Fed Study: US is going Bankrupt

[powayseller]

Copied in its entirety from a news article in telegraph.co.uk

US ‘could be going bankrupt’
By Edmund Conway, Economics Editor
(Filed: 14/07/2006)

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.”

[CardiffBaseball]

What about the recent news that the growth in the size of the deficit is shrinking? Or I assume that means the deficit is now less than planned.

Of course all it takes is an economy that isn’t smoking, and suddenly the deficits grow quickly, ala Bush years.

[powayseller]

This is the 4th year in a row that the Bush administration came out with anticipated high budget deficits at the beginning of the year, and then revised them downward in the summer, saying “Our deficit shrank”. Well, if revising your forecast is shrinking… The truth is, compared to last year, the deficit is higher. Word games do not change the fact that the deficit is growing.

This smoke and mirrors game has been covered by some of the more clever newspapers, like the LA Times.

It’s just another gimmick of an administration that works hard to fool us about the true state of the economy. Not picking on Bush – they all do this…

[speedingpullet]

Yes, I have to admire the logic: “The Deficit this year is XYZ less then projected”.

Which gives everyone the general impression that they’ve done very well…although the Deficit is still twice what it should be 😉

[Daniel]

Folks, read the paper, it’s pretty good (although perhaps a bit too techical for some).

The title is catchy, but the paper doesn’t really address the issue of current deficits, external creditors, etc. It’s a piece solely focused on the BIG picture of inter-generational accounting. It states that there is no way in hell that US can meet its obligations promised to the older generations under Social Security and Medicare. That’s not a surprise for anybody, I think. AG told Congress something to the effect that “you can pass any laws you want, but you can’t change the laws of mathematics”. Simply put, Social Security and Medicare promises will be cut, one way or another.

Does that constitute “default” and “bankruptcy” for the US? Well, in a strict technical sense, it does, because US can’t meet an obligation it promised to its “creditors” (older generation). But that’s not what most people would consider a default. If Congress passes a law tomorrow cutting Social Security benefits, I don’t think any paper will have “US Declares Bankruptcy!” on the front page.

[powayseller]

Yes, a technical paper. The bankruptcy does refer to the inability of the US to pay those creditors which are its own citizens, but does not talk about its ability to pay the interest on treasury bills.

However, since when can you say, “I am not really bankrupt because although I am unable to pay my credit cards and auto loans, I still have enough money to pay my mortgage”. Does that make sense?

If you have to take away promised benefits to seniors, then you can avoid bankruptcy, just as the person in my example above can avoid bankruptcy if the auto dealer and credit card companies are happy to let the debt slide.

This kind of violates the definition of bankruptcy, no?

Also, what will happen to the tens of millions of seniors in poverty, who need the promised SS payments to avoid homelessness, and the promised Medicare benefits to get basic medical care? Will our seniors be cast aside like some useless old tires? Please don’t call me a socialist, but if we are not going to pay these promised benefits, let’s just say so right now, so people can plan their future accordingly.

SS was a great idea when only 5% of people lived to collect it. Now 60% of people live to collect it, and the government is spending it, instead of saving and letting it earn interest.

[bsrsharma]

First boomer applies for Social Security

The nation’s first baby boomer applied for Social Security benefits Monday, signaling the start of an expected avalanche of applications from the post World War II generation.

Kathleen Casey-Kirschling, a former teacher from New Jersey, applied for benefits over the Internet at an event attended by Social Security Commissioner Michael Astrue. Casey-Kirschling, who now lives in Maryland, was born one second after midnight on Jan. 1, 1946, making her the first baby boomer — a generation of nearly 80 million born from 1946 to 1964, Astrue said.

Casey-Kirschling will be eligible for benefits after she turns 62 next year.

An estimated 10,000 people a day will become eligible for Social Security benefits over the next two decades, Astrue said.

The Social Security trust fund, if left alone, is projected to go broke in 2041, though Astrue said he hopes Congress will address the issue, perhaps after the 2008 presidential election

http://news.yahoo.com/s/ap/20071015/ap_on_go_ot/boomer_social_security

[bsrsharma]

First boomer applies for Social Security

The nation’s first baby boomer applied for Social Security benefits Monday, signaling the start of an expected avalanche of applications from the post World War II generation.

Kathleen Casey-Kirschling, a former teacher from New Jersey, applied for benefits over the Internet at an event attended by Social Security Commissioner Michael Astrue. Casey-Kirschling, who now lives in Maryland, was born one second after midnight on Jan. 1, 1946, making her the first baby boomer — a generation of nearly 80 million born from 1946 to 1964, Astrue said.

Casey-Kirschling will be eligible for benefits after she turns 62 next year.

An estimated 10,000 people a day will become eligible for Social Security benefits over the next two decades, Astrue said.

The Social Security trust fund, if left alone, is projected to go broke in 2041, though Astrue said he hopes Congress will address the issue, perhaps after the 2008 presidential election

http://news.yahoo.com/s/ap/20071015/ap_on_go_ot/boomer_social_security

[4plexowner]

the Boomer effect on the real estate markets will be interesting to watch unfold

many Boomers are counting on the equity in their real estate for retirement

that means:
– sell the house
– refi and cash out
– HELOC or 2nd mtg
– reverse mtg

what we don’t know is how many Boomers will choose ‘sell the house’ as an option

we also don’t know what state the financial markets will be in – it is possible that options 2 through 4 may not exist when Mr/Miss Boomer needs money to live on

I am expecting a bottom somewhere in the 2011/2012 timeframe but Boomers selling to fund their retirements could keep real estate markets flat for a looooonnnggg time after the bottom

[4plexowner]

the Boomer effect on the real estate markets will be interesting to watch unfold

many Boomers are counting on the equity in their real estate for retirement

that means:
– sell the house
– refi and cash out
– HELOC or 2nd mtg
– reverse mtg

what we don’t know is how many Boomers will choose ‘sell the house’ as an option

we also don’t know what state the financial markets will be in – it is possible that options 2 through 4 may not exist when Mr/Miss Boomer needs money to live on

I am expecting a bottom somewhere in the 2011/2012 timeframe but Boomers selling to fund their retirements could keep real estate markets flat for a looooonnnggg time after the bottom

[bsrsharma]

Boomer effect on the real estate markets will be interesting to watch unfold

Add 401(k), IRA  withdrawal/cashouts, other asset sales and most importantly, impact on Federal budgets as SS checks are printed out of the non-existent "trust fund". The $ will melt like an icecream cone dropped on a summer sidewalk.

[bsrsharma]

Boomer effect on the real estate markets will be interesting to watch unfold

Add 401(k), IRA  withdrawal/cashouts, other asset sales and most importantly, impact on Federal budgets as SS checks are printed out of the non-existent "trust fund". The $ will melt like an icecream cone dropped on a summer sidewalk.

[TheBreeze]

We got to start doing something with all these old people. Can we export them to somewhere?

[TheBreeze]

We got to start doing something with all these old people. Can we export them to somewhere?

[bsrsharma]

Mexico is an obvious choice. Import young workers and export old folks. Cost of living is less, it is warmer and they can come here for holidays etc., There are many American Colonies in Baja.

[Author]

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