Is Our Country's Fiscal Condition Past the Point of No Return? with David McKnight

For a grim depiction, check out this article The Mathematical Certainty of U.S. Government Default by Ptolemy3 about the future of the US government's debt situation.

The US government reached the tipping point at least fifteen years ago where the only way out will be default. People who calculate debt for the US federal always do it incorrectly. The proper way to do it is to figure out the net present value of everything that we've promised over the years minus what we can actually afford to deliver.

The US government currently only projects these numbers out for 75 years, if they went out beyond that timeline the situation get much worse.

The fiscal gap is growing. The expenses are going up dramatically and will continue to do so for years while the cash flow remains relatively static based on current tax rates.

The author begins by looking at US government positive cash flow. Any prediction that economic growth will rise dramatically over time is based on religious belief. There is no data that suggests that economic growth will increase more than 2% in our lifetimes short of an AI revolution.

Some people are suggesting that we've hit a maturity on economic growth and are actually approaching a decline. The basic standard programs are not likely to change; once a government program gets established it's incredibly hard to get rid of it.

Looking at the current assets and liabilities and estimating what the future cash flows will be over the next 75 years paints a pretty dark picture. When broken down, the net present value of the future obligations for social insurance programs alone is $49 trillion.

Core operations of the government are actually running in a surplus, but the situation gets really ugly when you get to the interest payments on the debt. The current payment is around $300 billion but interest rates are projected to increase to an average of 5.1% over time. This means we would have to have $110 trillion dollars in the bank account today earning Treasury rates to be able to deliver on just the debt.

The Terminal Value, the number we would need to have in the 75th year to be able to bankroll the expenses of the federal government in perpetuity, is an astonishing $1.6 quadrillion.

When you add all the numbers up the net present value of all our future obligations is around $239 trillion. To put that into perspective, our fiscal gap represents almost 70% of all the money in the world.

We are deficit spending, basically using debt to pay our bills. As the debt increases, there will be a point where it starts to snowball and we won't be able to afford the interest on the debt no matter how much we cut back on other programs, and we've already passed the point of no return on that number.

When interest rates go up, the costs of servicing the debt will triple. If the government defaults on the debt it would likely plunge the world into a depression.

The author considers what would happen if we continued on the current path. By 2038, the US government will be running an annual deficit of $3.3 trillion which will last for decades in the future. We would most likely default at this point since waiting until 2058 or later would only make the future default more devastating.

Gokhale and Smetters published a paper titled "Is the United States Bankrupt?" It describes the solution to the problem that would involve an immediate and permanent doubling of personal and corporate income taxes, and/or an immediate and permanent two-thirds cut of all social security and Medicare benefits.

The author comes to very similar conclusions. When using the government's numbers from their own financial reports, he ran into problems trying to reconcile their math. It looks like the government is deliberately trying to hide large numbers from the calculations including government employee benefits and Medicaid. Even using the government's own numbers, their fiscal probability is not sustainable and there is a 100% probability that this ends in default.

Everytime the debt comes due, the whole system breaks. The outcome is always hyperinflation or default, which are fairly similar in their effects.

This ends badly, either revenues need to be increased or costs need to be decreased. We have made promises that we can't afford to keep, even if tax rates went up to 100% it would not solve the problem and would obviously be disastrous for the economy.

This is the largest Ponzi scheme in human history. As the bubble pops during our lifetime it's going to get very ugly. Like all Ponzi schemes, the longer they are able to hold their disastrous financial situation together due to their trust in them, the greater the eventual damage will be when the bubble pops.

The Power of Zero paradigm is based on the belief that tax rates will go up in the future and that spending will have to go down. We want to take steps to protect ourselves from this reality by systematically repositioning your tax-deferred dollars to tax-free.

 

Mentioned in this episode:
Medium: The Mathematical Certainty of U.S. Government Default
https://medium.com/@ptolemy.3/the-mathematical-certainty-of-u-s-government-default-b53ba0e89da3