Past the Point of No Return?

Casey Research has an article, “The U.S. Government is About to Get Hit with the ‘Perfect Storm’ of Debt. Anyone concerned about the financial health of the US, and the world, should read the article.  Here is an excerpt:

Hearing President Obama’s economic peptalks, you might be under the impression that the U.S. needs to keep spending for just a little while longer to stimulate the economy – but then will swear off big deficits.

Reinforcing the point, to address concerns stirred by a Congressional Budget Office (CBO) forecast that the U.S. government will accumulate total deficits in excess of $6 trillion over the next decade, in February President Obama issued an executive order to create a bipartisan fiscal commission. The commission’s task is to deliver recommendations to the president by December 1 for limiting future deficits to 3% of GDP. (The FY 2009 deficit approached 10% of GDP. The FY 2010 deficit will probably go even higher.)

It’s our contention that the president’s fiscal commission is mostly for show; the 3% limit is just a hoop for the clowns to jump through. U.S. government finances are now past the point of no return; the U.S. government lacks not just the will but the ability to close the gap between revenue and expenditure.

At The Casey Report, we like to focus on facts. Unfortunately, when it comes to government debt, the facts aren’t pretty. They show that the country is already sliding towards financial collapse and hyperinflation in a way not dissimilar to the Weimar Republic.

Let’s first look at recent history to see how reliable CBO forecasts have been. In 1999 the CBO issued its 10-year forecast for 2000-2009 (see charts below). It looked as though we were heading into ten years of prosperity that would rescue us from little worries like the trillions in unfunded liabilities of Social Security and Medicare.

As you can see in the charts titled “CBO Revenue Projections 2000 – 2009” and “CBO Outlay Projections 2000 – 2009,” the CBO expected a budget surplus in every year from 2000 to 2009. And not just that, but that the surpluses would grow at an annual rate of more than 13% and would accumulate to $2.5 trillion over the decade.

The article is quite sobering and indicates that it is possible we have reached the point of no return.

The Perfect Storm

So what happens if the government hits all three landmines – the revenue landmine, the interest expense landmine, and the military spending landmine?

If (1) federal revenues only increase by 50% from now until 2020, (2) interest rates rise by one percentage point per year, and (3) military spending continues to increase at the same rate as it did from 2002 to 2010, by 2020, the U.S. government would be running a deficit of $4.2 trillion per year.

And with the Perfect Storm’s rising deficits, total debt would accumulate at an accelerating pace. In 2020 it would reach $50 trillion – double what the CBO is projecting.

At $50 trillion, the national debt would be 208% of the CBO’s projected GDP for 2020, and the 2020 deficit would be $4.2 trillion, or 17% of projected GDP. The interest expense on U.S. debt alone would represent 12% of 2020 GDP and 55% of the total federal budget.

And this only takes into account the three potential landmines outlined in this article. There is much more that could materially change the landscape of the federal budget in the next ten years. The most notable factors not accounted for in our analysis are the entitlement programs – Social Security and Medicare – which are likely to make the government’s debt problem significantly worse as the baby boomers start to retire. No matter how many times we shake the Magic 8-Ball, it keeps coming back with the same reading: “Outlook not so good.”

Read more:

Read the whole article.

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