U.S. Government Going Broke

Boston University economics professor Laurence Kotlikoff says the government “is going broke.”

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In a Federal Reserve Bank of St. Louis Review article, he points out that bankruptcy is usually defined as an inability to pay interest on current debt, with no prospect of being able to pay without changes in circumstances.

In assessing whether the United States is bankrupt, Kotlikoff drops the first half of the definition, The New York Times reports.

He instead looks at whether Uncle Sam can pay all of its future obligations under reasonable assumptions. The conclusion: probably not.

Kotlikoff cites a paper written by economists Kent Smetters and Jagdeesh Gokhale in 2002. They estimated the gap between all the government’s expected liabilities and its probable revenue at about $60 trillion, depending on the assumptions.

The Times points out that totals about five years’ worth of GDP, or a few decades of tax revenue at current rates. And seven years ago, the government’s fiscal picture was a lot prettier than it is today.

As that seven-year-old paper indicates, Kotlikoff isn’t the first to realize the dangerous predicament of government finances.

But the massive fiscal and monetary stimulus created in response to the financial crisis has clearly made the situation more precarious.

Investment guru Marc Faber, in an interview with Bloomberg, issued this dire warning: “I don’t know whether it will be tomorrow or in three years, five years, 10 years. But the next crisis will bring down the entire capitalist system.”

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