Debt crisis looming as Washington 'hides the real fiscal cliff numbers’
According to Kotlikoff, the true extent of the growing fiscal gap has been concealed by Washington for years, a process that could ultimately result in debt disaster: China and Japan, top American money-lenders, could simply stop the cash flow.
Moreover, in the last few years the Federal Reserve has raised the base money cap from $800 billion to $3 trillion, creating the foundation for possible hyperinflation, Kotlikoff said. The whole situation remains unnoticed by the public while politicians try to avoid the problem, leaving it to future generations to reach a solution.
RT: Laurence Kotlikoff, Economics Professor at Boston University, pleasure to have you with us today.
Laurence Kotlikoff: It’s great to be with you and great to be in Russia.
RT: You’re the one who stated that America is rogue and in even worse state than Greece and Ireland. How so? What exactly do you mean by that?
Laurence Kotlikoff: Well, we economists look at all the bills the government has to pay, and in the US case we have enormous bills that have been kept off the books. They’re not the official debts, but they are very real. For example, paying me my social security benefits, my old-age pension – that’s a real obligation. It’s not part of the official government debt, but it’s very important because there are 78 million baby boomers who’re going to get their social security payments, and, in addition, medical payments from the government. If you look at all those payments, they are about $3 trillion a year. So we have these huge bills, nobody has thought about paying for them, and Congress and the presidents over the years have just focused on official debt, and basically have not told the public about these big bills.
RT: You said the amount of the fiscal gap in the United States is, in your estimation, $222 trillion. This is an astonishing number, which is like three times the world GDP. This is more than what the world makes.
LK: Twenty times higher than the official debt in the hands of the public, which is $11 trillion. So if you add all the spending obligations into the distant future, and you compare them with all the taxes, and you include in the spending all the interest payments, and principal payments on the debt, and the official debt, you have $222 trillion of present value. Now, this is 12 per cent of GDP on an ongoing basis, and we need to get 12 per cent more in GDP either in tax increases or spending cuts in order to have the fiscal gap in zero.
We’re doing far too little, too late. It’s like operating on a person with cancer, and you say, “Well, there’s a big tumor here, we’re just going to take a little bit out today, and we’ll come back in five years, and we’ll take out some more.” But maybe in five years the patient is dead because the tumor got bigger. So this is why we are in worse shape than Greece – in Greece, it’s about 10 per cent of GDP they need on an ongoing basis, in Italy it’s about 5 per cent, in Germany it’s about 5 per cent. So when you look at it from this perspective, it’s a whole different story than if you look just at the official debt because these governments are making choices what to call official obligations, and what to call unofficial.
RT: So are they intentionally hiding the enormity of it?
LK: They’re intentionally hiding this. They’ve been spending in our country six decades, running a massive Ponzi scheme, taking from young people, giving to old people, and then telling the young people, “Don’t worry, you’ll get yours when you’re old,” promising pensions, promising healthcare benefits. And you know this is happening in all countries. Russia has a pension system, but it doesn’t seem to be in better shape than ours in terms of paying for its benefits in the future.
RT: I mean, this number – $222 trillion – where exactly is this money going, who is spending it? I mean, certainly not the average American. What is it, 1 per cent of the superrich? The military?
LK: Well, you’ve got a lot of old people now, they are getting very high benefits, about $30,000 per person. It’s scheduled to go up to $40,000 when I retire, which is about 15 years. So you see we’re just very generous to the old people in our country.
RT: What do you suggest: cut spending, raise taxes? They would be suicidal to any American president.
LK: If we’re running the country, we have to act like adults because our main responsibility as adults is to make sure our kids have a good future. So we have to reduce the growth rate of the benefits to the elderly, and that requires being much more careful about how much we spend on healthcare because the healthcare benefits have been growing at twice the growth rate of per capita GDP for 40 years. So it can’t continue because it’s going to kill the country. We have a huge problem, it’s being hidden, it’s not being described and discussed and disclosed.
RT: You just mentioned that you need to take care of the future generations, ‘clash of generations’ was the term you used to describe what future awaits the American children paying up the debts of their fathers, but the United States when you look at it, really has lived on debt ever since WWII, and increasingly so in the past 30 years, and they have somehow managed not to collapse. Why do think that the new generation will manage it?
LK: Well, over time, the official debt will become a bigger and bigger share of GDP, and at some point the Chinese and other people will stop lending us money, and our interest rates will go up dramatically. We’ll have a bond market collapse and, at that point, the deficit will get even bigger. The official debt will cumulate even more rapidly. And our government is also printing a lot of money to pay for these bills. So I see big problems, and they might not be in 30 years, they might be in five years or two years. The Chinese and other people start to understand how bad the situation is. And then we will be in situation of Greece where people won’t lend us money and then we will have to make big cuts and everybody will be injured.
RT: You mentioned China and Japan – they top the list of American lenders. It’s more than $1 trillion of US debts. Should they get used to the idea they are not getting their money back? They can’t just come out and say: “Hey, I want part of American GDP.”
LK: If I were anybody – whether Chinese, Japanese or Russian – I would not be buying 30-year US government treasury bonds. They are yielding 3.5 per cent or something right now because we have printed so much money since 2007 – it’s really unbelievable. The Federal Reserve has tripled what is called ‘the base money’ – the basic money supply, the monetary base. It’s actually gone from $800 billion to about $3 trillion now. This is more than tripled. So we have the basis in place for more than tripling the price level right now. We have created the foundation for hyperinflation. And the baby-boomers have yet to retire. So right now 12 per cent of all the federal spending is based, being financed and paid for by just printing new dollars – that is what is going on.
So we are acting very much like a developing country in terms of actual finances. I have been concerned about this and writing about it and speaking about it since the late ’80s. The other economists said about it as well as some politicians, but it’s getting worse. It’s not like anybody’s actually looking carefully at these numbers. The politicians are looking at the official debt numbers and are not really discussing the magnitude of what is coming.
RT: A lot of people like you who are critical of the current American financial system have come out in the street. The Occupy Wall Street movement voiced their concerns and protests. Do you think a movement like this is actually capable or able to solve real issues or is it just a red herring?
LK: Well, Occupy Wall Street was concerned about inequality, and they were concerned about what Wall Street was actually doing. And I think we need to radically change our financial system because we have too big problems. And this is true in every country including Russia. The traditional banking system, the model, is on a very high leverage. Banks borrow a lot of money, promise to repay and then there is opacity – they take the money and they do something with it but they are not telling you what they are doing with it. So people get very concerned at some points about whether the banks actually can repay. And then you can have runs on the bank, just overnight.
So it’s a very unstable situation when you promise people things and then you don’t show what you are doing with their money. And that’s what happening with Lehman Brothers and Bear Sterns and Merrill Lynch – these companies went under one after the other. Everybody started worrying because they couldn’t see the assets. So what we need to do is get rid of this “faith-based banking”. We need to have no leverage and we have to have transparency. The government has to disclose what the assets are. The government has to do verification and disclosure.
We should have the government agency verify that somebody’s mortgage is actually a reasonable mortgage: that person has a job, that person has an income, that person’s house which is collateral to the mortgage has actually this value. So we should not have any liar loans. And we should also have all the banks become what are called ‘mutual funds’ which just sell shares to these funds. They take all the money on an equity basis. They don’t borrow money – they just sell shares of stock: the money comes in and then they buy these disclosed assets – the mortgages, for example. If you have equity-based finance and then if the mortgages don’t work out, somebody doesn’t repay, the shareholder takes a loss, but the financial intermediary, which is a mutual fund, never fails and never goes bankrupt. So you have a banking system that can never fail. If it’s made of equity finance and mutual funds who are buying transparent fully-disclosed assets – that’s what we need.
The protesters of Wall Street didn’t know what they wanted, but this is what they need. Now what we need is also protesters among the young about their fiscal treatment – that’s a different thing.
RT: That’s the thing. The fiscal cliff and the possibility of America defaulting that we hear a lot around us – is this symptomatic agony or is it maybe artificial political crisis?
LK: I think the young people don’t fully understand how they are being treated. In the debates, in the entire campaign, not one of these two candidates talked about the magnitude of the problem. President Obama said that our social security system, our basic government pension system has a small problem that needs to be tweaked, is what he said. If you actually look at the system and at the trustees report, the thing is 31 per cent underfinanced. So it’s not a small problem. According even to social security actuaries. It’s a huge problem. So he is on a different planet from the reality.
Romney felt we could just lower taxes and get more revenue. So he was equally, you know, crazy on this stuff. And unfortunately we have children whose future is at stake here. And they are also under a lot of pressure in other ways because they are competing with other people all over the world and they are also competing with these new smart machines that are taking people’s jobs away. So in our country when you go to a grocery store or a drug store the checkout person is a machine: there is nobody working there, it’s just a machine these days. There is actually maybe one person to help you use the machine. And that replaced a lot of jobs, so we have young people who are having troubles finding jobs. Even college graduates are having trouble.
RT: Laurence Kotlikoff, thank you very much for a very interesting insight you gave us on the ongoing financial crisis and it’s great to have you with us again.
LK: My pleasure. Thank you.