The US has passed their danger point and recent US GDP experience conforms to their findings. The economy is growing at subnormal rates, despite unprecedented stimulus efforts.
By Monty Pelerin
Most people don’t understand the unsolvable problem the US government has created for itself and its citizens. Sovereign default is beyond a likelihood; it is inevitable. When and which (possibly all) obligations are defaulted on are to be determined. Panicked political decisions, likely in the near future, will produce a complete financial and economic collapse. Hopefully that is the worst that will occur.
Official Government Debt
The official federal debt is $16 Trillion. This debt represents 100% of current GDP. Ken Rogoff and Carmen Reinhart studied countries with high levels of government debt. This Time Is Different: Eight Centuries of Financial Folly, their well-acclaimed book, contains their findings. The authors concluded:
In our study “Growth in a Time of Debt,” we found relatively little association between public liabilities and growth for debt levels of less than 90 percent of GDP. But burdens above 90 percent are associated with 1 percent lower median growth. Our results are based on a data set of public debt covering 44 countries for up to 200 years. The annual data set incorporates more than 3,700 observations spanning a wide range of political and historical circumstances, legal structures and monetary regimes.
Elsewhere, the authors state:
Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP.
The US has passed their danger point and recent US GDP experience conforms to their findings. The economy is growing at subnormal rates, despite unprecedented stimulus efforts. A recent Rasmussen survey found that only 27% believe the economy is improving.
Actual Government Liabilities
Debt problems in the US are worse than stated, much worse. Three areas shed light on the problem:
- The Glide Path
- Treasury Obligations
- Unfunded Liabilities
Under that alternative fiscal scenario, far larger deficits and much greater debt would result than are shown in CBO’s baseline. Deficits would average 5.4 percent of GDP over the 2013–2022 period, rather than the 1.5 percent reflected in CBO’s baseline projections.
Mr. Ryan’s plan is devoid of credible math or hard policy choices. And it couldn’t pass even if Republicans were to take the presidency and both houses of Congress. Mr. Romney and Mr. Ryan have no plan to take on Wall Street, the Fed, the military-industrial complex, social insurance or the nation’s fiscal calamity and no plan to revive capitalist prosperity — just empty sermons.
The total obligation of the federal government to voters that is not funded at the present time is now $222 trillion. This does not mean that, over the entire life of the program, the government will be short $220 trillion. It means that the present value of the unfunded liability is $220 trillion. This means that the government would have to set aside $220 trillion immediately, invest this money in non-government projects that will pay a positive rate of return, and will therefore fund the amortization of this debt. I have written about the estimate here.
According to Kotlikoff’s calculations, the US government has promised its citizens almost four times the entire net worth of the nation. If the government confiscated everyone’s net worth, people would be left penniless and the government would still be unable to fund these promises.
At the risk of confusing readers, the annual government deficit using Generally Accepted Accounting Principles (GAAP) is $11 Trillion per year, not the $1.3 Trillion that will be reported. Kotlikoff’s calculations of the unfunded liabilities may be high. Other estimates are lower, but not enough to alter the conclusion that the US is hopelessly broke. Gary North comments on lower estimates:
Even if Kotlikoff is wrong by a hundred trillion dollars, it becomes clear that Congress is completely incapable of dealing politically with this problem. It could not possibly raise the funds to balance the budget if the budget really is increasing by, say, $5 trillion per year [GAAP calculation].
The claimed debt of the Federal Government of $16 Trillion is enough to threaten its viability and that of the US economy. The current glide path of spending and revenues ensures that debt will increase. Explicit and implicit Treasury guarantees will be required to bail out failing public and private agencies. The situation becomes hopeless when the unfunded liabilities are taken into account.
Buckle up for a very scary ride.
“Monty Pelerin” is a pseudonym derived from The Mont Pelerin Society. The writer has no connection with the Society (other than coincidence of philosophy). Nothing said by me should be considered to be representative of the views of the Mont Pelerin Society or any of its members. “Monty Pelerin” blogs at Monty Pelerin’s World
Help Make A Difference By Sharing These Articles On Facebook, Twitter And Elsewhere: