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Sunday, July 23, 2006

'U.S. Headed for Bankruptcy': Key Fed Member

London's Daily Telegraph is reporting that the St. Louis Federal Reserve Bank's Professor Laurence Kotlikoff, a leading constituent of the U.S. Federal Reserve, has announced that the United States is on the path to bankruptcy - if it is not already there.

"To paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property or wrecked in consequence of failure to pay its creditors?" he asks, according to the daily.

While the article acknowledges that the U.S. budget deficit is still small compared to those of many European nations, Kotlikoff asserts that: "The U.S. government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds."

The respected Fed member goes on to say that the only way to examine the solvency of a country is to look at "the lifetime fiscal burdens facing current and future generations." If these exceed those generations' resources, "get close to doing so, or simply get so high as to preclude their full collection, the country's policy will be unsustainable and can constitute or lead to national bankruptcy."

While Kotlikoff admits he is not sure the United States will actually become insolvent, he says many indicators point to such a development.

Especially worrisome is the calculation of the massive long-term gap between anticipated government spending and all future receipts. This gulf "will widen immensely as the Baby Boomer generation retires, and as the amount the state will have to spend on healthcare and pensions soars," the Telegraph reports.

"The total fiscal gap could be an almost incomprehensible $65.9 trillion, according to a study by Professors Gokhale and Smetters."

Says Kotlikoff: "This figure is more than five times U.S. GDP and almost twice the size of national wealth. One way to wrap one's head around $65.9 trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying."

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