What to Do About Debt?

cropped-bob-shapiro.jpg   By Bob Shapiro

According to Laurence Kotlikoff, economics professor at Boston University, the real, total National Debt including the “official” number, plus Agency debt, and plus unfunded liabilities like Social Security and Medicare is around $225 Trillion.

There are five ways to handle this situation:

  1. Do Nothing
  2. Borrow the Money
  3. Raise Taxes
  4. Inflate away the Value
  5. Cut Spending

$225 Spinner

Do Nothing is the choice our leaders have been making for a couple of generations. They’ve tinkered at the edges, mostly raising benefits to buy votes, but on balance, this choice has led us to the brink of collapse. By continuing to do nothing, they DECIDE to wait until the collapse does happen, leaving all those who depend on this money destitute. This is a bad choice going forward.

Borrowing the Money essentially is the same as Doing Nothing, except it allows us to focus on where the money will come from. $225 Trillion is more than the whole world’s GDP! Even if all 7 Billion people and all the businesses in the world, in all the countries in the world wanted to lend us everything they had, it wouldn’t be enough.

But, they don’t want to lend it to us. China and Japan, which have lent us well over $1 Trillion each, have stopped buying US Treasuries. They see the handwriting on the wall. They expect the US to default on what they already have lent us, and they’re trying to cut their losses. Borrow is not even a choice.

Raise Taxes also won’t work. If taxes were raised to 100% – taxing our whole Economy into the various entitlement trust funds – it still is only a drop in the bucket compared to the $225 Trillion actuarial deficit. A 100% tax rate, besides being impossible, would mean every American would have zero income to buy food, to pay rent/mortgages, or even to put clothes on their backs. Raising Taxes is a bad choice.

Inflate away the Value has been used increasingly at least since the 1960s. When Americans recoiled at the double digit inflation of the 70s, our leaders began distorting the CPI. Using the CPI methodology from 1980, we can see that the dollar has lost 92% of its purchasing power since then (even the “Official” CPI shows a loss of only” 2/3).

Real Inflation Since 1980

John Williams of ShadowStats believes that the FED will lead the US into a Hyper-inflation – the kind of disease which destroyed Wiemar Germany, Argentina under Peron, and more recently Zimbabwe.

This is the worst choice of all!

Cutting Spending, if it were politically possible, might work. The Entitlements, which make up most of the actuarial deficit would be paid out over many decades, so un-promising that money to future generations would leave them enough time to plan for replacement funding of their retirement, healthcare, etc.

Yes, there still would be pain, since much of what today’s young and middle aged have paid in and will receive nothing in return. And, the 50 million Americans who have become dependent on (or just used to) taxpayer handouts, also would need time to adjust.

So, there are no good choices, but cutting spending is the least bad. A real benefit to spending cuts is that the private, productive sector of the Economy would be allowed to grow, providing real wealth to replace cut benefits.

In future posts, I’ll suggest ways to handle the reductions that are so necessary in Social Security, Medicare, ObamaCare, Food Stamps, and Welfare. Some pain is better than death.

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