Why Doesn't the US Just Declare Bankruptcy?

If you were in the same financial mess as the United States government is, you might consider dropping $1500 on a bankruptcy attorney and exchanging a low credit score for the peace of mind that comes with flipping creditors the bird.

It certainly is a tempting possibility. The United States government, as of Tuesday, owes $14 trillion dollars ($14,345,440,513,979.37, to be exact). Every man, woman and child in the United States currently owes $47,216 for their share of the U.S. public debt. Walking away from that debt would seem to be a huge relief to the bottom line of the American government. Unfortunately, the facts are not as sexy as the concept.

Of the $14+ trillion, “only” $9.7 trillion is debt held by the public, either foreign or domestic. The remaining $4.6 trillion is money that the government owes itself — money it “borrowed” from the social security fund, the medicare fund, and other similar funds. That lock-box that Al Gore kept yammering about in 2000 was his strategy for keeping the $4.6 trillion away from Congress and its grubby little paws.

Filing bankruptcy, then, would only save us $9.7 trillion, unless the American people want to walk away from their commitments to senior citizens and the disabled.

But would we even save the remaining $9.7 trillion? Not exactly. Of the $9.7 trillion, only $4.3 trillion is held by foreign governments. Even China and Japan, who seem to get America's panties in a bunch about “owning” America through debt purchases, only hold $2 trillion or so in debt. The other $5.4 trillion is owed to entities like pension funds and your neighbor's college fund — hardly the folks that the government could stiff without causing a ripple effect through the economy.

Overall, best case-scenario, the government could save the $4.3 trillion owed to foreign governments by declaring bankruptcy. The U.S. economy, even in a recession, pulls in $14-15 trillion in GDP. That effectively gives the U.S. a dischargable debt ratio of 28.6%. Bankruptcy? You could get a house with a debt to income ratio around 28%, particularly if your credit is as good as the government's has been for years.

Of course, this scenario doesn't take into account the nearly $10 trillion we owe to ourselves, either intra-governmentally or through pension funds and other investments. It does, however, point to the insanity of defaulting on our sovereign debt as a policy strategy. We would write off less than a third of what we owe and we'd throw away our greatest asset: the full faith and credit of the United States.

Our word is (no pun intended) our bond. It needs to remain that way.