Bill Bonner

Another month gone by. Another month closer to bankruptcy.

Not you, dear reader.

We’re talking about the US government.

But hold that thought…

Let’s turn to the markets. Hmmm… Not much action. The Dow rose a piddly 4 points on Friday. Gold went up $15. Not much to talk about there…

Investors are waiting to see what happens next week. They’re sitting on the edge of their chairs. Will Ben Bernanke play it cool? Or will he want to do something really big, bold, and bumbling?

We’re not as curious as most investors. We doubt that he will want to go too far in either direction. Most likely, he’ll do what investors expect…announcing more quantitative easing – money printing, in other words – but being a little cagey about how much, and when.

So, let’s turn back to the biggest bankruptcy of all time.

Many are the ways the facts are interpreted, distorted and bearded. But the numbers keep going up.

The red numbers, that is.

The US press barely reports the story. They know Americans aren’t interested. In the US, people figure we’ll muddle through…we’ll work our way out of debt…

Or, hey, maybe there will be a miracle! In the US, we believe in all sorts of things that are miraculous…unbelievable…and preposterous.

Got too much debt? We’ll fix it by giving you more debt!

People short of real money? We’ll fix that by giving them make-believe money.

Did the authorities miss the biggest financial blow up of all time? Did they fail to stop the biggest Ponzi schemer in history – even after they were tipped off? Did they completely “blow it” when it came to controlling the bubble and the damage it caused?

Yes? Well, let’s give them $10 trillion of the taxpayers’ cash and credit and see if they can do better the next time!

Fantasies, hallucinations, delusions – and don’t forget the “war on terror”…the first war on nobody in particular in history.

But let’s get back to who owes what to whom. We’re talking about the US government. And Canada’s Globe and Mail has the story:

The scary actual US government debt

Boston University economist Laurence Kotlikoff says US government debt is not $13.5-trillion (US), which is 60 per cent of current gross domestic product, as global investors and American taxpayers think, but rather 14-fold higher: $200-trillion – 840 per cent of current GDP. “Let’s get real,” Prof. Kotlikoff says. “The US is bankrupt.”

Writing in the September issue of Finance and Development, a journal of the International Monetary Fund, Prof. Kotlikoff says the IMF itself has quietly confirmed that the US is in terrible fiscal trouble – far worse than the Washington-based lender of last resort has previously acknowledged. “The US fiscal gap is huge,” the IMF asserted in a June report. “Closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 per cent of US GDP.”

This sum is equal to all current US federal taxes combined. The consequences of the IMF’s fiscal fix, a doubling of federal taxes in perpetuity, would be appalling – and possibly worse than appalling.

Prof. Kotlikoff says: “The IMF is saying that, to close this fiscal gap [by taxation], would require an immediate and permanent doubling of our personal income taxes, our corporate taxes and all other federal taxes.

“America’s fiscal gap is enormous – so massive that closing it appears impossible without immediate and radical reforms to its health care, tax and Social Security systems – as well as military and other discretionary spending cuts.”

He cites earlier calculations by the Congressional Budget Office (CBO) that concluded that the United States would need to increase tax revenue by 12 percentage points of GDP to bring revenue into line with spending commitments. But the CBO calculations assumed that the growth of government programs (including Medicare) would be cut by one-third in the short term and by two-thirds in the long term. This assumption, Prof. Kotlikoff notes, is politically implausible – if not politically impossible.

One way or another, the fiscal gap must be closed. If not, the country’s spending will forever exceed its revenue growth, and no one’s real debt can increase faster than his real income forever.

Prof. Kotlikoff uses “fiscal gap,” not the accumulation of deficits, to define public debt. The fiscal gap is the difference between a government’s projected revenue (expressed in today’s dollar value) and its projected spending (also expressed in today’s dollar value). By this measure, the United States is in worse shape than Greece.

Prof. Kotlikoff is a noted economist. He is a research associate at the US National Bureau of Economic Research. He is a former senior economist with then-president Ronald Reagan’s Council of Economic Advisers.

He says the US cannot end its fiscal crisis by increasing taxes. He opposes further stimulus spending because it will simply increase the debt. But he does suggest reforms that would help – most of which would require a significant withering away of the state. He proposes that the government give every person an annual voucher for health care, provided that the total cost not exceed 10 per cent of GDP. (US health care now consumes 16 per cent of GDP.) He suggests the replacement of all current federal taxes with a single consumption tax of 18 per cent. He calls for government-sponsored personal retirement accounts, with the government making contributions only for the poor, the unemployed and people with disabilities.

Without drastic reform, Prof. Kotlikoff says, the only alternative would be a massive printing of money by the US Treasury – and hyperinflation.

Wait a minute, says our old friend Jim Davidson. Professor Kotlikoff is wrong. He “unaccountably overstates the solvency of the US,” he says.

Jim makes a good point. It’s not total GDP output that supports the government. It’s just the private sector part. The government part is a cost…not a source of financing. The total fiscal gap – unfunded government obligations – is over $200 trillion. It’s about 14 times GDP. But compared to the real output of the private sector, it’s 20 times as great.

If this were a more traditional debt burden, it would have to be financed. Interest rates are at a 60-year low. But they could easily be back up at 5% in short order. At that rate, it would take 100% of private sector output just to keep up with it.

Professor Kotlikoff is right. The US is already broke. Busted. Bankrupt. It cannot possibly honor its commitments. One way or another, it must default on them.

But how? That’s what we’re going to find out.

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • Filbert Flubottom

    Closer to bankruptcy only in the context of a financial system controlled and manipulated by the federal reserve.

    *if* the US chose to print its own money – interest & debt free – there would be no crisis, no shortage of jobs, etc.

    Eliminate the FED. That is your problem.

  • Peter Rogers

    The whole QE thing is just a sham, the US knows it’s broke and the only way to finance this gap between government spending and tax receipts is to issue bonds to be bought by the fed as part of QE, this is just printing money by smoke and mirrors, the market has caught onto this wheeze, look at the Dow / S&P rally since Sept.
    Also its interesting if you look at the Weimar republic of Germany before they had hyperinflation, the money printing there was giving almost 100% employment, whereas in the US you are printing money via QE and have between 10-25% unemployment, the US seems to be in a much worse state than Germany in the 1930′s

  • Jane Bobsky

    debt piled on debt/….default is inevitable.

    Most ridiculous spectre is one arm of the gov’t buying the US debt via the banks who make a profit on the deal!

  • http://www.investorsfriend.com The Investors Friend

    Bill says the War on terror is the first war in history on “nobody in particular”

    That is funny… and true…

    It must also be the first time in history when people are lining up to lend money to a bankrupt nation at microscopic interest rates. Very strange…

    Treasury yields are extremly low and yet people and institutions buy them. They are not forced to buy but buy they do.

    Buy buy… for now?

  • Pingback: Trackback

  • Pingback: Trackback

Recent Articles

Addison Wiggin
3 Ways to Identify Your Own Private American Oasis

Addison Wiggin

No matter where you live in the US, it seems like some federal employee has his hand on your wallet. That said, not all states are created equal in that regard. And so today, Addison Wiggin details which states offer you the least intrusive options when it comes to dealing with the various levels of government. Read on...


The One Number Every Penny Stock Investor Overlooks

Jonas Elmerraji

When it comes to investing in small companies with explosive growth potential, there is one number investors tend to be fixated on: share price. But as Jonas Elmerraji explains, there is another number that is far more important when it comes to discovering quality investments on the cheap. Read on...


Winners and Losers in the Battle of Economic Stupidity

Douglas French

A lot of people are buying to a lot of bad ideas right now, based on faulty logic or blindly following a political agenda. But if you ask the right questions, you can expose these ideas, as well as the people who support them, and show how silly (and stupid) they really are. Thankfully, one man has been doing just that for decades. Doug French explains...


Smart Investments in the Mobile Revolution

Greg Guenthner

The world is obsessed with smartphones. Most people can't go ten minutes without checking their phone for status updates on Facebook or Twitter or any number of apps they happen to have. And while Facebook's stock continues to soar, it's only natural to wonder, "What's the best way to play this mobile revolution?" Greg Guenthner explains...


The US Debt Crisis that Will Never Happen

Chris Mayer

One of the most heated political battles raging across the western world is debt versus austerity. In the U.S. this debate reached it's apex in 2011 when the U.S. credit rating was downgraded by Standard and Poor's. In today's essay, however, Chris Mayer throws the debate out the window, explaining why he thinks a U.S. debt crisis will never happen...