Bridging the Fiscal Gap of Unfunded Liabilities

The stock market took a tumble yesterday. The Dow fell 265 points after investors had a chance to ruminate about the Fed’s latest action.

It wasn’t what the Fed did or said that discouraged investors. It was what it didn’t say and what it didn’t do. It didn’t say, for example, that it was going to “crank up the printing presses” and deliver trillions of new dollars to the economy.

We didn’t think it would.

But it also didn’t say that the economy was doing well. Au contraire, it gave investors reason to believe that it was worried about the “recovery.” (We continue to put the word in quotation marks so dear readers will know there’s something fishy about it…)

Eventually, the Fed probably will get the printing presses going. But not just because it is desperate to re-start the economy.

We are getting used to big numbers. US trade deficits are more than $500 billion per year. US federal budget deficits are more than $1 trillion. And the US official debt is now more than $13 trillion.

Then, you add in all the off-budget items and the numbers get bigger and bigger. If the government promises to buy drugs for someone five years from now, for example, that’s a financial commitment that it has to own up to. If it were a private company, the expenses would be put on its balance sheet as a liability…a bill that will have to be paid in the future. Typically, a company would put aside money to pay the bill, so it would be “funded” – covered by savings or a special-purpose fund.

The US government, however, hasn’t saved any money since the Carter Administration. But it’s added a heckuva lot of financial commitments since then. Democrats, Republicans – it didn’t matter who was in office; the zombies got more money and the financial picture worsened.

The last number we saw for the whole enchilada of unfunded federal financial obligations was $115 trillion or thereabouts. So we were shocked when Laurence Kotlikoff, a well-known professor of economics at Boston University, updated the figure to…are you sitting down, dear reader?…$202 trillion.

How much is $202 trillion? Well, if you laid out $100 bills, end to end, day after day…you’d be an idiot. Because you’d die long before you got to even a trillion worth.

The $202 trillion is the current “fiscal gap” of the federal government. It is the present value of future unfunded obligations. To fund that gap, Kotlikoff refers to an IMF study showing we’d have to double taxes…raising an amount equal to 14% of GDP every year from now on. Every year that the gap is not closed, the additional amount is added to the “principal,” making that much more to be paid in the future.

“How can the fiscal gap be so enormous?” asks Kotlikoff.

“Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

“This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.”

What to do about it?

There are no win-win solutions. “Recovery”…”stimulus”…”grow our way out”…and all the other painless remedies are just claptrap. Nor is the US government going to double all taxes. Congress doesn’t have the stomach for it. And it wouldn’t help anyway. The economy would collapse even further – leaving possibly less revenue for the feds.

No, there is only one real solution. The feds will have to renege on their promises. But how? Will they step up to a microphone and just admit that they have been fools and knaves…and that they are cutting federal spending in half? Will they look the voters in the eye and tell the truth: “I can’t give you anything that I haven’t taken from you in the first place”?

Whatever your party affiliation, we wouldn’t advise you to hold your breath waiting for politicians to be straight with voters.

No, dear reader, they will use the only tools they have – lies, bombast and subterfuge. One way or another, sooner or later, they will call upon the Fed and the Treasury to bail them out. How? By using quantitative easing – money printing, in other words. The Treasury will borrow the money from the Fed. The bills will be paid. And the dollar will become almost worthless…or perhaps completely worthless.

At least, that’s what it looks like this morning…

And more thoughts…

“Things are heating up around here,” said Elizabeth last night. She was not talking about the weather.

“I guess it is inevitable. The balmy weather. The moonlight. The little boat on the lake. So many young people together.

“People were up until 5am last night. I couldn’t sleep. I kept hearing them singing. Laughing. Or I heard the crunch of the gravel when someone was walking around.

“Of course, I’m glad they’re having a good time. But I’m worried too. I don’t know what’s going on. Some of them are probably having a great time. And some of them are miserable. I suppose that’s inevitable too. The two boys got into an argument at the table last night. We couldn’t hear it because they were at the other end. But I know they’re upset.

“You don’t see it so much. You keep working. Which is probably a good thing. It gives you a kind of stability. But I think this extended vacation has a de-stabilizing effect on people. They spend a lot of time talking to one another. They get to know each other better…and know things about themselves probably that they didn’t know before. They’re just teenagers and young adults. The boys are more than a little impressed by Maria’s beautiful friends. And the girls seem to be at ease and relaxed in the large family setting. They’re treating the boys like little brothers…but the boys would probably like to imagine different roles.

“And then, the cook is acting very strange… I don’t know what to make of it…

“But sometimes when we’re here, I feel like we are dancing on top of a huge gasoline tank…and everyone is smoking a cigarette.”


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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