Laurence Kotlikoff: Government is bankrupt with bills coming out the wazoo

You know it's bad when even the other side's economists are calling the situation bleak. 

Larry Kotlikoff, a Boston University Professor of Economics at Boston University, who was an economic advisor to a Democatic candidate in 2008, has said that the US is bankrupt.  Not only due to debt, but due to the unfunded liabilities.  We wrote earlier that unfunded liabilities could be as high as 104 Trillion dollars.  Mr Kotlikoff estimated the fiscal gap to be over $200 Trillion.  That amount is more than 15 times our offical debt balance. 

The IMF put out a paper saying that in order to restore fiscal well being, we must radically simplify our tax, health care and retirement system.  Basically, they recommend an overhaul of medicare, medicaid and social security. Your humble blogger has been saying that since the day I went online.  Medicare is the real beast.  Any reform is miniscule compared to this beast, via Bloomberg:

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.


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