I predict that the government of the United States will default on its debts in the not too distant future. The main defaults will be the debts of Medicare, Social Security, and the federal pension system but the government will default on all its unfunded liabilities.
Scott Burns wrote an article recently on the unfunded liabilities of the United States government. I have written about those unfunded liabilities before. Our problems are not just our yearly deficit, or the accumulated deficits which equals the national debt. Our biggest problem is the unfunded liabilities. According to the Burns assessment in Forbes Magazine, which was based on Congressional Budget Office reports, in one year the debt of the United States government increased from $211 trillion to $222 trillion. That would be $11 Trillion in one year!
The U.S. fiscal gap, calculated (by us) using the Congressional Budget Office’s realistic long-term budget forecast — the Alternative Fiscal Scenario — is now $222 trillion. Last year, it was $211 trillion. The $11 trillion difference — this year’s true federal deficit — is 10 times larger than the official deficit and roughly as large as the entire stock of official debt in public hands.
This fantastic and dangerous growth in the fiscal gap is not new. In 2003 and 2004, the economists Alan Auerbach and William Gale extended the CBO’s short-term forecast and measured fiscal gaps of $60 trillion and $86 trillion, respectively. In 2007, the first year the CBO produced the Alternative Fiscal Scenario, the gap, by our reckoning, stood at $175 trillion. By 2009, when the CBO began reporting the AFS annually, the gap was $184 trillion. In 2010, it was $202 trillion, followed by $211 trillion in 2011 and $222 trillion in 2012.
Part of the fiscal gap’s growth reflects changes in policy, such as the Bush and Obama tax cuts, the introduction of Medicare Part D, and the expansion of defense spending. Part reflects “natural” growth of existing programs, including growth in Medicare and Medicaid reimbursement rates. And part reflects the demographic time bomb U.S. politicians are blithely ignoring.
When fully retired, 78 million baby boomers will collect, on average, more than 85 percent of per-capita gross domestic product ($40,000 in today’s dollars) in Social Security, Medicare and Medicaid benefits. Each passing year brings these outlays one year closer, which raises their present value.
Governments, like households, can’t indefinitely spend beyond their means. They have to satisfy what economists call their “intertemporal budget constraint.” The fiscal gap simply measures the extent to which this constraint is violated and tells us what is needed to balance the government’s intertemporal budget.
As one tries to ascertain what is to come in the future we need to know the past and the big dog in all of this is the Fed. Since its inception in 1913 the Fed has always protected the largest commercial banks. If a large bank went under it was swallowed by another large bank. No large commercial bank went under in the Great Depression even though thousands of little banks did.
The Fed will create digital money to protect the large banks and to enable the government but only up to a certain point. That point is hyper-inflation. The Fed will inflate as it always has, but it will stop short of hyper-inflation as that would be very harmful to the large commercial banks as people could pay off their loans with worthless paper. At some point the Fed will stop buying Treasury debt and stop inflating the currency at today’s ruinous rate.
Then what? The congress could nationalize the Fed and force it to continue on to hyper-inflation I suppose, but I am predicting that instead the US government will default on its unfunded obligations. That would be about 100 million old people tossed under the bus along with the welfare poor. That would be a politician’s nightmare but I believe that will be the outcome since the politician is owned by the wealthy class that needs to see the large commercial banks survive.
Time will tell.