Federal Reserve: U.S. headed for bankruptcy

Federal Reserve: U.S.
headed for bankruptcy
Report: Coming $65.9 trillion fiscal gap
5 times GDP, twice size of national wealth

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A newly published paper by a researcher for the Federal Reserve Bank of St. Louis warns that a ballooning budget deficit and pension and welfare timebomb is growing into a $65.9 trillion fiscal gap that will force the United States into bankruptcy.

Prof. Laurence Kotlikoff

In the view of Prof. Laurence Kotlikoff of Boston University, the U.S. is already bankrupt – at least the government is.

"The U.S. government is, indeed, bankrupt," he writes, "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."

While the U.S. budget deficit, currently forecast to be 2.3 percent of the gross domestic product this year, is smaller than that of most European states, Kotlikoff argues the much debated number is not a particularly useful measure of U.S. economic health.

"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."