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."
Obviously the author does not understand that history has shown that tax cuts increase returns to the Treasury, as it has in the instant ...
No matter how many times a week somebody asks.
Dennis Miller addressed this issue the best when he asked rhetorically, "they keep talking about the deficit, the deficit, who do we owe this deficit to anyway? F--k em! Don't pay 'em!"
And if that's not good enough for the Edmund Conways of the world, the U.S. still is backed up by the most potent and precious metal of all:
Weapons grade plutonium, mounted on the tips of land and sea based ballistic missiles. Lots of 'em.
And we haven't even begun counting the inventory of that precious metal on board B-52s, B-2s, and B-1s.
Take a hike Conway, you're outta here.
If WE'RE going bankrupt, I wish that the author would explain how every European nation keeps it's head above water the way that they spend money for their socialist paradise.
I know that they're incapable of pulling their weight in international "peacekeeping" but they still spend WAY too much on cradle to grave welfare.
ping
Maybe if every government program didn't waste several billion dollars per year, we would be less bankrupt.
" One solution is an immediate and permanent doubling of personal and corporate income taxes. "
Anybody believe that if we doubled taxes today, congress would not spend it, today?
There is no SS trust fund.
Does that mean the US is going to have a liquidation sale with everything 50% off???
That is exactly where I quit reading. Comment #1 is spot on.
I guess the author hasn't bothered to read the recent reports of the quickly shrinking deficit, due to increased revenues resulting directly from the tax cuts!
Just remember, all debts are eventually paid, if not by the debtor, then by creditor.
In other words, the US is "selling" at 5 times earnings.
For most of the history of the NYSE, average company stocks sold at at P/E of 10. That number is now currently around 20.
While there are unfunded liabilities in the future, the resulting labor demand which will occur when the baby boomers retire will drive salaries sky high (as they did in the late 90s with the dot.com boom). This will increase revenues and thus taxes.
Doesn't matter anyway, we can just print more. ;)
how Europe wishes...
FYI
All we need to do is elect hitlary and she'll fix it.
>"The figure is massive because President George W. Bush
has made major tax cuts in recent years."<
WHAT UTTER CLAPTRAP! When will the American people wake up to the fact that this (the bankruptsy of the U.S.) has been the plan and goal of the CFR since the early 20th century? Bush is doing what he is told to do, just as presidents have done clear back to FDR. Our President has been set up to be the fall guy, make no mistake. Recommended reading: "The Planned Destruction of America", by Dr. James W. Wardner
You hit it on the head. That's the guaranteed key to U.S. Bankruptcy.
Yep, Let's just take out of circulation another huge chunk of every "taxpayer's" income. They won't miss it. And watch all the homeowner mortgage defaults start to roll up and and businesses start to fail.
Great call!
Guess this means the end to all those handouts, foreign aid, disaster assistance, and other U.S. largesse.
Can't the government help pay for the war by selling war bonds? I'd buy some.
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