A Ticking Fiscal Time Bomb for the United States?

I am having a great summer but this is not a good time to be complacent when the following is taking place. Just think of this as a political tsunami for the Bush Administration. North Korea, Israel v. Political Factions created through democracies in Lebanon and Palestine, interest rates climbing, gas prices rising, retail sales report releasing information that shows a decrease in consumer spending. There is some good news... our total deficit according to our President went from a projected 498 billion dollar deficit to a 298 billion deficit.

If you were to add all of this up and then read the following The Telgraph UK link from The Drudge Report . You will understand what could be at stake for the United States in the next few years. (By the way, we are only in the middle of the hurricane system.)

US 'could be going bankrupt'By Edmund Conway, Economics Editor
(Filed: 14/07/2006) http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/07/14/cnusa14.xml&menuId=242&sSheet=/money/2006/07/14/ixcity.html

The United States is heading for bankruptcy, according to an extraordinary paper published by one of the key members of the country's central bank.

A ballooning budget deficit and a pensions and welfare timebomb could send the economic superpower into insolvency, according to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, a leading constituent of the US Federal Reserve.

Prof Kotlikoff said that, by some measures, the US is already bankrupt. "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 asked.

According to his central analysis, "the US 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 budget deficit in the US is not massive. The Bush administration this week cut its forecasts for the fiscal shortfall this year by almost a third, saying it will come in at 2.3pc of gross domestic product. This is smaller than most European countries - including the UK - which have deficits north of 3pc of GDP.

Prof Kotlikoff, who teaches at Boston University, says: "The proper way to consider a country's solvency is to examine the lifetime fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, 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.

"Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke."

Experts have calculated that the country's long-term "fiscal gap" between all future government spending and all future receipts 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 total fiscal gap could be an almost incomprehensible $65.9 trillion, according to a study by Professors Gokhale and Smetters.

The figure is massive because President George W Bush has made major tax cuts in recent years, and because the bill for Medicare, which provides health insurance for the elderly, and Medicaid, which does likewise for the poor, will increase greatly due to demographics.

Prof Kotlikoff said: "This figure is more than five times US GDP and almost twice the size of national wealth. One way to wrap one's head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143pc."

The scenario has serious implications for the dollar. If investors lose confidence in the US's future, and suspect the country may at some point allow inflation to erode away its debts, they may reduce their holdings of US Treasury bonds.

Prof Kotlikoff said: "The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century."

Paul Ashworth, of Capital Economics, was more sanguine about the coming retirement of the Baby Boomer generation. "For a start, the expected deterioration in the Federal budget owes more to rising per capita spending on health care than to changing demographics," he said.
"This can be contained if the political will is there. Similarly, the expected increase in social security spending can be controlled by reducing the growth rate of benefits. Expecting a fix now is probably asking too much of short-sighted politicians who have no incentives to do so. But a fix, or at least a succession of patches, will come when the problem becomes more pressing."

Op Ed of the Week Thomas Friedman

July 14, 2006
Op-Ed Columnist NY Times
The Kidnapping of Democracy
By THOMAS L. FRIEDMAN
When you watch the violence unfolding in the Middle East today it is easy to feel that you’ve been to this movie before and that you know how it ends — badly. But we actually have not seen this movie before. Something new is unfolding, and we’d better understand it.

What we are seeing in Iraq, the Palestinian territories and Lebanon is an effort by Islamist parties to use elections to pursue their long-term aim of Islamizing the Arab-Muslim world. This is not a conflict about Palestinian or Lebanese prisoners in Israel. This is a power struggle within Lebanon, Palestine and Iraq over who will call the shots in their newly elected “democratic’’ governments and whether they will be real democracies.

The tiny militant wing of Hamas today is pulling all the strings of Palestinian politics, the Iranian-backed Hezbollah Shiite Islamic party is doing the same in Lebanon, even though it is a small minority in the cabinet, and so, too, are the Iranian-backed Shiite parties and militias in Iraq. They are not only showing who is boss inside each new democracy, but they are also competing with one another for regional influence.

As a result, the post-9/11 democracy experiment in the Arab-Muslim world is being hijacked. Yes, basically free and fair elections were held in Lebanon, the Palestinian territories and Iraq. Yes, millions turned out to vote because the people of the Arab-Muslim world really do want to shape their own futures.

But the roots of democracy are so shallow in these places and the moderate majorities so weak and intimidated that we are getting the worst of all worlds. We are getting Islamist parties who are elected to power, but who insist on maintaining their own private militias and refuse to assume all the responsibilities of a sovereign government. They refuse to let their governments have control over all weapons. They refuse to be accountable to international law (the Lebanese-Israeli border was ratified by the U.N.), and they refuse to submit to the principle that one party in the cabinet cannot drag a whole country into war.

“Iraq, Lebanon and the Palestinians all held democratic elections,’’ said the Israeli political theorist Yaron Ezrahi, “and the Western expectation was that these elections would produce legitimate governments that had the power to control violence and would assume the burden of responsibility of governing. ... But what happened in all three places is that we [produced] governments which are sovereign only on paper, but not over a territory.’’

Then why do parties like Hamas and Hezbollah get elected? Often because they effectively run against the corruption of the old secular state-controlled parties, noted Mr. Ezrahi. But once these Islamists are in office they revert to serving their own factional interests, not those of the broad community.

Boutros Harb, a Christian Lebanese parliamentarian, said: “We must decide who has the right to make decisions on war and peace in Lebanon. Is that right reserved for the Lebanese people and its legal institutions, or is the choice in the hands of a small minority of Lebanese people?”
Ditto in the fledgling democracies of Palestine and Iraq. When cabinet ministers can maintain their own militias and act outside of state authority, said Mr. Ezrahi, you’re left with a “meaningless exercise’’ in democracy/state building.

Why don’t the silent majorities punish these elected Islamist parties for working against the real interests of their people? Because those who speak against Hamas or Hezbollah are either delegitimized as “American lackeys’’ or just murdered, like Rafiq Hariri, the former Lebanese prime minister.

The world needs to understand what is going on here: the little flowers of democracy that were planted in Lebanon, Iraq and the Palestinian territories are being crushed by the boots of Syrian-backed Islamist militias who are desperate to keep real democracy from taking hold in this region and Iranian-backed Islamist militias desperate to keep modernism from taking hold.
It may be the skeptics are right: maybe democracy, while it is the most powerful form of legitimate government, simply can’t be implemented everywhere. It certainly is never going to work in the Arab-Muslim world if the U.S. and Britain are alone in pushing it in Iraq, if Europe dithers on the fence, if the moderate Arabs cannot come together and make a fist, and if Islamist parties are allowed to sit in governments and be treated with respect — while maintaining private armies.

The whole democracy experiment in the Arab-Muslim world is at stake here, and right now it’s going up in smoke.