Only Inflation Will Save USA Since Politicians Won’t

Posted on October 5th, 2009 by admin in Political Economy

We have written about the stupendous obligation Medicare owes future retirees. The amount ($90T) truly dominates all US policy, even if the current crop of politicians indulges in denial. A brief analysis reveals the situation is even worse and inflation is inevitable.

{ See our last post on Medicare dwarfing all other economic problems }

Let’s take a look at the over-arching debt and obligations owed by the US. We can get get a meaningful overview from the few numbers below.

What the US Owes

US Assets and Obligations

The source for these numbers is the US Treasury and National Center for Policy Analysis (NCPA). They were conveniently pulled together here. The last line in the table is taken from our post above, and the source is Kent Smetters, Wharton School insurance and risk management professor.

Let’s get some perspective. According to the US Treasury, the average interest rate paid by Treasury is 3.36%/YR. Thus, the interest paid on the debt is about $400B/YR, which is a fraction of the annual revenues to the Treasury. On the other hand, if we applied the entire revenue stream to the US government to interest, we could pay down only $2.2T/.036=$65.5T . Thus, the enormity of the amounts of debt and obligation are loosely bounded.

Even more striking: if the US literally sold itself for the amount estimated by Prof. Smetters, the revenue still would be dwarfed by the outstanding obligations. The US cannot even hope for a hostile takeover to save itself!

So what will the end game from this situation be? Here are the possibilities, as summarized by Sprott, and the very likely outcomes:

  • Default on Medicare promises. (Unlikely given the current debate in Washington to expand medical coverage.)
  • Default on Social Security promises. (Unlikely given the increasing average age of the voting public.)
  • Put forward a credible plan to balance the budget. (Unlikely given the most recent budget projections.)
  • Default on outstanding debt. (Unthinkable)

The only remaining solution is to inflate the obligations and debt. QED.

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