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"U.S is Bankrupt and We Don't Even Know It"

oldreliable67

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The above-named article, found here, by Laurence Kotlikoff examines the IMF contention that "closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 % of U.S. GDP." (The fiscal gap is defined as the value today of the difference between projected spending (including servicing official debt), and projected revenue in all future years).

Kotlikoff asks, "Is the IMF bonkers?" Answer: if so, so is the CBO, whose Long-Term Budget Outlook shows an even larger problem.

Kotlikoff posits how the fiscal gap came to be so enormous: we have 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."

Kotlikoff offers no prescriptions for curing the situation, merely asserting that both demand-siders (Keynesians) and supply-siders are equally deluded.

Offered for discussion/debate: if both demand- and supply-siders are indeed equally deluded, what prescriptions are left to cure our economic ills?
 

donsutherland1

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Offered for discussion/debate: if both demand- and supply-siders are indeed equally deluded, what prescriptions are left to cure our economic ills?
IMO, there's little choice but to take the "bitter medicine" of increasing revenues and decrease spending/rate of spending growth. A combination of tax hikes, discretionary spending reductions, and entitlement program reforms that slow the growth of mandatory spending will be required. Consistent with IMF research, I believe the spending side measures should account for the greater part of the fiscal consolidation (maybe two-thirds?). Otherwise, the tax hikes would have the potential to damp long-run economic growth, which would create a host of fiscal, economic, and social issues. Entitlement reform would include the relatively straight-forward actuarial exercise to fix Social Security (benefit changes, increased age of eligibility, which would then be pegged to changes in life expectancies, and some increase in payroll taxes) and fundamental health care reform that addresses that sector's chronic excess cost growth problem. On the discretionary spending side, Defense should not be exempted and that can actually be beneficial in the long-run, as the U.S. is developing an asymmetric cost-disadvantage relative to its foes e.g., in Afghanistan the cost now runs to about $1.2 million per soldier per year, that makes attrition strategies increasingly viable against the U.S.

While all that is happening, it is imperative that U.S. industry becomes more competitive. Potentially emergent competitiveness gaps need to be addressed before they become entrenched, much less widen. Yuan devaluation is not a panacea for addressing that issue. In part, improving U.S. competitiveness will require improved education outcomes (federal, state, local government issue) and immigration policy reform that would create a "fast track" for talented immigrants to live and work in the U.S. In part, it will require marked increases in R&D spending (aimed at innovation, as well as improving business processes, risk management, etc.) and attention to cost-structures, as well as rigorous and recurring reviews of the results of that R&D/cost-structure developments to increase the returns on that spending/improve efficiency. U.S. firms will need to avoid a "not invented here" mentality, be open to the possibility that others may be doing things better, and be willing to seek out and learn from others who may be doing things better in certain areas. Certain U.S. firms and industries are truly near or at "best of class" globally. Others most certainly are not.

Households will need to become less leveraged over the coming years, as the U.S. debt issue is far broader than the problem of rising public debt.

None, of the above is easy. However, early action will result in less pain than delay.
 

MaggieD

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The above-named article, found here, by Laurence Kotlikoff examines the IMF contention that "closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 % of U.S. GDP." (The fiscal gap is defined as the value today of the difference between projected spending (including servicing official debt), and projected revenue in all future years).

Kotlikoff asks, "Is the IMF bonkers?" Answer: if so, so is the CBO, whose Long-Term Budget Outlook shows an even larger problem.

Kotlikoff posits how the fiscal gap came to be so enormous: we have 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."

Kotlikoff offers no prescriptions for curing the situation, merely asserting that both demand-siders (Keynesians) and supply-siders are equally deluded.

Offered for discussion/debate: if both demand- and supply-siders are indeed equally deluded, what prescriptions are left to cure our economic ills?
I liken our country's debt management to my household. What if Maggie had a home equity loan line-of-credit and just kept borrowing against it with an interest-only loan? Never paying principle? It's a sure-fire way for Maggie to go bankrupt.

In 2008, the government collected $2.5 trillion in tax revenue. What are the federal government's sources of revenue? Our national debt is $13 trillion and counting.

That's the equivalent of a household earning $25,000 a year and owing $137,500 on a mortgage. To retire that debt over 30 years at an interest rate of 5%, a household would have to pay $735/month to the lender. The mortgage payment is 35% of one's monthly salary. That's a high debt ratio. A real person wouldn't be able to borrow that money. The lender would consider him too high a risk. If by some stretch of the imagination the lender DID loan him this money, he certainly wouldn't allow him to continue tapping his loan ad infinitum.

But, of course, we aren't retiring any of our national debt. We just keep spending and borrowing more. A perfect recipe for disaster in MY house and OUR house, too.

DSutherland is correct. Stop spending. Raise taxes. And, like any fiscally responsible family in the United States, make a mortgage payment to itself to retire the national debt.

I know my example is simplistic, but it's the way I've always thought of it. 'Cause owing $13 trillion is just mind-boggling to me. (Maybe posters are going to tell me this isn't the right way to look at it. If that's true, tell me, because I'd like to learn something.)
 

oldreliable67

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MaggieD,

Though greatly simplified, the principles you outlined are indeed correct. One thing, though: we will never be able to stop spending completely. The trick is, if you can't reduce spending (and without a constitutional amendment or a near voter revolt, we may not be able to), then we must slow the rate of increase in spending while increasing tax revenues, to a rate that produces net reductions in debt in a reasonable time frame and with a plan that can be viewed with some confidence.

Easier said than done.
 

RDS

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I thought Madoff's was the biggest ponzi scheme ever.
 

oldreliable67

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I thought Madoff's was the biggest ponzi scheme ever.
Kotlikoff asserts that the US social security system is a Ponzi scheme in that it employs the key concept of a Ponzi scheme: it uses the cash inflows from one group (work-force participants) to pay benefits to another group (retirees). One can accept (SS does use receipts from one group to pay its obligations to another group) or reject (SS was created by legislation and is legal) Kotlikoff's description depending on one's view of the world and Ponzi schemes. Certainly, Madoff is currently the largest known illegal Ponzi scheme.
 

drz-400

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Kotlikoff asserts that the US social security system is a Ponzi scheme in that it employs the key concept of a Ponzi scheme: it uses the cash inflows from one group (work-force participants) to pay benefits to another group (retirees). One can accept (SS does use receipts from one group to pay its obligations to another group) or reject (SS was created by legislation and is legal) Kotlikoff's description depending on one's view of the world and Ponzi schemes. Certainly, Madoff is currently the largest known illegal Ponzi scheme.
Or you could realize that beneficiaries are not growing expodentially, beneficiaries have indeed left SS, and it has still maintained a postitive IRR. Thus it is not a ponzi scheme.
 

anewhope

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Although I don’t think the end of the world is coming, I’d be lying if I didn’t think the value of the US Dollars could drastically drop during in the next couple of years. This could be the equivalent of the fall of American Civilization. I hate being pessimistic but it seems foolish to not think about it. And it isn’t just the American economy, but Europe’s and Asia’s economies as well. For example, when Greece’s economy collapsed in May 2010 it brought down the value of the Euro throughout Europe. It was only because of England buying 1 billion dollars worth of Euro bonds that the damage done to the European economy was reduced. Rebecca Costa discusses in her new book “The Watchman’s Rattle” how human insight is the key to solving the complex problems and recognizing which human behaviors actually prevent optimum decisions from being made. It might be a problem with no solution, but doing nothing is definitely not an option.

Rebecca Costa | Facebook

Rebecca D. Costa: The Watchman
 

oldreliable67

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anewhope said:
doing nothing is definitely not an option
Given our current crop of congresspeople, all eager to play to their particular constituencies rather than seeking the best solution regardless of party affiliation, doing nothing is the least of our worries, IMO.
 
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