Reporting on the recent protest march in Washington, the AP interviewed Terri Hall, a participant, who said that she “felt compelled to become political” because of her concerns about government spending. Hall thinks that America’s deficits are out of control, which, in her view, is “putting the country at risk.”
Terri Hall is but one of millions of Americans awakening to the fact that their country is in serious fiscal trouble. What most have not yet grasped is just how dire the situation really is. To put it plainly, the US is bankrupt. This is no hyperbole, but a reflection of the fact that the federal government has contracted more obligations than it can possibly make good on.
The federal government’s overall indebtedness is essentially the sum of two figures. The first is the national debt, which currently stands at $11.9 trillion. The second is the amount of implicit obligations inherent in entitlement programs. These are conservatively estimated to be in the area of $55 trillion. This makes for the sum total of at least $66 trillion.
The federal government currently receives about $2 trillion in revenues – from individual income taxes, corporate taxes, tariffs, various fees, etc. – out of the economy whose size is roughly $14 trillion. Having accumulated a debt burden that exceeds its annual income by a factor of thirty, the federal government cannot conceivably meet its obligations.
There is a solution to this problem, and it’s actually quite simple. Since the national debt is the cumulative sum of annual federal deficits, to eliminate it the government would have to stop overspending and use surpluses to pay the debt down over time. In other words, the government would have to live within its means and not spend more than what it receives in revenues.
This, however, does not seem to be a realistic possibility. The federal government posted deficits in all but five of the last fifty years. Things have been getting worse in recent past when deficits climbed to record levels under President George W. Bush. Yet Bush’s deficits seem small when compared with those of President Obama. The deficit for the fiscal year that just ended last week broke all peacetime records both in absolute and relative numbers. At some $1.7 trillion, the current deficit nearly four times higher than even under Bush’s stewardship.
The president’s own team projects high deficits for the long term. This will, of course, add greatly to our national debt. So much so that, by the president’s own estimates, the national debt will exceed the critical level of 100 percent GDP in less than 24 months. Bear in mind that these kinds of estimates are almost always too optimistic. The reality will likely be worse.
So, how does the government plan to tackle the debt problem? The short answer is that it doesn’t. There is currently no government plan to get a handle on our vast and growing national debt. There is only a plan to grow it more, and dramatically so. The result is a shockingly irresponsible economic policy: The deeper the country fall’s into debt, the greater is the political leadership’s determination to borrow more.
Given the debt’s immense size and the fact that there is no political drive to bring it under control, it is becoming increasingly apparent that the US will be debt ridden for years to come. Peter Schiff, president of Euro Pacific, has compared our national debt to a Ponzi scheme similar to that of Bernard Madoff. Schiff is not the only one making this claim. Earlier this year, Nouriel Roubini, one of America’s leading financial experts, used the same metaphor when writing in Forbes. The title of his article was The United States of Ponzi. Wrote Roubini:
“A government that will issue trillions of dollars of new debt to pay for this severe recession and socialize private losses may risk becoming a Ponzi government if – in the medium term – it does not return to fiscal discipline and debt sustainability.”
Since this was written in March of this year, the government’s own projections make it abundantly clear that there is no plan to return to “fiscal discipline” or “debt sustainability.” The government borrows every time there is a new bill to pay. Then, when interest comes due, it borrows for that as well. Roubini’s fears have been fulfilled.
We are fast approaching the point when the debt burden will become so overwhelming that the government will have no choice but to repudiate it. Most observes think this will take the form of high inflation, which is really a default in disguise, since creditors get back only a portion of their original investment value. In an interview with Bloomberg earlier this year, legendary investor Marc Faber stated, “I am 100 percent sure that the U.S. will go into hyperinflation.” Given Faber’s long record of accurate economic forecasting, his statement should give us a pause.
As far as entitlements are concerned, the prospects of a responsible solution are equally bleak. To begin with, the $55 trillion figure we gave above is a conservative one. There are many who think that the amount of implicit obligations inherent in Medicare, Social Security and Medicaid is far higher. One of them is Richard Fisher, President of Federal Reserve Bank of Dallas, who estimates that the number is well over $100 trillion. This is what Fisher said last month at the 55th Annual Meeting of the North Dallas Chamber of Commerce:
“Our fiscal predicament is compounded by the embedded unfunded liabilities of Social Security and Medicare. By our calculation at the Federal Reserve Bank of Dallas, the present value of the unfunded debt of these two entitlement programs has reached $104 trillion, with $88.9 trillion of that due to Medicare alone.”
At more than seven times America’s GDP, these are truly mind-boggling figures. But even the lower-end estimates are gargantuan by any standard. Moreover, there is always a good chance that America’s entitlement liabilities will be further expanded by some misguided legislation. One such possibility is amnesty for illegal immigrants, which would pull millions of poor immigrants into the entitlement racket. Another is universal healthcare which, if passed, would effectively become the largest entitlement of all.
The only way to reduce the vast entitlement encumbrance is by cutting benefits. The possibility of that happening, however, is even more remote than that of deficit elimination. Entitlement reform is the third rail of American politics: Those who try achieve it, as George W. Bush did a few years ago, will be savaged politically.
The only thing politicians seem serious about when it comes to entitlements is hiding the impending disaster from the American public. This is why some years back they decided to take them off our national balance sheet. They disingenuously argued that entitlements do not represent hard obligations; they can be adjusted at will by legislation. This was cynicism of the worst sort, since every politician knows that the likelihood of passing such legislation is virtually nonexistent.
There exists no plausible scenario under which our federal government could meet its liabilities. Burdened with growing obligations it cannot fulfill, the government is dragging the country toward fiscal ruin. And no one in a position of power can answer the $66 trillion question: Where will America get all that money?
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