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Thursday
Aug122010

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

Bloomberg Video:  Dr. Laurence Kotlikoff economics professor at Boston University, discusses the national debt and unfunded liabilities - Aug. 11, 2010

Kotlikoff estimates the real national debt is $202 trillion.  

In case you're keeping track, the official deficit numbers for July were released last night - $165 billion -- that's just for 1 month.  Once upon a time - as in 2002 - $165 billion covered the deficit for the entire fiscal year.

---

Reprinted with permission.

Source - Bloomberg

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.”

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.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$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.

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.

Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run.

This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance.

Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”

(Laurence J. Kotlikoff is a professor of economics at Boston University and author of “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking.” The opinions expressed are his own.)

To contact the writer of this column: Laurence Kotlikoff at kotlikoff@bu.edu



 

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Reader Comments (10)

Bush Administration Announces $159 Billion Deficit for Year 2002

http://tech.mit.edu/V122/N50/spending-50.50w.html

In case you missed the link above...$165 billion used to mean something...
Aug 12, 2010 at 1:27 PM | Registered CommenterDailyBail
Now it is just paper with ink on it. How did that Confederate fiat work out after the war? There was quite a bit of it floating around after the war, no one would accept it...
Aug 12, 2010 at 1:44 PM | Unregistered CommenterS. Gompers
The interviewer treated him like he was talking about Obama's missing birth certificate...okay...we have ten seconds until a commercial break...tell us about what will happen when the U.S. defaults on its debt obligations...the 2 by 4 needs to be swung at the left wing media talking heads.
Aug 12, 2010 at 4:08 PM | Unregistered CommenterZ
home equity line of credit Debts Rise, and Go Unpaid, as Bust Erodes Home Equity

What, are we the only ones left making our payment.......? Dose make ya feel a little bit better, a little bit. But its real tought some mo. If I can live long enough till I die, then the bank can worry about the payments after im gone.

I only signed my life away, not my Future. & im taking my 99% perfict credit score with me. I'll need that to open an Acc. "Up thAre"...........
Aug 12, 2010 at 4:30 PM | Unregistered Commentertexasdar
...the 2 by 4 needs to be swung at the left wing media talking heads.

Crap "ZaRa" dont wast a good 2x4, thats what they make them A-lu-ma-num baseball bats for. To use over & over & over, or till they all start telling us the truth. & that Aint Neaver Gona Happen.

Thats why they make them bats with the funny sound. Then you hear a funny'er sound yeat when the bat hits the empty left wing media talking heads, and its sounds like hitting an empty soup can..................................

"Aw Shit", now the Soup Can Co. is going to Sue me for comparing them to the empty left wing media talking heads. Dam-It-All, I can get my self in more toruble, and I havent evan had my first drink yeat.......
Aug 12, 2010 at 4:44 PM | Unregistered Commentertexasdar
How about a plastic bat...

http://www.youtube.com/watch?v=AMVfMT7Ejn8
Aug 12, 2010 at 6:42 PM | Unregistered CommenterZ
Not bad, the IMF recognizes the obvious almost 20 years to late

Speaker-Rep. James Traficant, Jr. (Ohio) addressing the House:

"Mr. Speaker, we are here now in chapter 11.. Members of Congress are official trustees presiding over the greatest reorganization of any Bankrupt entity in world history, the U.S. Government. We are setting forth hopefully, a blueprint for our future. There are some who say it is a coroner’s report that will lead to our demise."

http://www.afn.org/~govern/bankruptcy.html

The road to prosperity has never been down the path of debt...
Aug 12, 2010 at 7:17 PM | Unregistered CommenterS. Gompers
Pick this one apart guys.............................an e-mail I just recieved, but worth posting. Then check out the link to back it up. Should get a case of "At-a-Boys" for this find, Ha ?

THIS WILL BLOW YOUR MIND!!! You may want to invest in this bank. Looks like a winner. This is an interesting story put together from various articles and TV shows by the British Times paper. It shows what Obama and his friends are really all about. It's not hope and change, it is money.

I warn you, the first part is a little boring, but stick with it. The second part connects all the dots for you (it will open your eyes). The end explains how Obama and all his cronies will end up as multi-billionaires. (It's definitely worth the read. You will not be disappointed).

A small bank in Chicago called SHORE BANK almost went bankrupt during the recession. The bank made a profit on its foreign micro-loans (see below) but had lost money in sub-prime mortgages in the US. It was facing likely closure by federal regulators. However, because the bank's executives were well connected with members of the Obama Administration, a private rescue bailout was arranged. The bank's employees had donated money to Obama's Senate campaign. In other words, Shore Bank was too politically connected to be allowed to go under.
ShoreBank survived and invested in many "green" businesses such as solar panel manufacturing. In fact, the bank was mentioned in one of Obama's speeches during his election campaign because it subjected new business borrowers to eco-litmus tests.

Prior to becoming President, Obama sat on the board of the JOYCE FOUNDATION, a liberal charity. This foundation was originally established by Joyce Kean's family which had accumulated millions of dollars in the lumber industry. It mostly gave funds to hospitals but after her death in 1972, the foundation was taken over by radical environmentalists and social justice extremists.

This JOYCE FOUNDATION, which is rumored to have assets of 8 billion dollars, has now set up and funded, with a few partners, something called the CHICAGO CLIMATE EXCHANGE, known as CXX. It will be the exchange (like the Chicago Grain Futures Market for agriculture) where Environmental Carbon Credits are traded.

Under Obama's new bill, businesses in the future will be assessed a tax on how much CO2 they produce (their Carbon Footprint) or in other words how much they add to global warming. If a company produces less CO2 than their allotted measured limit, they earn a Carbon Credit. This Carbon Credit can be traded on the CXX exchange. Another company, which has gone over their CO2 limit, can buy the Credit and "reduce" their footprint ad tax liability. It will be like trading shares on Wall Street.

Well, it was the same JOYCE FOUNDATION, along with some other private partners and Wall Street firms that funded the bailout of ShoreBank. The foundation is now one of the major shareholders. The bank has now been designated to be the "banking arm" of the CHICAGO CLIMATE EXCHANGE (CXX). In addition, Goldman Sachs has been contracted to run the investment trading floor of the exchange.
So far so good; now the INTERESTING parts.

One Shore Bank co-founder, named Jan Piercy, was a Wellesley College roommate of Hillary Clinton. Hillary and Bill Clinton have long supported the bank and are small investors.

Another co-founder of Shorebank, named Mary Houghton, was a friend of Obama's late mother. Obama's mother worked on foreign MICRO-LOANS for the Ford Foundation. She worked for the foundation with a guy called Geithner.

Yes, you guessed it. This man was the father of Tim Geithner, our present Treasury Secretary, who failed to pay all his taxes for two years.

Another founder of Shore Bank was Ronald Grzywinski, a cohort and close friend of Jimmy Carter.

The former Shore Bank Vice Chairman was a man called Bob Nash. He was the deputy campaign manager of Hillary Clinton's presidential bid. He also sat on the board of the Chicago Law School with Obama and Bill Ayers, the former terrorist. Nash was also a member of Obama's White House transition team.

(To jog your memories, Bill Ayers is a Professor at the University of Illinois at Chicago. He founded the Weather Underground, a radical revolutionary group that bombed buildings in the 60s and 70s. He had no remorse for those who were killed, escaped jail on a technicality, and is still an admitted Marxist).

When Obama sat on the board of the JOYCE FOUNDATION, he "funneled" thousands of charity dollars to a guy named John Ayers, who runs a dubious education fund. Yes, you guessed it. The brother of Bill Ayers, the terrorist.

Howard Stanback is a board member of Shore bank. He is a former board chairman of the Woods Foundation. Obama and Bill Ayers, the terrorist, also sat on the board of the Woods Foundation. Stanback was formerly employed by New Kenwood Inc. a real estate development company co-owned by Tony Rezko.

(You will remember that Tony Rezko was the guy who gave Obama an amazing sweet deal on his new house. Years prior to this, the law firm of Davis, Mine, Barnhill & Galland had represented Rezko's company and helped him get more than 43 million dollars in government funding. Guess who worked as a lawyer at the firm at the time. Yes, Barack Obama).

Adele Simmons, the Director of Shore Bank, is a close friend of Valerie Jarrett, a White House senior advisor to Obama. Simmons and Jarrett also sit on the board of a dubious Chicago Civic Organization.

Van Jones sits on the board of Shore Bank and is one the marketing directors for "green" projects. He also holds a senior advisor position for black studies at Princeton University. You will remember that Mr. Van Jones was appointed by Obama in 2009 to be a Special Advisor for Green Jobs at the White House. He was forced to resign over past political activities, including the fact that he is a Marxist.

Al Gore was one of the smaller partners to originally help fund the CHICAGO CLIMATE EXCHANGE. He also founded a company called Generation Investment Management (GIM) and registered it in London, England. GIM has close links to the UK-based Climate Exchange PLC, a holding company listed on the London Stock Exchange. This company trades Carbon Credits in Europe (just like CXX will do here) and its floor is run by Goldman Sachs.

Along with Gore, the other co-founder of GIM is Hank Paulson, the former US Treasury Secretary and former CEO of Goldman Sachs. His wife, Wendy, graduated from and is presently a Trustee of Wellesley College. Yes, the same college that Hillary Clinton and Jan Piercy, a co-founder of Shore bank attended. (They are all friends) Interesting? And now the closing...

Obama knows he must get the Cap-and-Trade Carbon Tax Bill passed before he loses his majority in Congress in the November elections. Apart from Climate Change he will "sell" this bill to the public as generating tax revenue to reduce our debt. But, it will also make it impossible for US companies to compete in world markets and drastically increase unemployment. In addition, energy prices (home utility rates) will sky rocket.

But, here's the KICKER (THE MONEY TRAIL).

If the bill passes, it is estimated that over 10 TRILLION dollars each year will be traded on the CXX exchange. At a commission rate of only 4 percent, the exchange would earn close to 400 billion dollars to split between its owners, all Obama cronies. At a 2 percent rate, Goldman Sachs would also rake in 200 billion dollars each year.

But don't forget SHORE BANK. With 10 trillion dollars flowing though its accounts, the bank will earn close to 40 billion dollars in interest each year for its owners (more Obama cronies), without even breaking a sweat.

It is estimated Al Gore alone will probably rake in 15 billion dollars just in the first year. Of course, Obama's "commissions" will be held in trust for him at the Joyce Foundation. They are estimated to be over 8 billion dollars by the time he leaves office in 2013, if the bill passes this year. Of course, these commissions will continue to be paid for the rest of his life.

Some financial experts think this will be the largest "scam" or "legal heist" in world history. This makes the Mafia look like rank amateurs. They will make Bernie Madoff's fraud look like penny ante stuff.

Check out supporting/related documentation on the web site, below.

http://wtpotus.wordpress.com/2010/05/22/tital
Aug 13, 2010 at 3:06 PM | Unregistered Commentertexasdar
A lot of us know that America is bankrupt and we've known it for about twenty years. But it's painful for most people to think about so they think about other things like sports, television programs, music and their personal lives.

Here's an interesting perspective from the left that makes me think (hope) that the left and right can come together on the basic issues of freedom and equality. It's from the former Assistant Secretary of the US Treasury in 1981 under Donald Regan, Paul Craig Roberts: http://www.globalresearch.ca/index.php?context=va&aid=20587

Roberts tried to save AT&T from being broken up but (whatever you think of the merits of it) but Donald Regan told him: “Which do you want to do,” he asked, “save AT&T or cure stagflation?”

It's that kind of desperation politics, not based on principle but on cynicism and ideology, that has put the massive holes in the American Titanic and is sinking our ship.

"Deregulation proponents will say that the breakup of AT&T gave us cell phones and broadband, as if foreign regulated communication companies and state monopolies do not provide cell phone service or high speed Internet connections. I can remember attending corporate board meetings years ago at which the European members had digital cell phones with which they could call most anywhere on earth, while we Americans with our analogue cell phones could hardly connect down the street.

What deregulation did was to permit Wall Street to push the deregulated industries-- phone service, airlines, trucking, and later Wall Street itself-- to focus on profits and not on service. Profits were increased by curtailing service, by pushing up prices and by Wall Street creating fraudulent financial instruments, which the banksters used America’s reputation to market to the gullible at home and abroad."

"With deregulated airlines, Wall Street calls the tune. If your flight has a mechanical problem, you are stuck where you are unless you have some sort of privileged status that can bump passengers from later fully booked flights. “Studies” that focus only on discounted ticket price omit major costs of deregulation and thereby wrongly conclude that deregulation has benefited the consumer.

When trucking was regulated, truckers would stop to provide roadside assistant to stranded travelers. Today, with deregulated trucking, every minute counts toward the bottom line. Not only do truckers no longer stop to aid stranded travelers, they travel at excessive speeds that endanger automobile drivers. Trucks have expanded in size, weight and speed. Trucks raise the stress level on interstate highway drivers and destroy, at taxpayers expense, the roads on which they travel."
Aug 13, 2010 at 8:31 PM | Unregistered CommenterJames Street
Nothing but nothing comes as a suprise when it comes to the USA banking system and wikileak looks set to release some dirt on BofA so i would advise people to take the money out but for god sakes don't then go and put it in a goldman account who are in big trouble for running a massive ETF short on silver that is just starting to come to light.

Time to talk about creating real jobs and to stop giving free gifts to the banksters who not only own you but also own your politicians and whilst that relationship lasts then exspect to continue going down hill untill you are force to stand and fight.

No none of this is something you can run away from so stop being cowards and take the medication.
Dec 18, 2010 at 11:51 AM | Unregistered CommenterUK-Guy

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