Mittwoch, August 11, 2010

The Coming American Insolvency...

There's a Bloomberg commentary by Laurence Kotlikoff (see here) that should put the ever-loving fear of God into you. Seriously.

Fundamentally, as he correctly points out, the US is bankrupt: we cannot pay the debts we owe with the means we have at hand.

You can take a look at the numbers behind what he is saying here (PDF from the IMF).

First: structural unemployment is up by 150 basis points, which is one of the reasons that we haven't seen unemployment decline;

Second: consumer de-leveraging (i.e. reduction of consumer debt) will probably take at least 6-8 years, with much more savings needed;

Third: both lending and consumer spending will remain depressed for the mid-term, reducing growth significantly;

Fourth: the debt will outstrip foreign financing, resulting in the need for domestic financing, crowding out many other investment instruments;

Fifth: Existing debt, entitlements and the aging of the baby boomers conspire to ensure that US debt will continue to grow, rather than to decline;

Sixth: the fiscal gap (difference between government revenues and government spending as a long-term trend) cannot be closed without running a permanent fiscal surplus for as along as the eye can see (i.e. permanent), meaning that taxes must essentially double across the board (and finally affect the close to 50% of Americans who currently do not pay any taxes);

Ye gods.

Right now, entitlement mandates, especially those of health care (including the Obama "reform"), will boost entitlement spending to over 18% of GDP by 2050. Given that long-term US government spending, until very recently, was around 18%, this means that all government spending, without any changes between now and then, will be spent on entitlement mandates. leaving nothing else available unless taxes are raised to around double where they are right now.

To quote from the Kotlikoff article linked to above:

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It's also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework.

Given this situation, no accountant could, in good faith, sign off on the US national accounts. The US is bankrupt unless it raises taxes significantly AND reduces spending drastically. The chance of this happening earlier, rather than later?

Nil. This will fester and fester until it pops. As I have said already, we are in the middle of the sovereign debt bubble, and when it pops, it will take down the state.

Keynes cannot save us now: this is a permanent structural problem, not a business cycle problem. Keynes could, at best, help to solve a business cycle problem, but Keynes is a not a solution to structural problems: his policies make them worse, not better.

May the Good Lord have mercy on us all.

Keine Kommentare: