(Extracts from Business Week
article, click headline above to read it)
"A June analysis by the Congressional Budget Office concluded
that keeping the U.S.’s ratio of debt to gross domestic product at current levels until the year 2085 (to avoid scaring
off investors) would require spending cuts, tax hikes, or a combination of both equal to 8.3 percent of GDP each year
for the next 75 years, vs. the most likely (i.e. “alternative”) scenario. That translates to $15 trillion
over the next decade..."
"A more revealing calculation
is the CBO’s measurement of what’s called the fiscal gap. That figure is conceptually cleaner than the national
debt—and consequently more alarming. Boston University’s Kotlikoff (who) has extended the agency’s analysis
from 2085 out to the infinite horizon, which he says is the only method that’s invulnerable to the frame-of-reference
problem...concluded that the fiscal gap—i.e., the net present value of all future expenses minus all future revenue—amounts
to $211 trillion...
"The
U.S. is in danger of reaching a generational tipping point at which older Americans have the clout to vote themselves benefits
that sap the strength of the younger generation—benefits that can never be repeated. Kotlikoff argues that we may have
reached that point already. He worries that the U.S. could become Argentina, which went from one of the world’s richest
to lower-middle income in a century of chronic mismanagement..."
A former Reagan administration official who worked on trade policy is warning that unless Congress can agree to a significant
reduction in spending that the world may run out of money in 6-18 months. When that happens the economy could enter “a
death spiral.”
“Based upon world liquidity, the amount of money available to fund sovereign debt in 2011 is between $6-9 trillion,”
Marc Nuttle told Townhall Finance. Nuttle runs the siteDebtWall.org. “The world’s government projections for deficit financing in 2011 is $8-10 trillion. We are bumping into the
ceiling of the world’s ability to fund ongoing sovereign deficits and debt on an annual basis.”
The $2-6 trillion shortfall will have to come from other parts of the economy like small business loans, the stock market,
commercial bonds and consumer spending.
Unless something is done to reign in spending, Nuttle,...predicts that the financing of government debt will eat into the
world’s ability to invest in public and private projects.
Money that would normally be available to capital markets would have to be switched just to finance interest rate increases.
“Interest rates may well hit double digits,” he said, “forcing businesses to operate without adequate
float for inventory, materials, facilities and production. Businesses will fail, jobs will be lost, salaries and wages will
be reduced.” ...Nuttle says that in order to avert a short-term crisis the U.S. has to take the lead by cutting
$500 billion in spending immediately.
“This will not completely solve the problem but it is an adequate step in the right direction,” Nuttle said.
“This is the necessary amount that will alleviate pressure on the funding of 2012 world sovereign debt projections.
It is still possible to develop a four-year plan to avert hitting the debt wall, but the plan requires immediate cuts in the
deficit.”...
Nuttle points out that under current artificially low rates, the interest on the U.S. debt is $187 billion. If interest
rates were to go back to the historic norm of 4 percent, interest on the debt would come in at $600 billion...
Nuttle predicts that when that happens, “The economy will enter a death spiral of increasing business failures, fewer
jobs, higher prices, higher taxes and stagnant growth. Liberals in government will use the ensuing economic crisis as a pretext
for increasing the size and scope of government.”...
The effects of fiscal consolidation—tax hikes and government
spending cuts—on economic activity.
Abstract of an IMF Study
Based on a historical analysis of fiscal consolidation in advanced economies,
and on simulations of the IMF’s Global Integrated Monetary and Fiscal Model (GIMF), it finds that fiscal consolidation
typically reduces output and raises unemployment in the short term. At the same time, interest rate cuts, a fall in the value
of the currency, and a rise in net exports usually soften the contractionary impact. Consolidation is more painful when it
relies primarily on tax hikes; this occurs largely because central banks typically provide less monetary stimulus during such
episodes, particularly when they involve indirect tax hikes that raise inflation. Also, fiscal consolidation is more costly
when the perceived risk of sovereign default is low. These findings suggest that budget deficit cuts are likely to be more
painful if they occur simultaneously across many countries, and if monetary policy is not in a position to offset them. Over
the long term, reducing government debt is likely to raise output, as real interest rates decline and the lighter burden of
interest payments permits cuts to distortionary taxes.
From World Economic outlook: Recovery, Risk, and Rebalancing, International Monetary Fund |
According to a new report
just released at www.truthinaccounting.org/, the states have used accounting trickery to conceal a total of $1 trillion of outstanding bills.
The report identifies five 'Sinkhole' states and five 'Sunshine' states.
Life is really simple, but we insist on making it complicated.
- Confucius
This
financial crisis is forcing state and local agencies to make some tough decisions. If things
continue for much longer, there's a real risk that we may have to lay off Jose.
The US ranks near the bottom of developed global economies in terms of financial stability and will stay there
unless it addresses itsburgeoning debt problems, a new study has found.
In theSovereign Fiscal Responsibility Index, the Comeback America Initiative ranked 34 countries according to their ability to meet their financial challenges,
and the US finished 28th, said David Walker, head of the organization and former US comptroller general.
Lawrence J Kotlikoff in the IMF Journal Finance
& Development,September 2010, Vol. 47, No. 3
A noted U.S. economist says debt figures
seriously understate long-term budget problems in the United States
"EVEN as the United States experiences continuing fallout from a terrible financial
crisis, a more alarming fiscal problem looms. The world’s largest economy faces a daunting combination of high and rising
costs for health care and pension benefits and constrained sources of revenue that will put enormous pressure on its fiscal
soundness...
The size of the U.S. fiscal gap, as recently measured by the IMF... indicates that
the United States is in terrible fiscal shape...America’s fiscal gap is massive. It is so massive that closing it appears
impossible without immediate and radical reforms to its health care, tax, and Social Security systems as well as mili...tary and other discretionary spending cuts...The potential
for the U.S. fiscal crisis to kick off a global financial meltdown is significant...Once the world catches on to the true
extent of U.S. fiscal insolvency, the ability of the United States to continue to finance its government borrowing could come
to a halt...How did the United States reach its current state of what could effectively be considered bankruptcy? It spent
six decades transferring ever more resources from the young to the elderly, under a variety of different programs described
with a variety of labels. Many policies across many administrations from Eisenhower’s to Obama..."
Whenever you find you are on the side of the majority,
it is time to pause and reflect --- Mark Twain
Kella
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