Posted on 07/15/2006 9:54:37 AM PDT by Babu
The United States is heading for bankruptcy, according to an extraordinary paper published by one of the key members of the country's central bank.
A ballooning budget deficit and a pensions and welfare timebomb could send the economic superpower into insolvency, according to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, a leading constituent of the US Federal Reserve.
Prof Kotlikoff said that, by some measures, the US is already bankrupt. "To paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors," he asked.
According to his central analysis, "the US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds''.
The budget deficit in the US is not massive. The Bush administration this week cut its forecasts for the fiscal shortfall this year by almost a third, saying it will come in at 2.3pc of gross domestic product. This is smaller than most European countries - including the UK - which have deficits north of 3pc of GDP.
Prof Kotlikoff, who teaches at Boston University, says: "The proper way to consider a country's solvency is to examine the lifetime fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country's policy will be unsustainable and can constitute or lead to national bankruptcy.
"Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke."
Experts have calculated that the country's long-term "fiscal gap" between all future government spending and all future receipts will widen immensely as the Baby Boomer generation retires, and as the amount the state will have to spend on healthcare and pensions soars. The total fiscal gap could be an almost incomprehensible $65.9 trillion, according to a study by Professors Gokhale and Smetters.
The figure is massive because President George W Bush has made major tax cuts in recent years, and because the bill for Medicare, which provides health insurance for the elderly, and Medicaid, which does likewise for the poor, will increase greatly due to demographics.
Prof Kotlikoff said: "This figure is more than five times US GDP and almost twice the size of national wealth. One way to wrap one's head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143pc."
The scenario has serious implications for the dollar. If investors lose confidence in the US's future, and suspect the country may at some point allow inflation to erode away its debts, they may reduce their holdings of US Treasury bonds.
Prof Kotlikoff said: "The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century."
Paul Ashworth, of Capital Economics, was more sanguine about the coming retirement of the Baby Boomer generation. "For a start, the expected deterioration in the Federal budget owes more to rising per capita spending on health care than to changing demographics," he said.
"This can be contained if the political will is there. Similarly, the expected increase in social security spending can be controlled by reducing the growth rate of benefits. Expecting a fix now is probably asking too much of short-sighted politicians who have no incentives to do so. But a fix, or at least a succession of patches, will come when the problem becomes more pressing."
As long as we have the Democrats and RINO's in Congress, the US cannot go bankrupt. Well, the government, that is. All they will do is keep raising taxes buying votes and bankrupt the citizenry instead.
Yes, it's sarcasm.
Well the 2nd part I would agree with. But I do not agree with you that raising the SSRA from 65 to 67 is dishonest as the purpose of SS was to help the elderly and as humans live longer, the age of the elder will continue to climb.
This guy is absolutely correct. Got gold???
Then that would put him in agreement with President Reagan's economists, who didn't believe it either. What they did say is that tax cuts wouldn't lose as much revenue as static analysis predicted. Growth recovered about 2/3 of each dollar cut, which is line with their predictions.
SS is a pass-through system, always has been. The goal has been to achieve a balance between payments and withdrawals. A surplus in the Social Security fund acts as a drag on the economy.
He gets it. But since he reads economic studies he's aware that the only tax cut that 'paid for itself' was the capital gains reduction of 1978. The other cuts achieved the goal of stimulating the economy, but at some reduction in Treasury revenue. Treasury revenues aren't solely affected by tax cuts. Defecit spending, the business cycle, and the natural growth path of the economy also contribute to increases in Treasury revenue, and are accounted for in any study other than the "everybody knows" versions that get endlessly repeated here.
And, do you think we have a balance between payments and withdrawels?
I haven't paid attention recently. For a time we were running a surplus, and that excess was 'invested' in Treasuries created to sop up the surplus, and this permitted Congress to spend that excess.
If I recall correctly, during Johnson's Presidency there was a surplus and the solution then was to lower SS taxes so that excess money wasn't taken from working incomes in the first place. It's a strange world when LBJ's era looks more conservative than the present time when the GOP is in control of Congress and the WH. It speaks volumes about what passes as "conservative" today.
43 years - never once has a dime been set aside.
In fact, to anyone but a moron, the idea that congress is collecting advance payments is a joke. They are just collecting more money, to spend, today.
Again, there is no SS trust fund.
Just imagine what will happen to interest rates when foreigners realize what bad shape we are in and stop buying US bonds and treasuries (and all that that implies).
I think we are already seeing the beginning of that. The dollar has been weakening for some time. Some central banks are looking to use the Euro as a reserve currency alongside or instead of the dollar.
You're either a tail-end 'boomer or a post-boomer- either way you are indeed screwed.
Save what you can, invest for your retirement. Times could be pretty tough when you look to retire.
Ronald Reagan said he wasn't worried about the national debt, it was big enough to take care of itself.
'Setting aside' of SS funds doesn't really work, anyway. That's a sort of money-illusion- stacks of dollars are too vulnerable to losing their value through inflation, especially in the post-Breton Woods monetary regime. What you need is money invested in something that will provide you income when you retire, and you need to be planning for that yesterday. IRAs, 401k's, mutual funds, rental property, there's a number of options, and a lot of sources to educate yourself on how to do it.
I'd be curious to see that claim sourced- I doubt its accuracy. I recall Reagan chastising Carter for increasing the debt.
That is what Prime Minister Pitt did in England, after the Napoleonic wars. Britain had hopeless debts, which was addressed by what was called a 'sinking fund' - taxes for that debt only. So they got out of it, over a generation. Nations which repudiated their debts, such as Spain, ended up in penury.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.