U.S. Government is Bankrupt

[archerships]

[Some of you may be wondering about the recent pattern of "emergency preparedness" links I've posted recently. Mostly, they've been for fun--I enjoy disaster scenario planning. However, pragmatism plays a role as well -- the U.S. government is bankrupt, and the most likely way I think it will try to meet its debts is to inflate the currency. Brazillian-style hyper inflation is quite likely in the next 20 years. (See the link below for more detail). Historically, bankrupt nations have often collapsed into war or revolution. Therefore, I think it prudent to be prepared should the worse case scenarios be realized.]

Via Marginal Revolution:

Going Critical: American Power and Consequences of Fiscal Overstretch by Niall Ferguson and Laurence J. Kotlikoff, The National Interest, Fall 2003, Vol 73.

"....The scale of this implicit insolvency was laid bare this summer in an explosive paper by Jagadeesh Gokhale, a senior economist at the Federal Reserve Bank of Cleveland, and Kent Smetters, former Deputy Assistant Secretary of Economic Policy at the U.S. Treasury and now an economics professor at the University of Pennsylvania. They asked the following question: Suppose the government could, today, get its hands on all the revenue it can expect to collect in the future, but had to use it, today, to pay off all of its future expenditure commitments, including debt service. Would the present value (the discounted value today) of the future revenues cover the present value of the future expenditures? The answer was a decided no: according to their calculations, the shortfall amounts to $45 trillion. To put that figure into perspective, it is twelve times larger than the current official debt and roughly four times the size of the country's annual output.

Gokhoale and Smetters also asked how much taxes would have to be raised, or expenditures cut, on an immediate and permanent basis to generate, in present value, $45 trillion? Their answer takes the form of a "menu of pain" with four unpalatable dishes to choose from. We could either, starting today, raise income taxes (individual and corporate) by 69 percent; or we could raise payroll taxes by 95 percent; or we could cut Social Security and Medicare benefits by 56 percent; or we could cut federal discretionary spending by more than 100 percent (which, of course, is impossible)...."

Comments

[smjayman.livejournal.com]

While I hope and pray the doomsayers are wrong, there's a reason I have a stockpile of all sorts of stuff in my house...

[crasch.livejournal.com]

Yes, I hope I'm wrong too. But I'm preparing for the worst.

[rillifane.livejournal.com]

There is one other way out which, for some reason, no one seems to emphasize (or even think of).

That is to increase the productivity of those in the work force.

After all if those two workers supporting one retiree that are constantly being mention were to be twenty times more productive then the problem is solved and then some.

The real solution is to encourage rapid and sustained growth in productivity by ending the capital gains tax, allowing businesses to expense (rather than depreciate) all investments in productivity multipliers, and giving tax credits for all R&D directed at improving productivity.

Furthermore, we should encourage immigration of the educated from abroad by slashing red tape and cutting restrictions while simultaneously discouraging growth of our existing underclass by aggressively promoting population control.

Just as importantly we need massive education reform by way of vouchers, rigorous testing, setting of national standards tied to corporate requirements, and substantial subsidies to the education of the gifted.

[crasch.livejournal.com]

Yes, you're correct. If productivity could be increased sufficiently and spending held in check, then we could grow our way out. However, I think it quite possible that government expenditure will grow faster than worker productivity. After all, if a Republican president, and a Republican dominated Congress can't keep themselves from increasing the budget for the NEA, I see little reason to expect fiscal discipline in the future.

I agree that we should end the capital gains taxes, allow tax credits for R&D spending, and encourage educated immigrants to come to the U.S.

What you mean by "aggressively promoting population control"? Although I'm worried about the budget, killing off all the old people at age 65 does seem a bit extreme...

I think vouchers are a trap, and will lead to state control of private schools and homeschooled children. Interest groups will demand regulations on schools that accept vouchers to the point that they will be indistinguishable from existing public schools. The government should get out of education altogether.

[commander-zero.livejournal.com]

Preaching to the choir. Those posts are the reason your on my particular Friends list.

Of all the 'doomist' scenarios, I (and aldoushuxley, I think) think the economic crawl and decline to Soviet-style dytopia or Argentine-style inflation is the most likely. You *do* have some gold socked away, right? ;)

[crasch.livejournal.com]

I'm getting some gold (or more likely, silver, since it's less likely to be confiscated).

[knavish.livejournal.com]

How much gold is enough, by the way? I've been buying the 1/10th of an ounce $5 gold eagles from the US mint over the last few months. I figure that they will be easier to spend on things I might need than the big 1 ounce eagles. I'm saving for a house anyway, so I figure on buying a couple of ounces a month and selling off half of the gold in a year to put down on the house. Or not selling any of it if things keep up the way they are.

What shocked me back into reality was Greenspan schooling congress this week on the importance of cutting back on social welfare programs. That was a wake up call if I ever heard one and everyone seems to be ignoring it. Gay marriage, Jesus movies and reality TV shows are far more important it seems. Fucking bread and circus'...

[crasch.livejournal.com]

How much gold? I don't know -- it depends on your risk preferences. Personally, I would like to have at least a year's worth of income in gold/silver.

[knavish.livejournal.com]

Fuck. That bad? Fuck.

[crasch.livejournal.com]

Well, here's the scenario I'm planning:

1. Currency collapse and hyperinflation.
2. Taxes increased by 20 - 40%
3. Widespread unemployment with attendant disgruntlement. Possible civil unrest.
4. Increased government crackdowns on free speech, habeus corpus, etc.
5. Possible rise of a demogogue?

Under this scenario, the best strategy may be to retreat to a more hospitable country for a while. So it would be nice if one had enough hard cash to live for a while without a job, in order to become acclimated to the new culture, pay baksheesh, etc.

[denshi.livejournal.com]

5th dish: reduce military spending. It's a little questionable of the report that they don't even consider that option.

[crasch.livejournal.com]

DOD spending is about 18% of the federal budget. Even if you cut it in half, that would only reduce total government expenditures by 9%. While that would help, the bulk of the problem is caused by the growth of Social Security and Medicare/Medicaid.

[apotheon.livejournal.com]

Write an article about this for @political. You know you want to.