I’m not going to recount his whole sad story, but I did create the graphic below to illustrate the data he presents in narrative format. Click on it for a better view.
The bottom line is that our total government liabilities are about 9 times our GDP which means that, in a more normal interest rate environment, just the interest on the liabilities would consume most of our GDP. I think everybody understands the $14T in federal debt, but the Social Security and Medicare liabilities are more mysterious. After all, hasn’t that money we have been paying in through our working years been put into a “trust fund” for our future benefits? No, it has not. Read more about it here, if you can stand it.
So, with this huge and burdensome debt and continuing deficits in the forseeable future, what is going to happen? Will the United States go bankrupt or be acquired by some other wealthier nation? Or will we just shut down and go out of business? Maybe hire an outplacement company to help people find new countries. I don’t think so. Such things don’t normally happen to sovereign nations with the ability to raise taxes and print money. As the financial situation gets grimmer, we will gradually make changes by raising taxes significantly, raising the age for Social Security and Medicare benefits, trimming Social Security benefits based on means testing, rationing health care, and drastically cutting other government budgets. The higher taxes will drive down private investment and result in continuing loss of private sector employment in favor of government jobs, and diminishing USA importance in the world economy. We will inflate the currency so that the debt will shrink in real terms and lots of government workers will be earning several hundred thousand dollars a year due to inflation indexed salaries. The rest of us will be stuck with “taking in each other’s laundry” instead of developing and producing products in demand around the world.
The wealthy will get fewer in number and will adopt a “precautionary principle” with respect to their resources. They will become less willing to give to charitable organizations or establish foundations or invest in risky business ventures. Their focus will be on preserving their wealth for the benefit of their children. The middle class will shrink because of fewer opportunities for productive employment, a natural result from reduced investment capital. And the poor will increase and have fewer non-government sources of assistance and less assistance from the government.
The prosperous will flock to the cities, and the poor will move to abandoned suburban properties built with subprime mortgages during the housing boom. We can expect to see more chickens in yards and attempts to grow tomatoes in poor soil left behind when the top soil was all scraped off and moved before the houses were built.
As economic conditions worsen, unemployment rises, and the dollar weakens, the United States will begin to look like an attractive place for wealthier countries to manufacture products for their own consumption. If our great grandchildren are willing to work hard, maybe they will get some of those jobs.
Well, that seems to me to be the dim outlook as long as we follow the thinking of such leading economists as Paul Krugman who argues in this New York Times Op-ed that we need to spend now and save later. I doubt that he would even agree with my simple math that says there will be no real savings until the $127T is paid off.
But, on the bright side, it will all happen gradually, we hope, and, in the last half of this century, old timers (today’s youth) will grumble about how things have changed since they were young and youth of that era will continue to while away time with the latest technological gadgets as they flock enthusiastically after the latest charismatic politician willing to promise the impossible in return for power, fame, wealth, and an ego boost. And our descendants will pay dearly because we swapped our gift of freedom for false promises of eternal security.
And, by the way, to see what challenges, in lieu of manufacturing and R&D, we are offering the young and energetic today, check out Attack of the Math Brats in the June 28th Time Magazine. Did you know that 10% of America is playing on-line poker and that $5B a year is changing hands there? That story is followed immediately by one on how former auto industry workers are learning the marijuana business and then one about online penny auctions that can generate as much as $6,000 in fees for the $100.01 sale of an iPad worth $699. I guess all that activity is good training for construction of complicated financial instruments designed to deceive and further impoverish a gullible and uneducated citizenry.