craschworks

[Some of you may be wondering about the recent pattern of "emergency preparedness" links I've posted recently. Mostly, they've been for fun--I enjoy disaster scenario planning. However, pragmatism plays a role as well -- the U.S. government is bankrupt, and the most likely way I think it will try to meet its debts is to inflate the currency. Brazillian-style hyper inflation is quite likely in the next 20 years. (See the link below for more detail). Historically, bankrupt nations have often collapsed into war or revolution. Therefore, I think it prudent to be prepared should the worse case scenarios be realized.]

Via Marginal Revolution:

Going Critical: American Power and Consequences of Fiscal Overstretch by Niall Ferguson and Laurence J. Kotlikoff, The National Interest, Fall 2003, Vol 73.

“….The scale of this implicit insolvency was laid bare this summer in an explosive paper by Jagadeesh Gokhale, a senior economist at the Federal Reserve Bank of Cleveland, and Kent Smetters, former Deputy Assistant Secretary of Economic Policy at the U.S. Treasury and now an economics professor at the University of Pennsylvania. They asked the following question: Suppose the government could, today, get its hands on all the revenue it can expect to collect in the future, but had to use it, today, to pay off all of its future expenditure commitments, including debt service. Would the present value (the discounted value today) of the future revenues cover the present value of the future expenditures? The answer was a decided no: according to their calculations, the shortfall amounts to $45 trillion. To put that figure into perspective, it is twelve times larger than the current official debt and roughly four times the size of the country's annual output.

Gokhoale and Smetters also asked how much taxes would have to be raised, or expenditures cut, on an immediate and permanent basis to generate, in present value, $45 trillion? Their answer takes the form of a “menu of pain” with four unpalatable dishes to choose from. We could either, starting today, raise income taxes (individual and corporate) by 69 percent; or we could raise payroll taxes by 95 percent; or we could cut Social Security and Medicare benefits by 56 percent; or we could cut federal discretionary spending by more than 100 percent (which, of course, is impossible)….”