Sunday, September 12, 2004

My Hypothesis

The Aristocracy is going to bankrupt this country


I know is sounds farfetched but it is the only explaination I can find that makes any sense. Why would they want to do this? So they can buy everything up for pennies on the dollar and create a feudalist society.

Speeches ignore impending U.S. debt disaster
No mention of fiscal gap estimated as high as $72 trillion


Carolyn Lochhead, Chronicle Washington Bureau
Sunday, September 12, 2004

Washington -- The first of the 77 million-strong Baby Boom generation
will begin to retire in just four years. The economic consequences of
this fact -- as scary as they are foreseeable -- are all but ignored
by President Bush and Democratic challenger John Kerry, who discuss
just about everything but the biggest fiscal challenge of modern times.

Yet whoever wins the 2004 race will become the first U.S. president to
confront what sober-minded experts across the political spectrum
describe as an impending "fiscal catastrophe" lying right around the
corner.

Astronomical federal debt, coming due as the Baby Boom generation
collects Medicare, Medicaid and Social Security, is enormous enough to
swamp the promises both candidates are making to voters, whether for
tax cuts, health care, 40,000 more troops or anything else.

"Chilling" is the word U.S. Comptroller General David Walker uses to
describe the budget outlook.

"The long-term budget projections are just horrifying," added Leonard
Burman, co-director of tax policy for the Urban Institute. "I've got
four children and it really disturbs me. I just think it's
irresponsible what we're doing to them."

What these numbers portend are crippling tax increases on workers,
slashed benefits for retirees, gutted budgets for homeland security,
highways, research and everything else, and an economic decline or a
financial collapse that devastates the middle class, as happened
recently in debt-strapped Argentina. Eventually, analysts insist,
someone -- today's children or tomorrow's elderly or both -- will pay
this debt.

Traditional budget measures used by politicians and the press give
what Walker and many others call a highly misleading view of the U.S.
debt. These focus on publicly held debt already incurred, now at $4.5
trillion, or 10-year budget forecasts like the one released last week
by the Congressional Budget Office showing a record $422 billion
deficit this year and a $2.3 trillion 10- year deficit.

'Fiscal gap' in the trillions

But these figures, worrisome enough, are deceptive because they ignore
future liabilities such as Social Security and Medicare payments to
the Baby Boomers. An array of government and private analysts put the
actual U.S. "fiscal gap," which means all future receipts minus all
future obligations, at $40 trillion (Government Accountability Office)
to $72 trillion (Social Security Board of Trustees).

These are not sums, but present-value figures, heavily discounted to
show in today's dollars what it would cost to pay off the debt
immediately. The International Monetary Fund estimates the gap at $47
trillion, the Brookings Institution at $60 trillion.

"To give you idea how big the problem is," said Laurence Kotlikoff,
economics chairman at Boston University, who has written extensively
on the subject, to close a $51 trillion fiscal gap, "you'd have to
have an immediate and permanent 78 percent hike in the federal income
tax."

These obligations are not imaginary. And unlike the 1980s and 1990s,
economic growth cannot bail out the government because the Baby Boom
retirement is at hand. Those born in 1946 will reach age 62 in 2008,
allowing them to take early retirement and receive Social Security
benefits.

"It's a number that's so large that people find it implausible, and so
they don't think about it," said Alan Auerbach, a UC Berkeley
economist who studies the issue and consults for the Kerry campaign.
"But it's based simply on the projections we have for Social Security
and Medicare. People aren't making these numbers up."

A pathbreaking study by Jagadeesh Gokhale of the Federal Reserve Bank
of Cleveland and Kent Smetters, a former deputy assistant secretary at
the Treasury -- commissioned by former Treasury Secretary Paul O'Neill
-- estimated a $44 trillion fiscal gap. It laid out a few painful
options on how to meet the liabilities:

-- More than double the payroll tax, immediately and forever, from
15.3 percent of wages to nearly 32 percent;

-- Raise income taxes by two-thirds, immediately and forever;

-- Cut Social Security and Medicare benefits by 45 percent,
immediately and forever;

-- Or eliminate forever all discretionary spending, which includes the
military, homeland security, highways, courts, national parks and most
of what the federal government does outside of the transfer of
payments to the elderly.

Such corrective actions grow more severe each year. Waiting just until
2008, the end of the next presidency, would mean raising the payroll
tax to 33. 5 percent instead of 32 percent, the study found.

Gokhale said that fresh numbers from the Medicare trustees show the
fiscal gap has since grown to $72 trillion, $10 trillion of that for
Social Security and an astonishing $62 trillion for Medicare, the
government health care program for the elderly.

"The long-term picture is pretty bad," Gokhale said.

Election's absent issue

These numbers are seldom discussed, least of all in the 2004
presidential race. Ironically, as the Baby Boom retirement has neared
-- and the remedies grow more painful -- political discussion has
faded. Gone is Ross Perot's anti-deficit crusade. Gone is Newt
Gingrich's call for Medicare restraint. Gone is Al Gore's "lockbox"
for the Social Security surplus.

Instead, Kerry and Bush promise only to halve the current deficit in
four years -- "both (of them) relying on pretty imaginative accounting
to get there" said Burman -- while promising more spending and more
tax cuts.

Yet today's deficit is a tiny fraction of the government's actual
liabilities, which are so daunting they promise to make Bush's tax
cuts a distant memory and Kerry's health care plan a fantasy.

While Bush and Kerry propose to address parts of the problem, "the
numbers don't add up on either side," Walker said.

Medicare makes up the bulk of these liabilities, driven mainly by the
expanding elderly population and rapidly rising health costs. Social
Security, more often discussed as a looming problem, actually accounts
for far less in future debt.

While Congress squabbles over whether the administration hid the new
prescription drug benefit's 10-year cost -- pegged by the White House
at $534 billion versus CBO's $395 billion -- the actual liability
incurred by the new drug benefit is estimated at $8 trillion to $12
trillion.

Kerry and Democrats call the drug benefit inadequate. They would do
little to restrain Medicare costs other than allowing the importation
of price- controlled drugs from Canada.

Bush and Republicans added the drug benefit along with costly
subsidies to providers. Even optimists do not expect their modest
market reforms to cut costs.

Promises, promises

Kerry has promised not to cut Social Security. "I will not cut
benefits," he said recently. "I will not raise the retirement age."

Democrats generally cite "trust fund" numbers that show Social
Security - - and Medicare to a lesser extent -- remaining solvent for
decades, even though government officials repeatedly call the numbers
an accounting fiction. CBO director Douglas Holzt-Eakin last week said
the funds contain nothing but "electronic chits" that measure
government obligations to itself.

Bush proposes adding private accounts to Social Security for younger
workers, which could reduce future government obligations, but would
do so by diverting a portion of the payroll tax, adding $1 trillion to
the short-term deficit. That might have been feasible when Bush took
office in 2000 facing a projected $5.6 trillion surplus, but the
surplus is gone. Similar plans in Congress that instead rely more on
benefit cuts have gone nowhere.

"The country's absolutely broke, and both Bush and Kerry are being
irresponsible in not addressing this problem," Kotlikoff said. "This
administration and previous administrations have set us up for a major
financial crisis on the order of what Argentina experienced a couple
of years ago."

If this sounds far-fetched, former Bush Treasury Undersecretary Peter
Fisher and former Clinton Treasury Secretary Robert Rubin both alluded
to such a scenario at a June budget forum in Washington.

"Having been involved in markets for a long, long time," Rubin said,
"I can tell you these things can change unexpectedly and without
warning," referring to potential financial market reactions to the
U.S. fiscal position.

Fisher warned of a "pivot point" when "the collective wisdom of bond
traders thinks that the deficit horizon has turned," adding, "Both Bob
and I are nervous."

The world has seen fiscal imbalances of this sort before, in Asia and
Russia in the late 1990s and more recently in South America. Such
financial panics can be triggered by any number of events -- a flight
from Treasury bonds by the foreigners who buy much of the U.S. debt,
for example -- if investors' views of the market, which are focused on
the short term, suddenly change.

"If you look at financial crises, they occur seemingly overnight,"
said Kotlikoff. "More and more pieces of straw drop on the camel's
back, and all of a sudden, the camel collapses. ... Nobody knew
exactly what day Argentina was going to go south or exactly what day
Russia was going to default. The timing is up for grabs."

But early signs of a problem are now appearing, analysts said,
starting with the mounting deficits under Bush caused not just by the
recession and terrorist attacks, but also by enormous spending
increases and tax cuts. The brief window of surpluses that appeared
during the late 1990s economic boom offered a chance to address
long-range liabilities, but those surpluses now are gone.

"Maybe the public doesn't want to hear it," Kotlikoff said. "Maybe
politicians think ... the American public can't understand the truth
or hear the truth or bear the truth. I think this is garbage. I think
that people care about their kids and grandchildren and need to know
the dangers facing them --

and us."

E-mail Carolyn Lochhead at clochhead@sfchronicle.com.



3 Comments:

At 9/12/2004 5:20 PM, Blogger Alan said...

iljaquar emailed a comment:

You know, when people ask me why I have given up on this country I
make my case plain and clear.

We have 72 trillion in debt coming due at a time we have deliberatly
destroyed our manufacturing and technology base. As America shifts to
a consumer walmart nation with the only high paying jobs in health
care and those who make a living suing health care (aka Edwards, who
was later found to be using bad science in his cerebral palsy suits
but still made millions off of health care insurance companies) there
will be precious little to pay our national debt. Our tax base will erode.

There is this very interesting notion of a tipping point. That day
will come without warning. On that day the dollar will devalue perhaps
100 to 1. Americans will be unable to travel abroad. All our
manufactured goods which now come from abroad will suddenly be 100
times more expensive. America will be instantly reduced to a pauper
nation with runaway inflation (perhaps as high as 20-200% a year).

Manufactures will then return to america to take advantage of our huge
population of slave labor, but only if they are allowed to operate on
the same cost basis they do in china, that is to say, work camps at
factories, 14 hour days, and diapers for workers who aren't allowed to
leave for the toilet.

Is this so far fetched? Think about it. Every single day, America
sticks its hands out and asks for another 2 billion dollars in bond
money from principally Saudi and Japanese. However, remember this is
an investment. Once the feeling is that America cannot repay its
obligations, like a housewife realizing that she cannot make her
minimum montly payments on her credit cards, and she cannot switch
money from one card to another to cover it (as we are doing now,
switching our social security income to pay for war), investors will
start selling rather than buying bonds.

The effects will be immediate. In one day suddenly the government will
have no cash to run. Federal workers will go unpaid. Congress will
scurry frantically to squeeze even more taxes from workers and
companies, only further escalating the crisis.

The devalued dollar (which has already declined 40% in 3 yrs) will
make american's trapped slaves. Europe will erect stricter controls
and travel restrictions on americans, the same way we do on chinese
today.

Next will be the huge stream of foreclosures on houses, which were run
up to record prices, which will then cause another banking crisis.
Personal bankruptcies will continue to mount, further putting pressure
on banking companies.

When the smoke clears, perhaps just four months later, America will
have defaulted on its bonds. A pair of jeans (from the phillipines)
will cost 3,000 dollars. Your life savings will now be worthless,
having been devalued by inflation, that is, if you can still get it
out of a bank. Stocks will remain strong, as corporations have little
to do with america, but oil will be a big problem. The soaring cost of
oil will make driving and heating all but impossible for americans.
Production and imports will slow. Store shelves will sit mostly empty
and lines for basic goods will grow like 1980s Russia.

When this happens there will be almost nothing the government can do
to respond to it.

Just like the great depression, the rich and foreigners will wait
until rock bottom then swoop up assets like rail and factories and
mines and property rights for pennies on the dollars, making the rich
richer.

This is why TODAY starting to pay down the deficit is the only way to
keep the new money flowing in.

By continuing to borrow, we are like a loony housewife at the
supermall trying to max out her newly received credit cards before
declaring bankruptcy.

Some day soon, our credit rating will drop, and no one will send that
next card in the mail.

Me? I'm outta here as soon as I can.

 
At 9/13/2004 7:07 AM, Blogger The Old Hippie said...

I agree with content of the article, and the comment of "iljaquar" - - - My question remains, where is the "best" place to go for:

1. The older than baby-boomers?
2. The baby-boomers?
3. The 20-30-40-somethings?
4. The families groups?

Are there "better" places for each and all?

Considering the priorities would be secure income,
level of taxation, availability of health care, a voice in the political structure, freedom from "fear," real or manufactured, etc. . .?

 
At 9/14/2004 11:59 PM, Blogger Sonni AKA Deby said...

When I was young and thought I had my whole life ahead of me - not realizing how fast it was going to go by - and the subject of social security came up, I used to scoff at it and say that if I had to resort to "that" then I had probably done something really wrong with my life.

OK - I made my fair share of mistakes and bad choices, who hasn't? But I worked very very hard to make ends meet and take care of my family. Now I am faced with the fact, that at age 50, I don't have stock options, a 401k, or a pension plan. Retiring or taking care of my health is going to be a difficult thing and a burden on my children. I can't change that. Now I read how the government is going to try and make it even harder under the guise of trying to make me believe that it is really going to be better. That pisses me off!

 

Post a Comment

Links to this post:

Create a Link

<< Home