Kotlikoff: we're doomed, scroomed and unboomed

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machinehead's picture
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Kotlikoff: we're doomed, scroomed and unboomed

Lawrence Kotlikoff -- a professor at Boston U. who did the original work with Aeurbach and Gokhale on generational accounting for the U.S. -- has penned an article for Bloomberg which makes other SuperBears look like the 'Dow 36,000' crowd, skipping merrily through a field of daisies. Kotlikoff asserts in no uncertain terms that we are doomed, scroomed, festooned and unboomed by metastasizing, utterly unpayable debt. His analysis cites two different sources. Debt indictment No. 1:

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.”

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act. Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. 

But this horror-show scenario is way too optimistic, says Kotlikoff in Debt indictment No. 2:

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. How can the fiscal gap be so enormous?

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.

'Benefits on average exceed per capita GDP' -- HA HA HA HA! We are wild and crazy KongressKlowns! We laugh at danger! We don't 'do' accounting! And we get reëlected! HA HA HA HA!

So what's going to happen, anxious readers want to know? Maybe Stephen Hawking consulted with Kotlikoff before recommending that humanity abandon the earth -- because this is bad, really bad:

Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aiFjnanrDWVk

Kotlikoff's intergenerational analysis uses accrual-based accounting, net present value discounting, and simply ignores the legal fiction that entitlement programs can be treated as off budget. His results speak for themselves. The basic reason we got into this grim fix is that cash basis accounting, for an entity with long-tailed obligations such as government, is a flat-out lie. Government accounting makes Bernie Madoff look like Mother Teresa.

By coincidence, today Usgov announced, via its compliant MSM mouthpieces, a $165 billion [cash] deficit for July -- one of the largest ever. This too is a lie. The accrual-basis monthly deficit for July, using Kotlikoff's accounting, is probably in the $300 to 400 billion range.

Kotlikoff's $202 trillion value for Usgov's negative net worth is almost 14 times annual GDP. Usgov is 'liquid but insolvent' -- liquid until a T-bill rollover fails. Could you afford to work for 14 years, turn over all your income to the government, and refrain from eating during that time? Me neither! 

So I guess it's skate away or inflate away, until we're all penniless Zimbabwean-style trillionaires. 

Frown Got wheelbarrows? Frown

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Re: Kotlikoff: we're doomed, scroomed and unboomed

One of Kotlikoff's books, The Coming Generational Storm, influenced me heavily early on (which is why it's in the essential books section of this site).  He uses lots and lots of data and seems not to have any particular political axe to grind, so I found him influential to my thinking.

The one place I would take exception with him is in his blithe assurance that the economy will be bigger in 20 years.  This is where knowing about energy sets my thinking apart from his.  I can easily envision a lot less energy flowing through the US economy in 20 years which will, by definition, result in a smaller economy.

Of course, I haven't had the opportunity to talk to him alone to find out if his private thinking departs any from his public statements about the future, which would not surprise me in the least.

Thanks for the write up of this important article.

Chris M.

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Re: Kotlikoff: we're doomed, scroomed and unboomed

Professor Kotlikoff is a great example of how we got in this mess.  Like many in academia, he misunderstands a very basic fundamental of our monetary system.  And he passes his misunderstanding along to young economists - indoctrination rather than education.  

Kotlikoff wrote:

The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills. Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices.

He suggests one of the remedies will be "government simply printing vast quantities of money to cover its bills."  This is a very common misunderstanding as many think government prints it's own money, but they don't, they borrow Federal Reserve notes when they need money with interest charges added.

One reason why this subtle but key fundamental is so widely misunderstood is that it seems to be common sense that of course government should print their own money, in our case, United States notes.   

If they had been doing this, there would be no national debt, no need to "borrow" social security funds and no need for federal income tax.

Fortunately, we have the objective and critical logic of a self taught genius to provide an elegant explanation:

“If our nation can issue a dollar bond, it can issue a dollar bill.  The element that makes the bond good, makes the bill good also...Both are promises to pay, but one fattens the usurers and the other helps the people.  If the currency issued by the Government was no good, then the bonds would be no good either.  It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges..."  - Thomas Edison

Larry

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Re: Kotlikoff: we're doomed, scroomed and unboomed
DrKrbyLuv wrote:

He suggests one of the remedies will be "government simply printing vast quantities of money to cover its bills."  This is a very common misunderstanding as many think government prints it's own money, but they don't, they borrow Federal Reserve notes when they need money with interest charges added.

I'd like to think that Kotlikoff was merely indulging in semantic shorthand, in saying that the government prints money.

The Federal Reserve is nominally privately owned. But the president nominates its Chair and board members, Congress confirms them, and the Chair appears before Congress twice a year for 'command performance' Humphrey-Hawkins testimony. Like Fannie and Freddie, the Federal Reserve perhaps should be called a Government Sponsored Enterprise -- but one with the exorbitant privilege of violating the law against counterfeiting with impunity.

Ultimately, I believe the government has sufficient control to force the Fed to monetize as much debt as the Treasury wishes. In the unlikely event that the Federal Reserve takes a principled stand against reckless money creation, Congress holds the big stick of repealing the Federal Reserve Act, taking its functions 'in house' to the Treasury, or replacing it with a different institution.

But whoever does the printing, 'soft default' is still an easier way out than repudiating debt. The Russian revolution led to repudiation of czarist debt. But the process works in reverse, too: repudiation sparks revolution by a radicalized former middle class with nothing to lose. 

To the Eccles Building, comrades! Surprised

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Re: Kotlikoff: we're doomed, scroomed and unboomed

The unfunded liabilities so often used in these calculations are one pen stroke away from being cut.  In my lifetime they've already raised the full benefit age as well as massively increased the withholding.  Eliminating the early retirement option, raising the retirement age to 70 and reducing benefits roughly 25% pretty well takes care of Social Insecurity on a cash flow basis.  Medicare is a different cat, but again controlling what a doctor is paid, hospital and service charges and increasing the co-pay transfers a lot of the costs back to the "insured". 

The real ticking time-bomb is the interest on the debt.  Clearly the current path is unsustainable and the only real solution is to massively cut spending.  I give that about a one in a Brazilian chance of happening.

Or we could just have a revolution and deny responsibility for the previous government's debt and refer them to a remote rock in the Atlantic where we exiled all of the scoundrels.

Of course if one were to do similar analysis on most developed countries, you would discover that they are all pretty much in the same boat to one degree or another.  Socialism is simply a Ponzi scheme reliant on growth and fueled by an all fiat fractional reserve system rewarding labor where none exists.

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Re: Kotlikoff: we're doomed, scroomed and unboomed

Thanks, machinehead, good post.

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Re: Kotlikoff: we're doomed, scroomed and unboomed

machinehead wrote:

I'd like to think that Kotlikoff was merely indulging in semantic shorthand, in saying that the government prints money.

Hello machinehead,

Thanks for the response...I always learn something from your posts.  I agree with much of what you wrote, but...      

I think it is intentional semantic confusion as there is a behemothic difference between government printing money and money being printed by private banks.  One is the problem and the other is the solution.  They "teach" debt based systems as if they are the only options; like debt is a law of nature.  Professors and universities would lose a lot of funding and standing if they added "The benefits of government issued money" to their curriculum. 

The bonds we print are backed by the people and property of the United States.  The banks use our bonds as collateral against money they create for virtually free.  They are using our credit to back their money which they lend back to us (nation) with interest added.  The banks should be borrowing the new money they issue from the Treasury since they are using our sovereign credit.  They use our credit and they give us debt that can only increase and never be fully repaid.

The national debt is a necessity under this crazy system that by design, devalues the currency, creates booms and busts and ultimately must collapse.  And, It is a tool for total control over our economy and government.

We're doomed, scroomed and unboomed by miscreants, scamps, poltroons and punks - financial oligarchy.

Larry

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Re: Kotlikoff: we're doomed, scroomed and unboomed
DrKrbyLuv wrote:

The bonds we print are backed by the people and property of the United States.  The banks use our bonds as collateral against money they create for virtually free.  They are using our credit to back their money which they lend back to us (nation) with interest added.  The banks should be borrowing the new money they issue from the Treasury since they are using our sovereign credit.  They use our credit and they give us debt that can only increase and never be fully repaid.

The national debt is a necessity under this crazy system that by design, devalues the currency, creates booms and busts and ultimately must collapse.  And, It is a tool for total control over our economy and government.

DrKrbyLuv

I  understand the logic of your argument, but to my mind what you propose has a big problem.  Under the current system when the government spends more than its income it officially acknowledges a debt that supposedly should be repaid, and incurs the penalty of interest payments.  We are now at the point where serious questions are being raised about the ability to keep the increase in debt slower than GDP growth, or even pay the interest.  A sense of alarum is building because there is a mathematical limit to this.

If the government printed the money directly we would indeed avoid interest and the obligation to repay the debt, so there would be no brake at all on  government spending.  It’s money for nothing in unlimited quantities.  It seems to me this would just be a faster way to devalue our currency  and go broke.  Am I missing something here?

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Re: Kotlikoff: we're doomed, scroomed and unboomed
Travlin wrote:

If the government printed the money directly we would indeed avoid interest and the obligation to repay the debt, so there would be no brake at all on  government spending.  It’s money for nothing in unlimited quantities.  It seems to me this would just be a faster way to devalue our currency  and go broke.  Am I missing something here?

This refers to the belief in Sovereign money which is discussed regularly around here.  To get an alternate perspective on this topic you might find the following two articles informative.

THE SOVEREIGN MONEY MOVEMENT

The tip-off that something is not quite right is the association of sovereignty with money. Sovereignty is a legal term. It refers to government immunity from civil procedure. It implies "final court of appeal." Four hundred years ago, this doctrine of sovereignty was called the divine right of kings.

Why should money have a divine right? Why should any divine-right agency have a legal monopoly of control over the money supply? Why should money be sovereign? In other words, why should it be immune from the pricing of the free market, based on private ownership?

What economic logic makes money uniquely a non-market phenomenon? What makes money a non-market institutional arrangement? What makes tenured bureaucrats in the Treasury wise enough to control the money supply, including who should receive zero-interest (subsidized) loans from the government? Talk about a potential for corruption!

The phrase "sovereign money" refers to an exclusively fiat money system in which the government controls the monetary base. The Federal Reserve would be abolished. Sovereignty in the case refers to the national government. Control over money would lodge in the government. This would have to mean the Executive branch. The rules must be enforced; the Executive enforces the rules.

The government would not face direct threats from the public in the form of a run on the government's gold. There would be no gold standard. There would be no limit on how much money the government could legally create. The movement has always been inflationist. It calls for the creation of money to fund the economy, equating this expansion with an increase in capital. There would be no interest charged on loans from government money creation.

It is never clear what would happen to the gold on the FED's books at $42.22 per ounce. Would it be auctioned off? To whom? When? On what terms? In what form?

Proponents of sovereign money have infiltrated the conservative political movement for the last five decades. They have gained entrance under a banner that says, "End the FED!" They are hostile to the Federal Reserve. But on what economic basis? This: because the FED is in part private. They want control over the money supply to be 100% in the hands of the Federal government.

These people are monetary socialists. They see capital as a monetary phenomenon. They believe that capital is essentially free. So, the government should be in control of the distribution of the tickets that give people access to free capital. Any price on capital – an interest rate – they see as immoral. It is extortion by bankers. They want interest payments abolished by law.

This is standard socialist utopianism: free capital, free money, free time. There really is no scarcity, they say.

The most famous partisan of this view was John Maynard Keynes. Keynes taught this about capital in "The General Theory." I have covered this long-suppressed fact in my article, "Keynes, Crackpots, and Deflation."

The University of Chicago economist, Henry C. Simons, reviewed Keynes's General Theory for the Social Gospel magazine, The Christian Century (July 22, 1936). This article was long neglected because it did not appear in a professional academic journal. Simons shrugged off Keynes's affirmation of monetary crank doctrines with these words: "sophistical academic leg-pulling."

This was a corrupt form of scholarship: pretending a universally respected master had not adopted sheer crackpottery, dismissing a major conceptual error with a light-hearted quip. "He could not have taught this – it is nonsense, crackpottery." But he did teach it, and it was crackpottery.

or this one...

May 25, 2009

A web page by Ellen Brown is making the rounds. It is here:

http://www.webofdebt.com/articles/hyperinflation.php

Ellen Brown is a lawyer. She is anti-Federal Reserve. So, she gets a hearing in conservative circles. This is unfortunate. There is nothing conservative about her. She is an apologist for statism and the United States Treasury (a wholly owned subsidiary of Goldman Sachs).

Her article is about the hyperinflation of Germany, 1921-23. She has no understanding of what happened or why, but she talks as if she does.

.....

I have shown you her view of the productive wonders of National Socialism. Here are her views on America.

In the nineteenth century, Senator Henry Clay called this the "American system," distinguishing it from the "British system" of privately-issued paper banknotes. After the American Revolution, the American system was replaced in the U.S. with banker-created money; but government-issued money was revived during the Civil War, when Abraham Lincoln funded his government with U.S. Notes or "Greenbacks" issued by the Treasury.

Henry Clay was the intellectual and political heir of Alexander Hamilton, the founder of the First Bank of the United States. Clay was a supporter of the Second Bank of the United States. These were our first experiments in central banking. If you want to know about those corrupt engines of inflation, read Part 1 of Murray Rothbard's great book, A History of Money and Banking in the United States. Download it here: http://mises.org/books/historyofmoney.pdf. For background on Clay's brand of government boondoggle economics, click here.

I raise all this because several of my subscribers have asked me if Ms. Brown's position has any merit. It doesn't.

She is a greenbacker. She is in the tradition of Gertrude Coogan and the other 1950's greenback inflationists whose footnote-free books are kept in print by Omni Books. They all have this in common: they want the American money system to be run by Congress.

If that's conservatism, include me out.

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Re: Kotlikoff: we're doomed, scroomed and unboomed

Travlin wrote:

DrKrbyLuv,

I understand the logic of your argument, but to my mind what you propose has a big problem. Under the current system when the government spends more than its income it officially acknowledges a debt that supposedly should be repaid, and incurs the penalty of interest payments.

If the government printed the money directly we would indeed avoid interest and the obligation to repay the debt, so there would be no brake at all on government spending. It’s money for nothing in unlimited quantities.

You raise a very valid concern - how would such a system be designed and implemented with adequate safeguards to avoid abuse?  Alternative systems have been proposed that claim to address this issue on a national level.  For example, the "Chicago Plan" was introduced in the Senate on June 6th 1934, (S. 3744) and Wright Patman introduced it in the House (HR9855) - for details see my post Hidden history of the great depression: A major monetary reform initiative that no one seems to know about

More recently, others have offered programs that claim to address this issue, for example "SwarmUSA."  I think government issued money programs can be engineered with adequate safeguards.

But back to this thread...you mentioned that "there would be no brake at all on government spending. It’s money for nothing in unlimited quantities" and I wanted to add a couple points to this regarding our current system.

First, under our current system, government must forever go deeper in debt - deficit spending is a requirement.  The national debt is around $13.3 trillion dollars and the broad money supply measured as M3 is around $13.7 trillion.  Without the national debt, there wouldn't be an M3. All the talk about balanced budgets was a lot of bs - for details see my post The National Debt is the Money Supply

Second, we have made our government subservient to the private bank cartel since they are the sole creators of money.  They control our money and by extension, they control the economy.  Senator Dick Durbin recently said of banks; "Frankly Own The Place"..."And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place"

My point is that the safeguards that you rightfully request do not exist now and I agree with you...they are needed!

Larry   

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Re: Kotlikoff: we're doomed, scroomed and unboomed

goes211 & Dr KrbyLuv

Thanks for your thoughtful replies.  They were helpful.  In the few months I’ve been at this site I have found the money creation threads to be challenging, enlightening, confusing, and an invitation to madness.  This is one of the fundimental issues of the ages and is amazes me that our various societies have not done a better job of taming it.

In This Time Is Different, Reinhart and Rogoff make a strong case that all systems that have been tried seemed to have a fundimental flaw and eventually self destructed.  The original post by machinehead is one more strong piece of evidence that our day is coming.  It is like watching two trains approaching each other on the same track.  If the people in control won’t stop the madness this has to end very badly. 

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