is, nobody knows. The reason is that no country, that controls its own currency, has ever declared bankruptcy and quit paying its bills.

That being the case, anyone who tells you what would happen, and the warning signs that its about to happen is only giving their best educated guess since its never happened.

That being said, I came up with an idea of how to tell if the United States is heading towards insolvency.  First, make a list of all the countries and their debt-to-gdp ratio.  This will tell us how much every government owes vs. how much they make every year.  Once we've done that, we can see where the  United States ranks.  Now we can look at all the countries that have a higher debt-to-GDP ratio.  Presumably any countries that have a higher debt percentage would go bankrupt before the United States.  They can be our canary in a coal mine.

Fortunately, Wikipedia has already made the list for us using data from the CIA.
Rank↓Country↓% of GDP[1]↓Date↓
1 Zimbabwe282.602009 est.
2 Japan189.302009 est.
3 Saint Kitts and Nevis185.002009 est.
4 Lebanon156.002009 est.
5 Jamaica124.502009 est.
6 Italy115.202009 est.
7 Greece113.402009 est.
8 Singapore113.102009 est.
9 Iceland107.602009 est.
10 Sudan103.702009 est.
11 Belgium97.602009 est.
12 Sri Lanka86.702009 est.
13 Egypt80.102009 est.
14 Israel78.402009 est.
15 France77.502009 est.
16 Hungary78.002009 est.
17 Portugal76.902009 est.
18 Canada75.402009 est.
19 Germany72.102009 est.
20 Malta69.402009 est.
21 Austria69.302009 est.
22 United Kingdom68.102009 est.
23 Kenya66.702009 est.
24 Jordan64.402009 est.
25 Seychelles63.202009 est.
26 Nicaragua63.102009 est.
27 Netherlands62.202009 est.
28 Cote d'Ivoire61.902009 est.
29 Norway60.602009 est.
30 Brazil60.002009 est.
31 Mauritius58.702009 est.
32 Philippines58.702009 est.
33 Albania58.102009 est.
34 India58.002009 est.
35 Bhutan57.802009
36 Ireland57.702009est.
37 Uruguay56.602009 est.
38 Cyprus56.202009 est.
39World56.002009 est.
40 Ghana55.202009 est.
41 Morocco55.102009 est.
42 United Arab Emirates54.002009 est.
43 Malaysia53.702009 est.
44 Vietnam53.702009 est.
45 Spain53.202009 est.
46 Tunisia53.002009 est.
47 United States52.902009 est.
48 El Salvador52.702009 est.
49 Argentina48.602009 est.
50 Croatia46.802009 est.
As you can see, if the United States is or is becoming "insolvent", then so are 46 other countries that will do so first.  I don't see how our government could go into bankruptcy, but not Italy which has more than twice our debt problem.

This isn't to say debt isn't a problem, just that we aren't quite at the point where we need to worry about insolvency.  Once our debt-to-gdp ratio is either in the top 3 of the world, or other countries(who control their own currency) start defaulting on their loans, then we should start worrying.
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