Deficit

Monster

Kotlikoff: America in Worse Financial Shape than Russia or China - Peter Diekmeyer

America’s 2017 fiscal gap will come in near $6 trillion, nine times higher than the $666 billion deficit announced by the US Department of the Treasury last week, says Laurence Kotlikoff, an economics professor at Boston University. 

“Our country is broke,” says Kotlikoff, who estimates total US government debts at more than $200 trillion, when unfunded liabilities are included. “We are in worse shape than Russia, China or any developed nation.” 

DYI:  Russia yes – one more reason for the on going Russian BS from the legacy main stream media – China I disagree.  China is one huge debt bubble in the private sector ready to burst.  Of course when?  All I can say is sooner rather than later knocking down China for 10 to 15 years in a 1930’s style depression.  However, the Chinese government will continue, as the debt is in private sector not the government AND they have been building gold reserves at a feverish pace adding an additional governmental safety net to maintain their power.  

Worse, says Kotlikoff, who has testified before Congress, government officials are well-aware that many of America’s debts and accruing liabilities are being written off the books. 

However, for the most part, they are keeping their mouths shut. 

According to Kotlikoff, a long-time activist for fiscal rectitude, the problem stems in large part from the fact that the US government has been spending almost all of Americans’ approximately $795 billion in social security payroll taxes to pay current bills, rather than investing them to fund retirees’ benefits. 

The US government has no money to 

pay all the benefits! 

Politicians know that defaults will occur, they just haven’t figured out how to finesse this. 

However even in the best of cases, Kotlikoff is correct on one crucial point: America is unable to meet its obligations as they become due. That is the definition of bankruptcy. 

In a sense, it should hardly come as a surprise that politicians are hiding this fact. 

Because if America is indeed in worse economic shape than Russia or China, voters might think twice about who they want to lead them.

DYI: 

First of all Social Security from day one, was and continues to be funded through general revenues.  That’s right – all of the accounting the Social Security does is nothing more than smoke and mirrors in order to deceive the public into thinking this is a stand alone program.  The excess monies have been spent from day one when Franklin Roosevelt signed into law the Social Security Act on August 14, 1935.  The excess monies were accounted in the Social Security Trust Fund securities only redeemable through the Treasury – simply put an accurate – yes it is accurate – nevertheless an accurate accounting trick.

Something happened along the way to the forum – demographic imbalance – Baby Boomers!

Social Security works wonderfully as long as the birth rate is above replacement and more than just marginally at 2.1 children per family.  The 0.1 is due to early deaths such as disease, accidents or outright murder.  All of those nasty and horrific events that befall families - our hearts go out to.  If all you remember is 2.0 close enough.  In order to keep the program chugging along with plenty of room to spare the fertility rate - future taxpayers - needs to be at 3.0 or higher.  Since the height of the baby boom (see chart below) the fertility rate crashed. 

Now we have the massive Boom generation over the next two years 50% will be 65 years old with about half receiving Social Security payments.  Those who are in good health will postpone signing up at age 70 for the maximum monthly payment.  Most, however, will jump on board at age 65 or 66.  The problem we now have the much smaller Generation X’er’s who are in their prime earnings age will shoulder the burden until the Millennial’s are up to speed earning enough income to help fund the payments for Social Security.

So…As a stand alone system – self funding – Social Security has 2.8 Trillion in Treasury Securities in the S.S. Trust Fund, only redeemable by the Treasury, tipping you off that this is only an accounting procedure as mentioned earlier.  Once this fund is used up, by law – of course Congress can change the law – monthly payments will have to drop by 21% to ensure the program is self funding through F.I.C.A (Social Security) taxes only.  This is projected to occur in 2034.  A projection without including the real possibilities of few recessions in between, reducing on going S.S. contribution thus depletion will happen some where in the mid to late 2020’s.

Now that you know firmly that the trust fund doesn’t actually exist but nothing more than accounting entry, as Boomer’s continue to tap S.S. budget deficits are going to get larger and larger.  If nothing is done deficits will grow sending our national debt to the far edges of the galaxy – so much so – those buying our debt will demand higher rates to offset their risk placing pressure on the economy as whole compounding the problem by reducing tax revenues.  A vicious downwardly spiral that will NOT endure Congressmen with their voters.

How will the political elites going to finesse this without pissing off too many voters?

Simple – A multi fold process:  Social Security payments are currently caped at $127,200 per year taking from all participants at 12.4% of their income.  This earnings cap – once $127,200 is achieved every dollar after that is no longer taxed by F.I.C.A. – has been raised by 7.3% taxing additional dollars.  Through out the upcoming years the caps will be raised faster than the rate of inflation – you can bet on it. 

Unfortunately raising the cap will only help other measures will be put into place.  Such as means testing those with large savings, investments, pension etc. reducing or eliminating their monthly check until a certain reduced threshold has been achieved.  And by upping the retirement age; Gen Xer’s (and subsequent generations) capturing additional dollars before this group retires, paying for the tail end Boomers.  An increase in the payroll – F.I.C.A. to around 14% or 15% on a tiered basis has been talked about as well.

And in the end to close the budget gap within tolerable limits our government will resort to the worst tax of all – INFLATION!  The Federal Reserve (there are no reserves & it’s privately owned) through QE is a big purchaser of Treasury securities along with mortgage back securities.  The interest is paid back to the Treasury as of 2015 a little more than 100 billion.  Sounds like a perpetual motion machine or the first free lunch? No.  The purchase of the securities was ginned up or digitally printed – debasement of our currency – INFLATION.  Ergo the interest would not have occurred without the digital printing to purchase the bonds the interest is nothing but pure debasement of our dollars.  Simple as that!  Look to the years to come (inflation around 5%) with the Fed’s balance sheet bloated with Treasuries, mortgage back debt, along with corporate bonds as well.  This will only be reduced until Boomer’s begin to pass away in statistical significant numbers reducing the inflationary rate as well.

Any other flies in the soup?  Not for the Boomer’s but if our fertility rate drops to European levels around 1.4 when Millennials go to retire they will have the same problem as we are experiencing today.

  DYI