Is the United States government solvent?

When George Bush responded to the US downturn by sending everyone a check with some money my first thought was that it might not be the right approach to solve the current issues in the US economy. My reasoning is that I think that the main problem the US face at the movement is that the federal government is heavily underfunded and that the world markets are starting to doubt the strength of the US economy due to the extreme level of debt the US has acquired. So splashing out money to stimulate consumers might alleviate things a little in the short term, it made the underlying problem of US state finances being horrendous bigger. While this problem was not completely ignored by analysts at the time, it was mostly mentioned as a byline. In fact I think that if I hadn’t been searching for mentions of it I might have missed those mentions all together.

Got reminded of my worries today when I came accross an article in a Norwegian paper discussing the Fannie Mae and Freedie Mac bailouts. The US federal government having to bail out  Fannie Mae and Freddie Mac comes at the price of taking on even more debt at the federal level. And while I don’t doubt the need for the takeovers, I can’t help but wonder if by putting out one fire they have laid the foundation for a bigger one. The US defaulting on its debt would have rather overwhelming negative consequences for the world economy. And if that article is correct I am not alone in my worries, it seems a lot of the Asian countries which has up to know invested their trade surpluses into US bonds are getting cold feet and have started pulling out.

Syndicated 2008-09-08 14:41:25 from Christian Schaller