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Is the United States on the Brink of Bankruptcy?
Posted by David M. Katz | | US
December 6, 2007 5:14 PM ET

A handful of Valium might be more appropriate. That was my reaction when a non-U.S. regulator suggested to me that we wouldn't need coffee to stay awake.

We had just heard a barrage of alarming economic news at the International Foundation of Accountants' World Accountancy Forum on Tuesday. Particularly dour were the remarks of Laurence Kotlikoff, a Boston University economics professor. Finance executives who think the government might be in a position to assume some of their health care or pension costs have another think coming, the professor's speech suggested.

Kotlikoff cited recent accounting by two economists, Jagadeesh Gokhale and Kent Smetters, that suggested that, in present-value terms, more than $70 trillion divides projected future U.S. federal spending from projected federal receipts. "This fiscal gap is enormous and indicates that our nation is, quite literally, facing bankruptcy," the professor intoned.

After he used the "b" word, you could have heard a pin drop. "Bankruptcy is a strong term," he allowed. What bankruptcy would mean in a government context, he said, is "defaulting on creditors—all those expecting to receive government healthcare, pension, welfare, and other benefits as well as all those expecting to be employed by the federal government. Government bankruptcy also means jacking up tax rates and printing money to 'pay' for what the government spends."

A proponent of "generational accounting"—which aims to show how fiscal policy affects people of different ages—Kotlikoff attributed what he sees as the dire state of U.S. economic affairs not to federal spending but to household consumption. And the biggest consumers in the house are the elderly, he says. "Since 1960 average consumption per oldster has roughly doubled relative to average consumption per youngster," he said, adding that "Uncle Sam has been cutting taxes on the elderly, which has also permitted them to consume a lot more."

Other speakers, including U.S. Comptroller General David Walker, felt that although the situation was threatening, the government wasn't on the verge of filing for Chapter 11 yet. Still, if prominent economists are talking about the possibility of major government defaults, senior finance execs might well start running off some scenarios to think about what they'd do if the government demanded more benefit payments from them or hiked their taxes considerably.

Comments (5)

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This isn't the first time a US Bankruptcy alarm has been sounded. We've been fortunate in the past, but this time things are different. The US is facing a well organized European Union, China has more influence and various third world countries are seeing more consumption demand.

The Conservative Rush Lambs always derrided the Dems for being Tax and Spend. But whats worse than tax and spend...?

Tax CUT and spend
Posted by Guy Nevers | December 06, 2007 12:16pm

It's not the US going bankrupt.

Just it's people.

How? Either through asset deflation or HIGH inflation. Inflation allows the government to pay for their expenses TODAY with cheaper $$$ TOMORROW.

Of course the ones really paying are the people whom the government sucks dry.

The rich continue to get richer(they have to charge higher prices) and continue to move THEIR money around the world, buy gold, etc.

I've always thought a bankruptcy with a cram down was appropriate.

OW how about taxing those corporations again as today they only pay 19% of tax while people pay the rest. In 1980 it was 50/50.

What's wrong with america? besides the moral decay and greed run rampant. It's truly the selfish nature of the beast which will slay it!
Posted by Robert Pischke | December 07, 2007 09:15am

Will our country hit the bankruptcy skids in the near future? More than likely. I am no financial expert and don't want to be (I sell plants for a living). I am, however, old enough to have a long view of history and the writing is there for anyone who wishes to read it. Are we in denial? Yes, every last one of us who occupy the industrial world. We all know why, too. Cargo ships loaded with plastic Soma arrive daily at our local box-stores. The drone of the boob-tube can be heard 24/7 in homes, shopping malls, bars, etc., telling us to buy more, pay later. No one really stops to give it a ready hard think - "Do I really need another widget?" And as I see several times a day: a shopper, most often a woman, throws a temper-tantrum because we don't happen to carry that plant that lives year 'round, both indoors and out that requires no water, care, or light, and why haven't we invented such a thing? We, as Americans, are spoiled rotten to the core and we made ourselves this way and we will have to figure it all out when the SHTF! All the financial acumen in the world cannot save us now. There is no Savior - save yourself and your family by getting your priorities straight.
Posted by Josette Collins | December 07, 2007 05:21pm

I have a document from David Walker that I have been using in my economics class for the past few years. He estimates the unfunded liabilities (social security but largely medicare) are $18T. Not to sneeze at this. It took us 75 years to get here, and we need to have a long term plan starting today (75 years) to get us out. 1) reinstate PAYGO 2) begin cutting benefits (extending age requirements) and 3) cut the deficit by about 6% the first year and increase that .1% per year for the next 75 years.
Oh yea, and stay out of wars that simply from an economic view are super expensive.
Any statesmen in the country willing to tackle this?
One more thought - send AARP packing, the idea is to leave the grandkids something.
Posted by Bob Misko | December 09, 2007 01:53am

RE: U.S. unfunded liabilities:
Of course, Barack Obama was correct when he said on Meet The Press a few weeks ago, that we should raise the cap on which social security taxes are levied. When Warren Buffet earns $ 24,000,000 and pays taxes on the first $96,000, that?s not right.
As far as the Euro replacing the dollar, the Fed has a problem: It is under pressure to lower rates tomorrow to help the economy, but lower rates will force the dollar lower.
With that in mind, I offer a portion of an email I sent to The New York Times Dec. 22, 2004, regarding a new book " THE UNITED SATES OF EUROPE":
" It was in 1973, that I first read the words: "The United States will cease being the leader of the West and will probably become in some way a part of the new European sphere of power." ... The United States will not hold its present position of leadership in the western world; financially, the future leader will be Western Europe Look for the emergence of a "United States of Europe"... which will become the mightiest coalition on earth."
Of course, I spent two minutes reading the words and another twenty minutes laughing
since I had a difficult time believing that the then nine-nation EEC would ever amount to anything! I thought the book in which I had read the above ("The Late Great Planet Earth" by Hal Lindsey, Zondervan : 1970, on pages 84 and 173 of the bantam paperback) was crazy along with its author!
Now, over three decades later, the Economist said the Euro could replace the U.S. Dollar as "the world's main (reserve) currency" (See "The passing of the buck?", The Economist, December 4th, page 71) . The Economist tells us that"..The euro area is the world's biggest exporter (who'd have thought that could happen? - Well I think Mr. Lindsey did) and since the creation of the single currency, European financial markets have become deeper and more liquid...
Zbigniew Brezinski (Jimmy Carter's National Security Advisor), wrote this about Europe in his book "Out of Control: Global Turmoil on The Eve of The 21st Century (New York: Charles Scribner's Sons; 1993):
:"To truly unify, Europe must either fashion a remarkable degree of consensus ---or be led by an acknowledged leader, guided by a clear and compelling historical vision." Mr. Brezinski appears to be giving us a secular description of Mr. Antichrist. 9Page 137)

Every Christmastime, Christians are once again asked to have faith in a Person born some 2,000 years ago, even though we were not there to hear Gabriel speak to Mary (the same Gabriel, as amazing as it seems, who had spoken to Daniel over five centuries before he spoke to Mary), neither were we there to hear the Angels sing "Peace on Earth to men of goodwill".
Yet, despite that, we are asked to place our faith in the Man/God Who said:" let not your heart be troubled. You believe in God, believe also in Me. In My Father's House there are many Mansions...I go to prepare a place for you. And if I go to prepare a place for you, I am coming again. And I will take you to Myself, so that where I am there you also will be." - Jesus Christ in The Gospel of John 14: 1-4. Merry Christmas

Robert P. Del Rosso

Posted by Robert Del Rosso | December 10, 2007 06:37pm

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