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Lawrence Kotlikoff: "the Us Fiscal Gap Is $200 Trillion"

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While it is easy and often enjoyable to distract oneself with daily drudgery such as who will bomb whom (if not so enjoyable for those on the receiving end of said bombs), the key word in the sentence is one: "distract" and as Kyle Bass pointed out correctly in the past, the best, and most "economic boosting" of all distractions end up with the red button being pushed. Sadly, with an economy which Boston University's Larry Kotlikoff defines as "arguably in worst fiscal shape than any other developed country", there is much to be distrated by and is why we correctly predicted in July that the Syrian false flag event is only weeks or months away (turned out to be precisely one month). So for those who have no desire to prove the axiom that ignorance is bliss, or to have their heads stuck in the sand, here is a must read interview between Goldman's Hugo Scott-Gall and the iconoclast economist who, in a vast minority, dares to call it like it is.

The highlights:

I estimate the US fiscal gap at US$200 tn, 17 times the reported US$12 tn in official debt in the hands of the public. And this incorporates this year’s tax increases and spending sequestration. What would it take to come up with US$200 tn in present value? The answer is tax hikes or spending cuts, or a combination of the two, amounting to 10 percent of GDP, starting immediately and continuing indefinitely. To do so via spending cuts, alone, would require an immediate and permanent 36% cut in all non-interest spending. To do so via tax hikes, alone, would need an immediate and permanent 55% increase in all federal taxes. Hence, a description of the fiscal adjustments made over the last year could be “too little too late.” In terms of generational accounting, were we to leave our kids and future descendants to cover the entire fiscal gap, they’d face tax rates over their lifetimes around twice as high as those we face.

The US is arguably in worst fiscal shape than any other developed country. But Greece, the UK, and Japan are close runner ups. As mentioned, our fiscal gap is 10% of the present value of our future GDP. In Germany it’s around 5%, while Canada, Australia and New Zealand are close to zero. Even Italy's long-term fiscal gap is just half of the US’s, yet Italian government bonds sell at a much lower price than US government bonds simply because people don't understand the pension reforms that Italy has rolled out or that Italy has much better control of its healthcare spending.

Our country is broke. It’s not broke in 50 years or 30 years or 10 years. It’s broke today. Six decades of take as you go has led us to a precipice. That’s why almost the entire economics profession is talking as one at www.theinformact.org. Economists from all political persuasions are collectively sending our government a warning about what is, effectively, a nuclear economic bomb. I’ve been around economics for a long time. I’ve never seen such a strong response to a proposed Congressional bill. This is the profession sending a statement to the President and Congress that’s not unlike the warning physicists sent via Einstein to Roosevelt about the bomb.

And with that, here is the full interview:

Laurence J. Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, and President of Economic Security Planning, Inc., a company specializing in financial planning software.

Full interview at ZH.

The Americans love taxes so I'm sure it can all be fixed.... I'm sure the US uber rich can't wait to chip in and bail out the govt.

Although this again is a made up figure no one will know the exact costs until it's too late, when it's revealed the country is bankrupt.

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America's True Debt - The Fiscal Gap

Issue Briefs | Economy

No. 101

Wednesday, September 07, 2011

by Laurence Kotlikoff

Our country is in far worse fiscal shape than its $14 trillion — and rapidly growing — official debt suggests. Indeed, that figure measures just a small portion of the government’s total liabilities. It leaves out, for example, the obligation to pay hundreds of trillions of dollars in Social Security and Medicare benefits to today’s and tomorrow’s elderly.

Why is that? If the unofficial obligations, such as Social Security and Medicare, are as real as the official ones, why are they not also called official debt?

A Tax or Borrowing? The answer is there is no answer, and because there is no answer, the deficit is not well defined. The government has a choice with respect to every dollar it takes in from the private sector whether to call that dollar a tax or call it a dollar of borrowing, which in turn affects the official debt count.

Take Joe, who hands the government $5,000 this year and $3,000 next year. Suppose the interest rate on one-year Treasuries is 1 percent. Uncle Sam could say, “I’m taxing Joe $5,000 this year and $3,000 next year.” Or Uncle Sam could say, “I’m borrowing $4,000 from Joe this year and taxing him $1,000 this year. And next year, I’m paying him $4,040 in principal plus interest and taxing him $7,040.” Note that whether Sam uses the first or second label (choice of words), he collects $5,000 from Joe this year and $3,000 ($7,040 minus $4,040) next year. Using the first set of words, rather than the second, however, means this year's deficit and the debt at the beginning of next year are $4,000 smaller.

Nothing in economic theory pins down whether to use the first or second set of words or, for that matter, a zillion other sets of words. For example, Sam could say, “I’m taxing Joe $10,000 this year and making a loan to Joe this year of $5,000. And next year I’m receiving $5,050 from Joe in principal plus interest and making a transfer payment to Joe of $2,050.”

If Sam uses this third set of words rather than the first, Sam still receives $5,000 from Joe this year and $3,000 from Joe next year, but Sam reports a deficit this year and a debt at the beginning of next year that is $5,000 smaller.

Economics' Labeling Problem. These examples illustrate economics’ labeling problem. Economics, at its core, is not a set of opinions about the economy related through media to the public by people with doctoral degrees. At its core, economics consists of a body of mathematical models that provide insight into how the United States and other economies actually operate.



Edited by billybong

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