Transcription
The United States has already spent close to $280 billion dollars on attacking Iran on the Iran war. And yet the United States government is insolvent. As you recently mentioned in a fascinating article in Fortune magazine that you published, um, just probably about a week or so ago, maybe two weeks ago. The article is titled "The Treasury Just Declared the United States Insolvent." And, uh, I was absolutely fascinated by the argument and by the article itself. Um, could you walk us through the data that you examined that you referenced in the article and, uh, your conclusions as well?
Okay, I'd be happy to do that. I I can see why you probably like that, being a CPA. You you you you can get into the get into the balance sheet and get into the weeds. I I I I wrote, I I co-authored that with a good friend and colleague of mine, uh, Dave Walker, who was the controller general of the United States. So, uh, we teamed up to look look at the financials. When when they came out, by the way, the the US government does every year produce the financials. So if you look at them, though, uh, let's let's look just look at the budget itself before we get into the off-budget. So the budget itself, you you have assets of about $6.1 trillion and the liabilities are, uh, about $48 trillion. So when when assets are much smaller than liabilities, you're insolvent. So, so that's the that's the budget. Uh, I I should say that's the balance sheet, not the budget, that's the balance sheet.
But there there there actually is another big balance sheet. Uh, that's that's off-budget and that includes Social Security and Medicare. And that that adds to the $48 trillion liabilities that you have to add a little over $88 trillion more. So it's, you know, almost doubling the size of the assets. So So if you combine the combined on-budget and off-budget items together, uh, and those off-budget items are basically unfunded liabilities. I mean, there there there's no no provision for funding these things. They're they're just liabilities of the federal government. The federal government promises to pay. And if they're unfunded and and they promise to pay and they deliver on the payments, what's that mean? That that means that either taxes are going to have to go up to direct taxes to pay them, or you'll have an inflation tax to to inflate the liabilities away. And e either way, somebody down the line is going to get hit with one hell of a big bill, $88 trillion dollars already and and climbing. So, so the bottom line, if you combine the combined budgets, Lena, are we $6.1 trillion in assets and $136 trillion in liabilities. So that's the insolvency.
So, what what do you do about this? Well, Walker and I, uh, pointed to a couple pieces of legislation that are actually, uh, in in the works now that ultimately would would start tackling the problem. One one of those would be to set up a fiscal commission, and and there is a bill to do that. Uh, HR 3289 is the number if anyone wants to look at it. It's co-sponsored by Bill Huzzinga and Scott Peters. Both one one is a Republican, Huzzinga from Michigan, and Peters is a Democrat. And then it's, I think they're over 40 co-signers. So So what would this commission do? Well, it would start trying to put a spotlight on what the problem is that we're talking about and and how to clean it up. So, so that that's kind of, shall we say, the the short-term fix of the of the insolvency problem that I just outlined that they would start tackling that.
The the next bill is in a way more significant, and that that was sponsored by, uh, Jody Arrington from Texas, and and that would call for a constitutional convention to rewrite the US Constitution. And and that, um, bill is actually HR. It's a resolution. It isn't a bill. It's a congressional resolution. Uh, 15, number 15. And and what that would do, it it would force the, if if acted upon, it would force the Congress to do what they're mandated to do anyway. And since 1979, two-thirds of the states have proposed that we should have a constitutional convention, a limited one that would be limited on focusing on constraining the politicians so that they couldn't engage in these activities that rendered us insolvent. So it, there are many possibilities, but one, you'd put a debt break in the Constitution. You you'd amend the US Constitution, put a debt break in it like the Swiss debt break that was put in in 2001 in Switzerland. And and and what the Swiss do, they say government spending can't increase any more rapidly than the rate of growth in the economy. So, so the by doing that, the the government can't crowd out the private sector. It could get smaller, but it couldn't get any bigger as a proportion of GDP than it is right now. So that would that would be one aspect.
The second aspect, over the over over the business cycle, you would have to balance the budget. That would be a good thing. At least an attempt.
So, so at least that means over the business cycle, you couldn't be adding to the debt because you would the deficit would have to be zeroed out. You'd have to you'd have to balance revenues and expenditures, and and the expenditures could not grow any more rapidly than the economy was growing. If the economy is growing at like last year at 2.1% real rate of growth, then the inflation real rate of growth in the government spending could only be 2.1%. It's it's much greater than that now, by the way. It's over double that.
So that means the government's expanding. That means that means that that Trump, of course, who has no interest in fiscal sanity. He he he's latches on to what I call fiscal lunacy. And the fiscal lunacy is that our deficit is over 6% of GDP, a very high number. So that that means we'll have to be issuing a lot of Treasury bills and bonds to finance it. And hopefully the Fed will not monetize those. The Fed won't buy. The Fed's already buying them. By the way, in December, the Fed changed from quantitative tightening, where they were shrinking the size of the balance sheet and and and letting the bills and bonds that they had run off and shrinking shrinking. Now they've gone into quantit from quantitative tightening to quantitative easing, and they've actually produced since December, they they've bought over $40 billion worth of bonds, mo most bills, actually, most of them bills, treasury bills, short-term treasury bills. And that means what that that means they've increased their contribution to the money supply, the Fed has. But when they buy those, they they create credit, and that is increases the money supply, and that eventually feeds into more inflation. So, forget the infla, we haven't talked about inflation. The the Fed is not going to put the inflation genie back in the bottle. The money supply is accelerating now. Accelerating. And and and that means more inflation, not less inflation.
And if we turn to deficit very quickly, um, I recently read that based on early 2026 data, the US federal budget deficit is projected to reach approximately $1.9 trillion for the fiscal year, with $1 trillion deficit already recorded through February of 2026. Dr. Dr. Hanky, at what point does a large and growing deficit become a crisis rather than a manageable condition?
Well, it's two ways. One one is if if for some reason the bond vigilantes get on their horses and start riding, they they they will to buy Treasury bills or bonds, they will demand a higher interest rate. And a higher interest rate feeds back into the budget because right now, interest expenses are increasing at a very rapid rate, and and they're eating up, uh, the exact number off the top of my head, I can't remember today, it's around 15% of the budget, which is a very high number, by the way. Now, that's 15% of of budget expenditures that that that are going to just service the debt. I mean, it it's not buying anything, or or it's not transferring money back to taxpayers or anything like that. It's going to people who bought the bonds. And so that that's that's one channel that could be could create a crisis because if interest rates go up, it's not only going back and feeding back into the federal budget and and meaning that there's bas basically less being spent on real goods and services out of the federal government budget, or or being transferred from one taxpayer to another taxpayer. It's just money money going in in a way into a black hole.
So that's that's one aspect. Another aspect is if if we have a situation like when we when we had COVID, remember we we had the the lockdowns and the economy was locked down, and the revenues going into the government went down, but at the same time, expenditures went up, and we had a monstrous deficit. And what happened? That about 90 over 90% of that monstrous deficit was financed by what the Treasury issuing bonds and bills that were bought by the Federal Reserve and monetized. You monetized the debt, and we had what? All of a sudden, the money supply shot up. It was growing faster than it had ever grown before. Was growing over 27% per year. And with a lag, what happened? Well, we got inflation. Went up to 9.1%. That's where the inflation came from. Forget this supply chain shocks and temporary, remember team temporary inflation was going to be team temporary. No, it was a natural thing. The money supply skyrocketed, growing at a more rapid rate than any time since the Federal Reserve was founded in 1913. And sure enough, with a lag of about a year, inflation revved up. And and by the way, the only people who made a forecast of that with John Greenwood and I using the quantity theory of money, we we said in in an article published in the Wall Street Journal for the record that inflation could go up to as high as 9%. Well, everybody thought we were nuts at the time. And when what happened? Well, it went to 9.1%. I I think that's why you first contacted me because of because of that forecast. Actually, you you you saw it and recognized you said, "Well, maybe these guys know something."
Yes. And and it's it's interesting because there's so many things going on in the US economy right now that sort of they're flashing red. Um, one of them is the jobs market because despite the most recent headline labor market data, I noticed that the household survey showed that year to date, the United States has lost 1.4 million jobs. So, the US economy is weakening, and that's on top of the the effects of the Iran war. Um, and so now with the rise in energy costs, it may be safe to say that we're on the path toward a full-blown stagflation, and the Federal Reserve is now stuck between sort of fighting inflation, as you said, it's not going to put that genie in a bottle, and supporting economic growth. How does this situation complicate decisions for central banks like the Federal Reserve and maybe other global banks? Uh, let's just take the EU, for example.
Well, it it puts them in a very difficult situation because what what you have, you you've had misguided monetary policies in the United States and and and Europe and Great Britain. And you've also had misguided fiscal policies. No one has any room to wiggle. There's no wiggle room left. Everybody's running huge deficits. They have very high levels of debt. Uh, and and and monetary policy, they're they're trying to get inflation back towards targets, but the inflation's above targets. So So that's a situation before you start the war. And and the war is to use jar a little bit of jargon, but people will understand, the war does what it imposes a huge negative exogenous shock in the system. And and the system is all very fragile before the fiscal thing is not correct. The monetary thing is not correct. The tariff thing, trade is not correct. Everything is not correct. And then you've got in the US, the the the world's biggest economy and mo most powerful great power. You you've got this regime uncertainty where not only everything is not not correct, the standard monetary fiscal, it's not correct. It's off-balance. And then all of a sudden, you've also got surrounding at this regime uncertainty. So you've got the biggest economy kind of teetering on one leg, and then you start a big war. Th this is just this just lunacy. And and and by the way, we don't know what the next lunacy coming out of the box will be because this this ceasefire thing we we talked about, I I think is very fragile at at best, at at best, it's very fragile. And and the spoiler will be Israel. Israel wants to keep this war going, and and they will attempt with all kinds of false flag operations that will be very hard to detect, by the way, because the censorship in Israel is almost total. And and you notice that none of none of the reporters, by the way, they can't they can't even go into the Gaza.
And and I think of the reporters, the one thing Israel is pretty good at is assassinations. And they've assassinated, I don't know what, I can't remember what the final count on, but it's it's in the hundreds of journalists that have been assassinated. So if the Israelis don't like what you're reporting, boom. So all all the reports you see from the Middle East, they're all reporting from Jerusalem or Tel Aviv, the reporters. But all all of that is all totally censored. And and and and there are two things that the Israelis are very good at: assassinations and censorship. It turns out that the glorious Mossad, who knows everything and never makes mistakes and so forth, they they made a big one in Iran. The decapitation strategy didn't did. We know unambiguously where it came from. It came from the Mossad. And we know unambiguously that it did not work. It failed. And and we know from the scholarly literature and history that decapitations almost never worked.
And I all of that was known. And and we also know, by the way, that the deep state in the United States did tell Trump just what I've told you. But Trump went ahead, and that's that gets back to the Israeli lobby. That gets back to Professor Mshimer. Why why did he not listen to the deep state? Why did he take orders from Netanyahu and basic basically the Mossad? Because the Israeli lobby is it's very powerful.
Exactly. Exactly. And I would just add that it may be fair to argue that, uh, the decapitation strategy actually backfired because if you talk to, uh, people from Iran or of Iranian origin who now live in the West, they would tell you that it actually, um, the assassination of Ali Hamini actually united Iranians again around the state. It didn't cause them to want to be bombed. It didn't cause them to want for their infrastructure to be destroyed. It actually united them around the state and against the aggressors, the US and Israel. So, it it backfired, arguably. This is this has happened, uh, this has happened many times in in the, you know, Persian history, Iranian history, and Persian culture. And and and this, one of my colleagues, uh, Professor Vali Nassar at the John's Hopkins School for International Studies, has written a book on the, and I think his latest book is was published in December. I think it's called "The Iranian Strategy." You can Google that. But he's another one to watch on YouTube because, uh, of course, he he's a very distinguished scholar. Having he was born in Tehran. His father, he got his PhD at MIT. His father is also a very distinguished scholar who also received his PhD from MIT. So, so his his he's gone through the history to understand Persia and for thousands of years, but more recently, let's say since 1500, that Persia has always been in in a defensive position in a in a way because, number one, they are not Arabs. They're they're not Arabs, but they're surrounded by Arabs. So, you've had the Arab, shall we say, challengers. That's that's been one thing. You've had Russia challenging him. You've had Great Britain challenging him. You've had the United States challenging. You had Israel challenging. Always these challenges, but but but they persist with this rally around the flag. When they're when they're attacked and and people try to destroy them, what do they do? They rally around the flag. And and and that he goes through this, and he he indicated he anticipated even before the the earlier war this year with Iran that that's exactly what they do, and that's what they've done. And and and and his conclusion, as well as Mshimer's, by the way, they're they're both on the same page, that that the longer the war stretches out, the the better it is for Iran. They they will be they will be that will be be beneficial, and and that you don't get that spin in the United States. The propaganda machine says, you know, they've been destroyed this thing and that thing, but but in fact, they've they've they've been what the the war has actually helped them because they they control the Strait of Hormuz, the choke point. There are eight choke points in the world. One of them happens to be the Strait of Hormuz. They control that. And the other one is a strait going into the Red Sea. And who controls that? Houthis.
Bob and Deb, you're right. Exactly. So those two straits, if they if they actually were shut down, we we would have pretty much a catastrophe in in the world economy. So So keep that in mind. So So and and and finally, some somebody apparently told Trump that he's going to destroy the world economy if this thing keeps up. Now, he'll spin it as as we want everything. I I've gotten everything I wanted. It's been beautiful, and so forth. But all we have, we have a lot of negatives in the United States. We have the financial negative that you talked about. We have an economic negative. We have a political negative. And and a huge reputational damage because China will come out ahead, Russia will come out ahead, BRICS will come out ahead, the Global South will come out ahead. Everyone's pivoting away from the US. In fact, it was just announced earlier this week, you know, that the French have finalized the removal of all their gold. They in the United States. That that pivot is is one of many little symptomatic things that are happening. You can't totally pivot away. By the way, just to make clear, the the greatest power in the in the world is the United States. There there's no way you can do 100% pivot. But at the margin, you can pivot and move away. And this will be very damaging to the United States, I think, in the long run. The long run cost of of these tariffs and the war against Iran will be very significant.
Dr. Hanky, and maybe the last question for today, what is Trump's economic endgame? He is several months away from midterms, and we're in a complete catastrophe with the cost of war mounting, inflation rising, the labor market weakening. What is his endgame here?
Well, I think it's rhetoric versus reality. We'll see if his rhetoric is powerful enough to convince people that the economy is booming and he's making America great again. Now, I if you look at the economic numbers that I just gave at the start of our interview, that that's not true. It's a it's just factually not correct. That that's the end of that story. Uh, and and I think the public is basically realizes what I just told you factually. His polling numbers on all economic indicators, they're going south. So, so the po that the public opinion, for whatever that's worth. Now, Trump will say it's it's a bunch of rubbish. It isn't worth anything until he gets a good number. If the numbers are bad, he says it's rubbish. If the numbers are good, he says, "God, these guys are geniuses." Uh, so, so that's where we're at. PE people have to be very careful about the the spin coming out of Washington and remember Hanky's 95% rule. 95% of what you read in the press is either wrong or irrelevant. And that that's very hard for people to swallow and and uh, and get a grip on. See, see, by the way, Mhim, this what we're talking about, the rhetoric versus reality. Now, do you know the school of of international studies that the that Merchimer, he's a realist?
Right?
That's that's a realist school.
And and I'm a realist, and not only international economics, but international politics and economic policy. You just you got to look at the facts and see see what it says and try to understand what's happened in the past and how that relates to today and today's numbers and and all these things. So as they say, uh, got to know how to connect the dots.
Exactly. Dr. Hanky, thank you so much for joining us. This was a fascinating conversation, and I really enjoyed it, and I know that our viewers would absolutely love to have you back on the program again soon. So I look forward to having you on the program again.
Well, I look forward, Lena, to joining you again. Thank you for having me.