I've been following the situation in Greece and seen the comparisons with the United States and I've been disappointed that the analysis always focuses on the annual deficit. Sure, Greece and Spain spend more of their GDP than the US does, but that analysis seems to ignore the massive entitlement meltdown that the US is destined to endure. The federal government's Medicare, Medicaid and Social Security obligations now total about $107 Trillion, and that's not factored in to the fiscal equation.
Of course, there's an obvious solution. Just take the present value of all the obligations and the present value of all the future revenues and then compare them. That's what the Financial Times has done for both Greece and the US and the result is really sobering. (Long excerpt below)
This is classic bubble behavior--we all know that the US Government is never going to be able to pay off these obligations, but the collapse could be years away, and until then, the US still seems like the safest place to put money...until it isn't. At that point, the money rushes out very quickly and the bubble collapses. So we are in the middle of a US based sovereign debt bubble that is being kept inflated by the the willingness of foreign governments--mainly China--to park their money in our currency until they have a better option. They understand that there are really only three possible outcomes...inflation, the collapse of the dollar or outright default. But at the moment, those outcomes look to be far off, so they stand ready to pull their money out of the US while they continue to work to find a safe alternative.
As in all bubbles, we can't tell the timing or the triggering event, but something is going to cause a major panic. It may be next week, or it may not be for 20 years, but at some point, investors are going to react to the knowledge that these obligation are going to come due.
Here's the article.
Fortunately, theory suggests a label-free measure of fiscal status: the fiscal gap, or the present value difference between all future expenditures and receipts. The Greek fiscal gap is staggering. Calculations developed with my colleagues at Freiberg University put it at 11.5 per cent of the value of Greece’s future GDP. And this huge figure already incorporates Greece’s recently legislated fiscal policy retrenchment. But the US figure, based on the Congressional Budget Office’s just-released projections, is even larger: 12.2 per cent.
Clearly, Greece is in terrible fiscal shape. To get its books in order it would have to pull in its belt each year by another 11.5 per cent of GDP. This provides new meaning to the word draconian. But the US is in much worse shape, because the CBO’s projections that reveal the 12.2 per cent fiscal gap already assume a 7.2 per cent of GDP belt-tightening by 2020.
But the assumptions underlying this 7.2 per cent adjustment are highly speculative, including a substantial rise in the share of taxpayers facing the Alternative Minimum Tax, once called the “millionaires tax” for targeting only the rich. The CBO also assumes that real wage growth will push all workers into much higher tax brackets, and that Congress will slash discretionary spending as well as greatly limit growth in Medicare and Medicaid benefits. Each supposition runs counter to recent experience.
Wishing won’t fix America’s fiscal mess. The US is one foot away from a deep and permanent economic grave. It is far past time to do meaningful long-term fiscal planning, level with the public, and implement radical reforms that permanently put America’s fiscal house in order.