Caveman Books

The Caveman Explores Economics & Politics

Thoughts About Economics

Part I.

Part II, THE INVENTORY ... MODEL OF MONEY

Part III, The Overall Model

Part IV How Much Cash Is Needed In An Economy?

Part V, Money Needed ... Determined By Production Increases

Part VI, How Do Profits Impact ... An Economy?

Part VII Assets

Part VIII Summary

Part IX, Money and Fractional ... Reserve Banking

Part X, Government

Caveman Articles

Money

Government and Taxes

Creating Money & Inflation

Tax Rates VS. Tax Receipts

Taxing The Rich

Government Debt

Government Stimulus



 

 

 

 

 

PART I: What happens when a country goes bankrupt?

 

Bankruptcy is pretty clear when we are talking about organizations (companies, etc.) within a country. Most countries have bankruptcy laws that set down the procedures. Less clear are local governments like cities, counties and states. But it is completely unclear when countries go bankrupt as there are no international laws that handle the situation. And there are a variety of circumstances that could erupt to cause the bankruptcy and a variety of solutions to the problem.

 

What is bankruptcy anyway? In corporate law, it generally means the organization is unable to pay its bills but even here there are a variety of circumstances. Generally, bankruptcy would mean that a company has less assets than it has liabilities; in other words, if the assets could be turned into cash, that cash would not be sufficient to pay off all the debts when they become due. It might be said that the company has a negative net worth. But even here, the exact particulars can become fuzzy. Often, the assets on the books of a corporation are worth more to the corporation that they are to anybody else so converting those assets to cash is easier said than done. You get a new car and it might be worth the purchase price to you for a while, but not to anybody else.

 

Another circumstance can happen when creditors are willing to slow down their payment requests, believing that the potentially bankrupt company might survive and pay them in full at some future time. If the company goes through the bankruptcy procedure, often times the assets are not worth more than ten cents on the dollar and thus the creditor will get little out of deal. So waiting and hoping is a possible strategy.

 

In most cases, in the United States, if a single creditor wishes to force the company into bankruptcy, it can. So for the company to stay out of bankruptcy, it must keep all its creditors happy. Once the company is forced into bankruptcy, a federal bankruptcy judge manages things either through a reorganization where new money is brought in and some of the owners take “a haircut” meaning they get less, if anything, than they put into the company. Creditors might also get a haircut, getting paid some percentage of what they are owed. If new money is found, the company can continue, known as Chapter 11, or if new money is not available, the judge eventually closes down the company, known as Chapter 7.

 

So this is what happens in the United States as a cursory glance with companies. What might be some outcomes if a country goes bankrupt? First of all, many of these countries that are on the edge have more liabilities than they have ready assets. That is, they do not have enough cash to pay off what is due on the current debts, usually interest payments and other expenses. But even worse, they have long term debts and potential debts that far exceed their current assets.

 

The United States in particular has obligations under Medicare, Medicaid and Social Security that translate to over $100 Trillion, with a T. These are obligations over the future that would require the government having some $100 T now to earn money at a reasonable interest rate to cover all those future obligations. Instead, it is in debt by some $15 T now not including the need for $100 T in cash to cover the entitlement programs. In some sense, it is bankrupt already though nobody can go to a court and demand that it go into bankruptcy.

 

I used the term, current assets, because the U.S. government owns a great amount of assets that could over time be sold. Current assets would be the money they generate from taxes and other assets that might be sold in a relatively quick period of time, like gold.

 

Nobody probably has an idea of what the worth might be of the longer term assets, like the Federal highway system. What would that system sell for if a buyer could be found? Would the nation accept toll roads for every national highway, as that would be needed to make a buyer interested in a deal? The Federal government owns millions of acres of land. What is that worth? A lot of it is desert in NV.

 

So the United States may have a positive net worth is all the assets were properly valued. But on a more reasonable basis, its current assets do not cover its current liabilities. In that sense, they would now be bankrupt but since they continue to service the debt and people and countries are willing to loan them more money, they do have the money to pay their bills. The same would not happen in a company.

 

One might ask how the Federal government got into so much debt. Congress happily incurs debt through legislation which assures legislators of getting reelected at the next election. But those loaning the money to the Feds also cooperate because of all the assets of the Federal government, like the land mentioned above, but also because of the power to tax. Through the force of law, guns and jail, the Federal government is a money machine for which lenders feel comfortable. And they lend at much lower interest rates than even the best company can expect to receive. So with easy money and the beauty of democracy, the country is way in over its head.

 

In Part II, we will look at some alternative methods of resolving the debt dilemma.


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