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."
The retirement age should by what ever the pay out age was when the government took the first payment out of your earnings. Would one buy an insurance policy and after you paid for it, the insurance company would then decide if they were going to pay or not?
The baby boom starts to retire in 2008.
from the american conservative
"Over the long term, Social Security and Medicare are the true budget busters—accounting for $518 billion and $290 billion in outlays, respectively, in 2005. Together they account for almost one-third of federal spending.
Medicaid is another budget boulder, running $192 billion this year. "
I think you're onto something.
Why don't we hold a massive "Yard Sale"?
Or maybe even a combination yard sale & barbecue.
Everybody in the United States gets out all their old useless stuff (you know you're never agaib gonna' fire up that TRS-80 that's in your closet) and sell it in the yard sale to pay off the deficit.
If you've ever been to a yard/garage sale, it would help you to know that there is nothing too ridiculous/old/trivial to sell. Somebody will buy it.
This article is basically a verbatim copy of the abstract to a paper presented at an economic policy conference in Nov. 2005. Interesting that the UK Telegraph choose now as a appropriate time to reprise it.
The other part of the statement is also incorrect... " 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." is a conglomerate of misstatements. Sorting out the various misstatements would take a news article.
As an example, the cost of Medicare to recipients is being raised. Many Federal, State and Local employers, as well as private employers provide medical programs to retirees that diminish the dependence upon Medicare, indeed, many retirees do not acquire parts of the Medicare program benefits as it isn't financially beneficial to them. Federal Employees under Civil Service have their SS decreased by 60% as an offset. The offset is a "special tax" on a group of people that supplement the rest of the recipients. Medicaid should not increase because of the aging demographics, it should remain the same or could be reduced if the welfare recipients are made to take jobs Americans don't want to do, thus reducing the number of "guest workers" and eventually the reduction of SS / Medicare / Medicade benefits for illegals. And the beat goes on...
because reality always triumphs over faulty promises.
we should just lower the retirement age to 22 of course we can't pay, but who cares about reality.
the reality is the current retirment age can not be allowed to stand because the alternative is bankruptcy which sometime happens to insurance cos. too and then you get zip, no matter what the promises.
lol!
We won't go bankrupt.
We are the United States.
>If it comes to bankruptsy of the US and shooting the elderly, we will shoot the elderly<
LOL! Spoken like a true mother hater.
mk, exactly.
We are a nation. Who exactly do we have to answer to with our 'creditors.'
What are they going to do, stop doing business with the UNITED STATES?
loL!!!!!!!!!!!
This article is ridiculous beyond belief.
My prediction is that a) they will greatly cut benefits to SS and Medicare at some point b) they will figure out a way to impose a special tax on IRAs and 401K plans, somehow.
I they cut tax rates in ordr to raise revenue, why do we call it a tax cut?
Americans are living longer and retiring later. Raising the retirement age doesn't change anything. As far as I'm concerned the only promise was to help the elder in retirement, not a guarantee at 55 or 65 or whenever. If most people are living to 80+ now and retiring at 67-70, then the retirement age should also be that.
The looming entitlement crisis is easily fixed. Reneg.
We can expect partisan hit pieces like this from every quarter and on every issue until the fall elections are over. There will be much public hand-wringing, brow-beating, teeth-gnashing and garment-rending about the imminent incineration of the planet Earth by those evil fat cats in American business, the disastrous quagmire in the Middle East, the looming theocratic take-over of our institutions, the impending return of "coat-hangers in back alleys" for American women, etc. ad nauseum.
"how Europe wishes..."
Er, this is a report by one of the Federal Reserve staffers, not by the ECB.
You have to be more specific...not sure how much % wise of the U.S. debt is owned offshore, but I have some T-Bills, and I think billions are invested by U.S. pension funds, are you proposing that myself and those retirees lose their investment? Besides a default would shut down all goverment services above actual U.S. income. That could be a good thing, but you know it wouldn't be social pgms. that were shut down.
And that's the irony. This America-bash from the UK was hatched from a joke from the St. Louis Fed (original thread here) who's point was that the US needs to cut welfare.
Exactly. But why stop there? Demand immediate payment of all foreign debt owed to us and the immediate return of all foreign aid we have generously bestowed on other countries, including the low-interest and no-interest loans, and extending over the entire past century -- at market interest, adjusted for inflation. Then plug the leak by ending all current and future hand-outs, such as the 25% of the UN budget we pony up every year. Surely, even Kotlikoff would agree than when one is deeply in debt, one curtails spending.
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