Friday, August 13, 2010

US economy is worse than Greece

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

Laurence J. Kotlikoff is a professor of economics at Boston University

IMF annual review of US economic policy:
"The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates ... closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP"
To correct this fiscal gap would require doubling of US taxes, which is politically not yet possible
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...

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.

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