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Wednesday, August 11, 2010

Is the U.S. really bankrupt? What we all intuitively know.

How to solve the federal deficit/debt problem (poll).
Americans intuitively know that we are in a world of hurt with our national debt and annual deficits. We don't necessarily know exact numbers or how exactly our debt and deficits affect us on a micro level. However, anyone who has ever had to make a budget and/or taken out a line of credit or two understands these basic notions:

1) When you buy on credit you eventually have to pay it back. The longer you take to pay it back, the more it will cost.

2) Credit is a double edge sword: too much credit begets the need for more credit. Eventually, you will be working just to keep the debt current.

3) When you have too much debt, your future is at risk. Your ability to borrow is squeezed, your ability to keep what you have is at risk and your ability to provide for others is more limited.

In any case, few truly appreciate the concept of debt in the trillions. Whether it is 1 trillion or 10 trillion. However, they know it is an absurdly large number. When we break it down to the following, most people start to understand the gravity of the problem.

Per capita debt:

The national debt equates to $30,400 per person U.S. population, or $60,100 per member of the U.S. working population,[36] as of February 2008.

In any case, most people know without hearing exact figures, that between social security, Medicare and Medicaid our unfunded liability to seniors in in the next generation will be crushing and probably unsustainable. This begs the question: are we effectively bankrupt now?
I think Mr. Kotlikoff makes an excellent argument in favor of that hypothesis.

Between the financial crash of 2008, the downturn that followed and between the endless bailouts and 'stimulus', people are pushing back against the runaway train of debt. It's pretty clear we will have to endure pain now to avoid it compounded more later...

U.S. Is Bankrupt and We Don't Even Know It: Laurence Kotlikoff

Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.

What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

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.
$4 Trillion Bill

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.

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