Will The US Eventually Default On Its Debt? |

Will The US Eventually Default On Its Debt? 2

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us default on its debtFederal debt has been growing as a percentage of GDP for over 30 years, and everyone agrees that the government must bring its budget under control to keep from further pumping up that giant balloon of debt. But are we past the point of no return? Is there no way out? Reducing the deficit by the needed percentage of GDP by either raising taxes or cutting spending will send the economy into depression. Almost all economists agree on that; it’s easy math.

There is no way the U.S. government can set aside in the present what will be needed in the future to satisfy its obligations. According to Laurence Kotlikoff, Professor of Economics at Boston University, the present value of the U.S. government’s future obligations is now over 222 TRILLION dollars.  What is this enormous figure? Some kind of accounting trick? No, the real accounting trick is the one being used by the U.S. government. For example, when it comes to Social Security and Medicare, instead of saying “borrow” and “future repayment of principal & interest”, Washington says “payroll tax” and “future transfer payments”. And the result is an enormous “unofficial” debt that is kept off of the books. But official or unofficial, these are still liabilities. IOU’s . And IOU’s must be repaid.

Here’s some food for thought… The average total Social Security, Medicare, and Medicaid benefits that retirement-age people are now receiving is right around $30K/person/year. In 20 years, when all the Baby Boomers are retired, the estimates are that this figure will be over $40K/person/year in today’s dollars. So here’s the thing, according to the CBO, this will be around 16 percent of our GDP in 2032.

So?

So, the CBO also projects that the total Government revenues in 2030 will be around 19 percent of GDP. In other words, the U.S. government’s obligations on these three programs will eat up almost 85 percent of the tax money the government takes in. IOU’s that are “unofficial”, “don’t count” and are off the books.  But they must be paid. So how? Well, by expanding the monetary base of course, that’s how. AKA, kicking the can down the road.

When does the can-kicking end?

According to some economists, (especially those with Austrian School leanings) eventually the only two options will be either an across-the-board DEFAULT on all this debt or a MAJOR expansion of the monetary base. A major expansion of the monetary base will eventually bring mass inflation, and if the government nationalizes the FED, we could even see hyperinflation. But hyperinflationary periods are short-lived, they end in a currency reform and when all is said and done those same debt obligations are still there. (This is why the FED probably wouldn’t hyperinflate, they’d default before they got to that point). So, we still end up at DEFAULT.

But according to economic historian Gary North, there is a third scenario, the one that is most likely to happen; it is called selective default. In this scenario the Government will continue to expand the monetary base, even to the point of mass-inflation, then it will be forced to selectively default on one of its two largest obligations – either Social Security or Medicare; most likely Medicare. This will enable the remaining unfunded liabilities to be surmountable.

Hmmmm. Interesting.

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2 thoughts on “Will The US Eventually Default On Its Debt?

  1. Reply LeRoy Matthews

    I already wrote to Professor K. some time ago- CRAZY OBAMA & His Crooked Gang AREN’T the United States!!!
    The so-called “federal government” is not only Bankrupt, It’s Head-Over- Heels in Debt, & Operating Way In The Red, & It Has A Huge, & Increasing, Budget Deficit. There’s virtually zero $ for anything whatsoever.

  2. Reply Chaz Miller

    Hi LeRoy, I’d be interested to know what you wrote the prof about and what his response was. Got any more info?

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