The threat of financial collapse

“U.S.is bankrupt and we don’t even know it”

“Let’s get real. The U.S. is bankrupt.” So claimed Laurence Kotlikoff, professor of economics at Boston University and one of the nation’s leading authorities on Social Security, while speaking on Bloomberg Television on August 11, 2010.[i]

Referring to the International Monetary Fund’s annual review of U.S. economic policy, Professor Kotlikoff said:

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP”.

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.[ii]

Referring to the Congressional Budget Office (CBO)’s long-term Budget outlook, Professor Kotlikoff declared:

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labelling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

Technically, the U.S. is a worse state than Greece was at the height of its crisis. It only survives because the U.S. credit rating allows it to continue issuing IOUs in the form of bonds, to be taken up by creditors such as China and Saudi Arabia.

The CBO’s long-term numbers are simply frightening: the “alternative fiscal scenario”, which factors in likely changes in policy, calculates that public debt will rise from 44 per cent of GDP in 2008 to 100 per cent in 2023, 150 per cent by 2031 and 300 per cent by 2047.[iii]

Note that these figures do not account for the estimated $100 trillion of unfunded liabilities in the Medicare and Social Security systems (figures taken into account in Professor Kotlikoff’s calculations above). Nor do they include the rapidly growing deficits of the states, nor the burgeoning liabilities of public employees’ pension schemes.

In testimony before the Senate Budget Committee on February 25, 2015, Professor Kotlikoff told members that the U.S. now has a fiscal gap of US$210 trillion and “may well be in worse shape than any developed country, including Greece”.

“The first point I want to get across is that our nation is broke”, Kotlikoff testified. “Our nation’s broke, and it’s not broke in 75 years or 50 years or 25 years or 10 years. It’s broke today.”

“This declaration of national insolvency will, no doubt, shock those of you who use the officially reported federal debt as the measuring stick for what our country owes”, Kotlikoff told committee members who were considering President Obama’s proposed budget for Fiscal Year 2016.

“We have a $210 trillion fiscal gap at this point”, Kotlikoff told the senators, which amounts to 211 per cent of the U.S.’s $18.2 trillion GDP, making it higher than Greece’s 175 per cent debt-to-GDP ratio.[iv]

With a debt-to-revenue ratio of 312 per cent, Greece, in 2009 was in dire straits. However, according to calculations by Morgan Stanley, the debt-to-revenue ratio of the United States in 2009 was 358 per cent.[v]

The U.S. fiscal system cannot survive such numbers. Sometime between tomorrow and 2040, the U.S. financial system will collapse, taking the rest of the Western economies with it.

Global pension time-bomb

In a press release dated 26 May, 2017, the World Economic Forum claimed that the world’s six largest pension systems will have a joint shortfall of $224 trillion by 2050, imperilling the incomes of future generations and setting the industrialized world up for the biggest pension crisis in history[vi].

The world’s six largest pension saving systems – the US, UK, Japan, Netherlands, Canada and Australia – are expected to reach a $224 trillion gap by 2050,  a new study by the World Economic Forum shows.[vii]

Adding in China and India, which have the world’s largest populations, the combined savings gap for the eight countries reaches a total of $400 trillion by 2050, a sum five times the size of the current global economy.

A shortfall of about $400 trillion could be reached by 2050, the World Economic Forum said.

The World Economic Forum said its calculations are based on publicly available data on government programs such as Social Security in the U.S.; employer-based contributions and individual savings. It assumed that workers would retire between the ages of 60 and 70.

The World Economic Forum is a not-for-profit foundation known for organizing an annual gathering in Davos, Switzerland.

Respected economist and former chairman of the Australian Securities Exchange, Maurice Newman, in a newspaper article in 2013, summed up the situation:

The West has now reached the point where total private and public debt, together with unfunded government liabilities, can never be repaid by an ageing demographic. One day even debt servicing will be an issue. With fewer taxpayers and lenders, the ability to take from the future to provide for the present will end. This is when we see the final collapse of the great international governmental Ponzi scheme.[viii]