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Federal Reserve Bank researcher: US Going Bankrupt

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Professor Laurence Kotlikoff [for the Federal Reserve Bank of St Louis]: "the US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds''.
US 'could be going bankrupt'

By Edmund Conway, Economics Editor
(Filed: 14/07/2006)
 link to www.telegraph.co.uk

The United States is heading for bankruptcy, according to an extraordinary paper published by one of the key members of the country's central bank.

A ballooning budget deficit and a pensions and welfare timebomb could send the economic superpower into insolvency, according to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, a leading constituent of the US Federal Reserve.

Prof Kotlikoff said that, by some measures, the US is already bankrupt. "To paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors," he asked.

According to his central analysis, "the US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds''.

The budget deficit in the US is not massive. The Bush administration this week cut its forecasts for the fiscal shortfall this year by almost a third, saying it will come in at 2.3pc of gross domestic product. This is smaller than most European countries - including the UK - which have deficits north of 3pc of GDP.

Prof Kotlikoff, who teaches at Boston University, says: "The proper way to consider a country's solvency is to examine the lifetime fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country's policy will be unsustainable and can constitute or lead to national bankruptcy.

"Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke."

Experts have calculated that the country's long-term "fiscal gap" between all future government spending and all future receipts will widen immensely as the Baby Boomer generation retires, and as the amount the state will have to spend on healthcare and pensions soars. The total fiscal gap could be an almost incomprehensible $65.9 trillion, according to a study by Professors Gokhale and Smetters.

The figure is massive because President George W Bush has made major tax cuts in recent years, and because the bill for Medicare, which provides health insurance for the elderly, and Medicaid, which does likewise for the poor, will increase greatly due to demographics.

Prof Kotlikoff said: "This figure is more than five times US GDP and almost twice the size of national wealth. One way to wrap one's head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143pc."

The scenario has serious implications for the dollar. If investors lose confidence in the US's future, and suspect the country may at some point allow inflation to erode away its debts, they may reduce their holdings of US Treasury bonds.

Prof Kotlikoff said: "The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century."

Paul Ashworth, of Capital Economics, was more sanguine about the coming retirement of the Baby Boomer generation. "For a start, the expected deterioration in the Federal budget owes more to rising per capita spending on health care than to changing demographics," he said.

"This can be contained if the political will is there. Similarly, the expected increase in social security spending can be controlled by reducing the growth rate of benefits. Expecting a fix now is probably asking too much of short-sighted politicians who have no incentives to do so. But a fix, or at least a succession of patches, will come when the problem becomes more pressing."

homepage: homepage: http://research.stlouisfed.org/publications/review/06/07/Kotlikoff.pdf
address: address: Federal Reserve Bank of St. Louis

a nation-state is not a household 15.Jul.2006 14:35

and the U.S. is not an ordinary nation-state

An institution is "bankrupt" if there are insufficient real resources available to pay obligations that another more powerful institution is capable of making it pay. In the case of the United States, there is no such more powerful institution. It's like worrying whether Queen Victoria was bankrupt in the 19th century. If she ran out of her own money, or land, she'd just take yours. No problem.

when it happens, kiss your forests goodbye. 15.Jul.2006 14:54

old fool

If the US goes bankrupt like someome sorry ass south american country in the 1980s, or Germany in the early 1930s. Mass deforestation on a scale non can imagine will occur to sell abroad for cold hard ca$h.

If you google it, you will find Pre-nazi Germans with wheelbarrows full of Marks trying to buy a loaf of bread.

This economic collapse is directly responsible for the rise of Hitler. So be careful what you wish for.

well.... this is important 15.Jul.2006 15:06

Ecotopian Yeti

Yes the US Empire is not a normal "nation-state" because it got its strength from debt be that the growing indebted middle class after WWII and especially in the 1990s and the debtor countries used by the US as vassel states. Is the US bankrupt... yep and that does matter too because the mythology that the "country was owned by the people" is a fading mythology and the reality is starting to hit the average Amerikan hard espcially the middle class as their little finacial games of swapping debt for debt and readjusting morgages come to a screatching halt and the realization that the bankruptcy safety net was yanked by the corporate elite. If we stay in the sinking empire then we will be doomed to either indebted slavery or one of the huddled starving masses. Cascadians, wake up! Time to break from this diaster that is coming. Free Cascadia!

Thoughts on Bankruptcy 15.Jul.2006 15:42


Well, I agree with much of Kotlikoff's analysis, but there are other things to consider. First is, what happens if you think of the US on a balance sheet with a value to its real property? The answer is, the nation could claim immenent domain, seize (for example) Florida, and sell it to (for example) China. Now that is currently an unthinkable political gambit, but it could be done.

Another take on it is the value of the US military machine. In some ways, the US Army is already one of mercenaries doing battles around the world, except instead of charging other nations for those services, the US taxpayer gets stuck with the bill. We socialize the cost and privatize the profits. A pretty sweet racket if you have no scruples and invest with inside knowledge of the military-industrial complex (uh... like Bush or Cheney, perhaps)?

The American people could revolt in large numbers, take back the government, and impose a one-time personalty tax on the super-rich, extracting that wealth that (had the regressive tax policies of Bush, Reagan, etc, not been passed) would have accrued to the state.

Or we could get control of government and do a real investigation into the crap that the international bankers behind the Fed have been pulling on the American people through corrupt politicians. Once that corruption is exposed, the American people could review and declare many of those debts invalid, dissolve the Federal Reserve Bank, and return control of the money supply to the US Treasury, which is what the Constitution originally intended.

Either way, it's a pretty dour situation. Stupid replublicans and mainstream dems need to realize they have been betrayed by an international elite pretending to have our best interest at heart.

it's just psyops for the IMF and Wolfowitz World Bank to take charge 15.Jul.2006 18:27

watch out

It's all a lie. The Federal Reserve is a zero tangible assets required backed currency, they just print as much as they want. There's zero correlation with assets and the money supply. (Moreover, our taxes barely even cover a small portion of interest payments on debt, instead of go to services for governmental issues.)

They are just attempting a psyops on you. To make the sheep say "well, I guess to get the IMF money, to keep the government going (the lie), we will have to privatize services even more."

It's going to be a scam. Call any Congress people on it, and call the Federal Reserve on it.

boomers not the problem 16.Jul.2006 09:31

war is

I notice that the bankruptcy of the US is being blamed here on the rising ages of boomers who will need Social Security. Medicare. etc.

These kinds of reports start off sounding good, as though maybe we can have a real discussion about where the money is going and the impending collapse of the US economy.

But, no, we end up with heavy back pedaling and no discussion of the miltary/industrial/media mega-multinational-conglomerates that are profiting right now from Bush policies (and paying NO taxes!).

Knowing it is one thing, doing something about it is something else.

The revolution needs to start, now!

How The Fed Really Works 16.Jul.2006 11:25


What actually happens is that the Fed is a gate keeper. Congress says, OK, let's print more money (they've been doing this a lot lately). A bond issue goes out, someplace like China will buy the bulk of it to make sure we keep importing their goods, and the Treasury prints currency. Voila, the national debt goes up.

The Fed has three ways of controlling the US economy. Note here that a private institution with private (and much foreign) ownership has control of monetary policy. The Fed can (1) control the Federal Funds interest rate which has a muted domino effect on all interest rates, (2) alter the Reserve Requirement Ratio (probably the smartest thing to do right now, but that directly gets in the way of Wall Street's profits) to force banks to maintain higher reserves and loan less, (3) choose to expand or contract the money in circulation. Number 3 is where the real slight of hand occurs with the Fed and it represents its most powerful effect on the economy (though you only hear about interest rate changes). When the Treasury needs to finance govt spending and issue bonds, the Fed immediately buys up an equal amount of bonds on the open market, according to Federal Open Market Committee, which consists of the Chairman of the Fed and the heads of the 12 regional Fed banks (like St. Louis). These securities are assets to the Fed that are offset by the liability of currency in circulation. To the extent that the Fed wants to expand or contract the money supply, it chooses to buy more or less securities on the open market than there are new bonds being issued by the Treasury. Ultimately, this activity is monitored by the publication of M3, but Bush appointed Bernanke just decided to do away with that with a wave of his hand back in March.

In many countries all of this is done by the Treasury, without the Fed intermediary. While justification for the Fed is to keep politics out of monetary policy (though not fiscal policy, which is mostly controlled through taxation and government spending by the Executive and Legislative branches) and there is some validity to that, it also creates a conflict of interest between the largest member banks (back in 1922 a Congressional inquiry found these to be Bank of England, NM Rothschild, Nat' City Bank (Rockefeller), JP Morgan, Jacob Schiff, etc). Hence the resistance to the creation of an independent central bank made famous by people like President Andrew Jackson. I have my own opinions, but this is just the objective. An interesting footnote is that historically the Fed was audited by those great guys at Arthur Anderson, who looked the other way with Enron and other high profile scandals. No wonder Paul Volker tried so hard to save Anderson.

Boomers fell asleep on democracy 16.Jul.2006 11:31

boomer blamer

Since the control of the electorate passed from the WWII generation to Boomers in the 70s, your generation elected Nixon, Reagan, Bush, etc. You are the wealthiest generation in American history. You had the people power to reign in the military-industrial complex. It's not fair to blame everybody, because many boomers stayed informed and fought these trends, but we're all paying for it now. Most of you were to damn busy feeling all patriotic and going to Disneyland on $1/gal trips in your SUVs. History will judge your gluttany.

The Federal Reserve Is The World's Largest Counterfeiter 18.Jul.2006 22:22

James F. Marino

The Federal Reserve Bank is a privately held corporation which is operating
illegally and UnConstitutionally. Only Congress is granted the power to control
the creation of US Currency, not a privately held company.

And the Federal Reserve Notes are not based on anything but thin air,
unlike the US Treasury Notes which were based on the coinage in the
Treasury's vaults.

Jacob Schiff, JP Morgan, Senator Aldrich, Strong, and few other heads of
the banking business back in the early 1900's known as the Jeckyl Island 7,
got together to hatch a plan to screw the American people out of their
own country, and to this day Americans are still paying for it, in federal
income tax, the devalued dollar and the worst corruption this country has
ever seen.