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U.S. effectively bankrupt, economist says

August 12, 2010

Laurence Kotlikoff, an opinionated Boston University economist with a history of criticizing fiscal policies of both Democrats and Republicans, has posted a chilling column on Bloomberg.com saying the United States is not hurtling toward bankruptcy, like some pessimists say, but already is effectively broke.

You heard that correct, we’re broke. Actually worse off than Greece, Kotlikoff says.

Kotlikoff reaches the conclusion by pointing to other authorities, namely the International Monetary Fund and the Congressional Budget Office.

Buried in an IMF document this summer was the assertion that in order for the U.S. to meet all of its financial obligations, including its debt payments, taxes must be doubled immediately and permanently on personal income, corporate, federal and payroll.

CBO data shows the U.S. is on the hook for $202 trillion, 15 times the official debt level. The figure is so much bigger than the one normally bandied about because it includes the burdens of such future benefits as Social Security, Medicare and Medicaid.

The deluge of baby-boomer retirements is about to collapse the system, Kotlikoff warns. No longer will younger generations be able to support old folks.

“Uncle Sam’s Ponzi scheme will stop. But it will stop too late,” he said. “And it will stop in a very nasty manner.”

The upshot is that the U.S. faces huge benefit cuts just as boomers hit retirement, massive tax increases that would leave little incentive for young people to work and save, and the temptation to crank up the presses that print money.

“This is an awful, downhill road to follow, but it’s the one we are on,” Kotlikoff said. “And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.”

What do you think? Is he a Chicken Little or sage prophet?

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