Putting it all into perspective: This is how bad is the US national debt problem really is…

Putting it all into perspective: This is how bad is the US national debt problem really is…

Since the great recession which started in 2008, we saw many local municipalities across the country throw up their hands in defeat and file for bankruptcy.  Multiple cities and counties from all over began to declare bankruptcy and restructure their debts. 

This was quite shocking to most, since municipal bonds have always been considered a safe and secure asset class.  Unfortunately, many bond holders received significant haircuts on their “sure bets.”

The following is a list of many of the local governments that either declared bankruptcy or some other similar form of default on their debts:

  • The City of Detroit, MI
  • The City of San Bernardino, CA
  • The Township of Mammoth Lakes, CA
  • The City of Stockton, CA
  • Jefferson County, AL
  • The City of Harrisburg, PA
  • The City of Central Falls, RI
  • Boise County, ID
  • The City of Vallejo, CA
  • The Commonwealth of Puerto Rico (US Territory)

Up until 2017, the City of Detroit was the largest municipal bankruptcy on record, defaulting on $18 billion of debt (2013).  This year, Puerto Rico declared bankruptcy, effectively defaulting on the territory’s $73 billion of debt and making it the new largest municipal bankruptcy in US history. 

Although local governments can use bankruptcy laws to restructure their debts and start all over financially, it is US law that states cannot declare bankruptcy.  This makes it very difficult for states such as California, Illinois and New York who have massive spending deficits and debts.  Puerto Rico, which is really more like a state than a municipality, was allowed to declare bankruptcy as a municipality due to the fact that Puerto Rico is not a state.

The United States as a country is in a far worse financial condition than any of the municipalities that were listed above.  Here is a comparison of the debt/income ratios for Detroit, Puerto Rico and the United States government to help illustrate just how bad things really are. 

2013 Bankruptcy of Detroit

detroit_city_600x400

At the time of bankruptcy, the City of Detroit defaulted on $18 billion of debt and unfunded liabilities.

At the time of bankruptcy, the City of Detroit had an annual tax revenue of $1.1 billion.

At the time of bankruptcy, the City of Detroit had a debt/income ratio of 16.36 (this means that the city’s debts were 16.36 times larger than its annual revenue).

2017 Bankruptcy of Puerto Rico

USA-2016-Puerto_Rico-San_Juan-Santa_María_Magdalena_de_Pazzis_Cemetery

At the time of bankruptcy, Puerto Rico defaulted on $73 billion of debt and unfunded liabilities

At the time of bankruptcy, Puerto Rico had an annual tax revenue of $9.7 billion.

At the time of bankruptcy, Puerto Rico had a debt/income ratio of 7.5 (which is bad, but far better than the City of Detroit’s ratio).

2017 Financial State of the United States of America

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Currently, it is estimated that the US government has more than $220 trillion in debt and unfunded liabilities.  (The official public debt is $19.9 trillion, but most people do not realize that this does not include all of the unfunded liabilities such as Social Security, Medicare, Federal Pensions, etc… which are estimated to be more than $200 trillion).

Currently, it is estimated that the US government annual tax revenue is about $3.4 trillion.

Based on these estimates, the US government’s current debt/income ratio is a whopping 64.7! (The US debt and unfunded liabilities are 64.7 times as large as its annual tax revenue.  This is makes the US government 3.95 times worse off than the City of Detroit was when it declared bankruptcy in 2013!  This also makes the US government 8.6 times worse off than Puerto Rico was when it declared bankruptcy earlier this year!

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