Is the Federal Government Broke?
We previously reported on Larry Kotlikoff’s assessment. The first issue of a new publication by Morgan Stanley called Sovereign Subjects is captioned “Ask Not Whether Governments Will Default, but How.” Here is Richard Posner’s comment at his blog:
Morgan Stanley’s report estimates that the ratio of current U.S. public debt to realistically realizable tax revenues is 3.58 to 1, which is the highest by a large margin of the countries in the report’s list; only Greece comes close (3.12 to 1)… America’s net worth is negative, and this negative net worth is eight times larger than our GDP. This means that the net present value of the government’s liabilities, minus assets, is approximately $120 trillion… At [some] point the bondholders, and holders of other contractual rights against the government, have to start worrying about the prospects for outright default or default through inflation. These are possibilities in our future, just as in the future of Greece.
As Robert Samuelson and others like to remind us there is a positive correlation between concerns about the resistance of high unemployment rates and the dramatic rise of inflation. Debasing the currency is easier than cutting spending and raising taxes and it is almost always more popular or at least less damaging politically, albeit more corrosive socially and economically. At one time in the past President Carter was at the tail end of a long lime of those who choose inflation. This time around the President who reminds many of us of Carter may start the process.
I think the answer to the question is probably yes. Nobody knows it yet. But I fear the international credit market may wake up soon.
If you assume the federal government will never be able to cut off the Medicaid population, the unfunded liability number would be even bigger.
I am glad to see serious people in the financial community taking this problem seriously. Every time it comes up, Paul Krugman and the editorial page of the New York Times denies there is a problem and claims that there is nothing going on other than a Republican plot afoot to privatize these programs.
Most Democrats in Congress are only too happy to believe this drivel.
The most politically feasible scenario to reduce debt obligation is probably default through inflation.
A default by any other name is still a default.
This site & Morgan Stanley apparently has me in hysterics. “Realistically Realizeable Revenues”. What a bunch of BS.