We're not in Kansas anymore: US National Debt and the Fiscal Cliff

I saw this in my inbox this morning. Combined with Jeff Opdyke's commentary about the difference between a real social safety net and the Social Security system the United States (and virtually every other western country) has today, and Laurence Kotlikoff and Scott Burns's The Clash of Generations, and I think my own views concerning the current so-called "debate" between Democrats and Republicans are coming into sharp focus.

I see so many of my Democratic friends touting the "compassion" and "love" being shown by their favorite politicians, and I think: "Really?"

It's all well and good to speak of compassion. But who can pay for this so-called compassion--much less who is willing to pay for it (with their own money)? Please don't talk to me about your great compassion when you are willing to saddle future (not-yet-able-to-vote and/or not-yet-aware-enough-to-vote) generations with massive debt that they will never be able to repay [that's the message I get from Kotlikoff and Burns; good summary of their book here]. And please don't talk about compassion when the supposed social safety net is being used, today (and for the foreseeable future--unless Congress decides to change the system) as a primary vehicle of retirement funding [the message I get from Jeff Opdyke's article].

The following, by Alexander Green of InvestmentU in last Friday's Investment U Plus newsletter, provides further perspective, I think:

Imagine that your 18-year-old son goes off to college for the first term of his freshman year. You are happy to pay for his education costs - room, board, tuition, books, etc. - but you also give him a credit card "in case of emergencies."

When he comes home for Christmas, you discover that he has run up $70,000 on his MasterCard. You hit the roof and demand an explanation.

"Now hold on, Dad," he says. "Before we start talking about how much less I might spend, let's talk about how much more money you [really ought to be giving] me."

Consider your response - and whether it would be printable in a family paper. Yet Congress makes our hypothetical spendthrift look like a piker.

Most reasonably well-informed Americans know that our $16.1-trillion federal budget deficit is now larger than the nation's GDP. But what most don't realize is this figure doesn't include the unfunded liabilities for Medicare, Medicaid, Social Security and the Prescription Drug Benefit. That's another $121.6 trillion. [According to Kotlikoff and Burns, it's actually more than $200 trillion. But what is $80, $90, or $100 trillion between friends? --JAH] Combine the federal budget deficit with the unfunded liabilities for current entitlement programs (excluding ObamaCare) and it comes to a mindboggling $1.2 million per taxpayer.

Some will argue that this is exactly why we need to stick it to the ultra-rich, an approach that has clear populist appeal. But here's a bit of perspective. Less than a hundred years ago, the nation's richest man, John D. Rockefeller, could have written a personal check and paid off the entire national debt, every penny accumulated since 1776. Today the government could confiscate the entire net worth of the nation's wealthiest man, Bill Gates, and it wouldn't pay six weeks' interest [NOTE: That's interest! --JAH] on the national debt. . . .

Writing in The Wall Street Journal this week, former Congressional Committee Chairmen Chris Cox and Bill Archer note that even if the government confiscated the entire adjusted gross income of every individual and corporation in America, it still wouldn't cover U.S. entitlement obligations. Yet the first order of business according to President Obama, Senator Reid and Mr. Buffett is not to reform entitlements or rein in spending but to raise tax rates? You might as well try bailing out the Pacific Ocean with a teaspoon.

Congress has a world-class spending addiction, but then so do most other Western democracies, including Canada, Britain, Western Europe and Japan. In every case, politicians on both sides of the aisle have learned that promising lush government benefits paid for by "someone else" is a big winner at the polls.

As for the current fiscal cliff negotiations, the Congressional Budget Office estimates that raising the top marginal tax rate to 39.6% - as Obama proposes - would generate approximately $70 billion a year. That's not an inconsequential sum. But it won't come close to fixing this year's $1.1-trillion federal budget deficit. Where would we get the other $1.03 trillion?

And why did I title this post "We're not in Kansas anymore"? 

Because I get the impression that the American empire has run its course. It can no longer maintain the illusion. Reality is beginning to set in. The U.S. cannot continue to inflate away its debt problems and expect its citizens not to feel the impact. We all--wealthy and poor--are going to experience the results of almost  three decades of spending beyond our ability to pay.

What's wrong with Social Security?

I have been aware since the early '80s of the idea that Social Security is a Ponzi Scheme . . . and why. I have understood how the government has played games with the Social Security "fund"--counting the Social Security tax as a supposed "insurance premium" if (and only if) and when (and only when) it was convenient, but, yet, then, treating it as a general source of current government income if and when that was more convenient . . . and so the Social Security "fund" is really composed of government IOU's that future taxpayers will have to pay off if current recipients of Social Security payments are to receive what is their promised "due." . . .

I have understood that. And because I have understood that, I have realized that I ought never to figure I would receive a penny in benefits from Social Security. It is a forced Ponzi Scheme, a tax, and the government will do with those funds what it will, but it will, most likely, not be paying me whatever it pretends it is promising.

But this morning I saw a new perspective on Social Security that I had never seen or thought of before. And I thought it was worth sharing.

From Jeff Opdyke of the Sovereign Society:

I agree that society must deploy safety nets to catch the fallen. [My opposition to the idea that society, collectively, has a responsibility to provide a lifestyle to any particular individual or group of individuals] has nothing to do with people who, through no fault of their own, find themselves in need of society’s munificence. But the safety nets should not be so large that they encourage reliance among those who see falling as the easier path – which is precisely the effect our safety nets have today.

Worse, they’re ill-designed and over the decades have spawned among Americans a warped sense of entitlement. Social Security is, perhaps, the best example. In a recent note, reader Lee S. wrote to say that, because he and his wife have paid into Social Security for years, “we are entitled [his emphasis] to what was removed from our salaries.”

To which I say, no – absolutely not.

Government – under [Franklin D.] Roosevelt – originally designed the system as social insurance. And insurance in its purest form pays out only as a failsafe, when a monetary need arises. Homeowners and drivers do not expect their policies to provide a source of income just because they pay premiums. They expect a payout only when, in an emergency, the cost of replacing or repairing a house or car exceeds the policyholder’s financial capacity.

Social Security should follow an identical principle.

For those without a meaningful source of income to draw on in retirement because of factors beyond their control, Social Security should ensure a certain level of economic wellbeing. But to believe that everyone should access the system just because they paid into it is ludicrous; it’s the reason the program is structurally unsound today. It’s a question of fairness, ultimately. If my assets generate, in retirement, an annual income of $30,000 or more – roughly double the poverty line for a family of two – am I entitled to even more money from a government that must, through increased taxation, dispose of the estates of others?

Without question, no!

Before the entitlement mindset ran amok in this country, Americans once felt a sense of personal shame falling into a government safety net. In a personally responsible society, Americans would purposefully be more frugal – instead of purposefully more consumerist – to build up a nest egg over the years. The personally responsible would see reliance on Social Security as a personal failure and the pathway to a diminished lifestyle that they would want to avoid at all costs.

In that world, the liberty of the individual, as encouraged by the state, would supersede the desire of others to live a life unearned. As it stands now, though, it is an immoral system that requires government to take from the individual a penny more than is needed to provide a basic standard-of-living to those unable to provide for themselves. It is an immoral system when government taxes the individual to provide anything to those fully capable of providing for themselves.

Whoa!

I think he's hit something on the nose!

Clearly, Social Security is not (and never was) set up as an investment vehicle. It was not--and is not--set up to acquire and/or produce assets that can generate income. No. Almost from the very beginning it was (and is) an income redistribution plan--taking from current earners to make payments to people who used to earn. (Even as the earlier earners made payments into the "system" to cover payments made to even earlier participants.)

Insurance policies and plans don't work that way.

So where do we go from here?

And when will either the Democrats or the Republicans begin to "talk straight" about what it is we are up against?

The difference between debt and deficit

I have been observing with ongoing horror at what our nation's political "leaders" are doing with respect to the onrushing fiscal crisis.

I finally decided, on Thursday, to take the time to write them. Not that I expect they really care that much what I have to say!

I wrote first to my congressman, who is a Republican, then to my two senators, who are both Democrats. I wrote much the same to each one. Except for the last one. Senator Mark Udall has the beginning of a statement on his homepage that directly addresses the situation: "Letter to Congress on the Debt." He offers only the first few sentences, before hitting a link to Continue Reading. I realized I needed to Continue Reading if I was to write him. So I clicked the link.

And the first thing I saw on the new page, was a statement he makes on the side of the page: "Add your name to my letter to Congress and send the message: we need a sensible, bipartisan debt plan -- now."

And, of course, my first thought was--and still is--"Oh, yes! We do!" And, boy! If his plan is sensible, I absolutely do want to sign it.

So what was (or is) Senator Udall's sensible, bipartisan debt plan?

Here's what he wrote:

Letter to Congress on the Debt

Dear Members of Congress,

Today, I delivered remarks on the Senate floor about our government's inability to come together to address our looming national debt and its fast-approaching limit. The clock is running out, and Americans are calling for a comprehensive, bipartisan solution. Yet once again negotiations are at an impasse. Our escalating national debt stands at over $46,000 per citizen - that's an outrageous number that is weighing down our economic recovery, jeopardizing our status as the world's economic leader and threatening our national security.

There's a growing disconnect between what most Americans want - quality roads, a safety net for the sick and elderly, and strong investments in education and research that will develop the well-paying jobs of tomorrow - and our country's ability to pay for them. But I believe we have to be realistic and make tough decisions - on both sides. For example, spending cuts alone won't reduce our deficit. And if those cuts are too deep they will hurt the middle class and prevent us from creating the jobs we need for a full economic recovery. So I believe generating more revenue must at least be part of the solution. There are plenty of wasteful tax loopholes - not tax rate increases, but corporate giveaways through the tax code - that can be closed. Our economic future rests on the fulcrum of this balance: both sides have to come to the negotiating table with skin in the game and agree that nothing is off limits.

If we continue arguing over whether to use the right or left paddle, we'll just keep going in circles until we careen over the edge together. I'm willing to stay in Washington as long as it takes to achieve a sensible, bipartisan plan that puts our country back on track. We already have a template: The President's National Commission on Fiscal Responsibility and Reform, chaired by Erskine Bowles and Alan Simpson, came up with a set of recommendations that would reduce the debt by over $4 trillion over the next decade, including spending cuts, reasonable entitlement reform and revenues generated from closing special interest tax expenditures. Now let's start paddling in unison.

Respectfully,

Senator Mark Udall and co-signers

It was that penultimate sentence that put me over the top: "The President's National Commission on Fiscal Responsibility and Reform . . . came up with a set of recommendations that would reduce the debt by over $4 trillion over the next decade."

Though I should have been ready for it based on what he wrote in the middle of his second paragraph: "spending cuts alone won't reduce our deficit. . . . I believe generating more revenue must at least be part of the solution. There are plenty of wasteful tax loopholes - not tax rate increases, but corporate giveaways through the tax code - that can be closed."

In case the problems with Udall's letter aren't immediately obvious, please permit me to point them out.

1. The President's National Commission on Fiscal Responsibility and Reform came up with no suggestions on how to reduce the federal debt, as Udall claims. All they proposed was means by which, maybe (if Congress could possibly allow itself to do nothing to alter the situation over the course of 10 years! --Ha ha!), . . . --They proposed means by which maybe they would spend $400 billion less each year, for ten years, than they were otherwise planning to spend. They would continue to spend in deficit--$1.2 trillion more than they bring in in taxes. The debt would continue to increase at a pace of $1.2 trillion a year (again, assuming no one got any ideas over the course of 10 years concerning how to spend more money than they did in 2011--a far-fetched idea if I ever heard of one).

So Udall's comment about "reducing debt" is total hogwash.

But his first comment about "spending cuts alone [not being able to] reduce our deficit" is also hogwash.

2. Look, I'm all for closing wasteful tax loopholes. Or even non-wasteful tax loopholes. If the government would treat everyone with greater equality, that would be fine with me: The tax code that impacts one person should be the tax code that hits the next.

But if you're spending more than you can afford, then if you cut spending--any spending at all--you will reduce your deficit. You won't be spending quite as much beyond your means.

Clearly, either Udall doesn't understand the difference between a deficit and a debt, or he is cynically playing upon the lazy thinking of his constituents to try to woo them with his nonsense.

I decided to write him much the same letter I wrote to his colleagues--with just some minor modifications that directly address his letter:

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--Oh! . . . And I was sure I had saved a copy. I planned to share it here. But it seems to have disappeared from my computer.

So summary: Basically: Hey, I'm one of the people whom you want to tax more. I am more than happy to pay more taxes . . . under one condition, and one condition only: That you-all come up with a reasonable plan actually to stop the bleeding, stop the deficit, balance the budget and, eventually, actually pay off the debt.

My problem: I have seen no one in Congress--or the White House--at any time during my adult years make any serious attempt to pay down the debt, even at the best of times. Even when the economy was screaming along, the government was wracking up more debt, more unfunded future obligations.

Until our supposed "leaders" in Washington actually lead and come up with a real plan to stop borrowing more and, at some point, actually pay off what they have already borrowed, I don't want to throw any more of my somewhat-good money after bad.

That, more or less, is what I wrote.

But there is more.

The government talks about the $14-point-some-odd trillion debt. But that's only what they are willing to acknowledge. Our federal government has obligated itself for far more. At this point, well over $100 trillion--most of it, obviously, "off book."

I mean, we're talking about Medicare and Medicaid and Social Security and all the retirement funds for all the federal retirees, not to mention the unlimited obligations they have signed up for with respect to Fannie Mae and Freddie Mac. They never reference those obligations. (Oh, yes, they reference them: that they contribute--or will, at some day in the future, contribute--to the federal deficit.) But they don't acknowledge that the funds supposedly set aside to pay off these obligations don't exist; that all the Social Security taxes you and your employer pay (or used to pay) go (or went) directly into paying the current expenses of the federal government. There is absolutely nothing there--or anywhere--to pay you what the government has promised to pay you . . . other than the "full faith and credit of the U.S. government"--which means the tax generating and paying ability of those Americans who will be paying taxes at the time you try to draw upon the program that the federal government has set up supposedly to meet your needs.

Put another way: The acknowledged debt of the federal government is "only" the debt upon which it is actually paying interest at the moment. It is not the future debt--the contracted obligation--for which any normal business would be investing in anticipation of having to pay.

All those tens or hundreds of thousands of dollars you hope to draw upon from Social Security? They don't exist. And the federal government has no plans for how they are supposed to come into existence . . . except somehow, miraculously, that taxpayers will show up in the future to give up the funds they need to live a modest (hopefully non-dismal) life so you can enjoy the benefits you believe you are entitled to (because the federal government made some promises to you: that if you paid in your Social Security taxes now--which would go to pay off those who had come before you--they would ensure that they fleeced future taxpayers to cover what they have been promising you).

[By the way, if you would like to read a very clear summary article about the on-going frauds involved in the Social Security system, read this from Merrill Matthews at Forbes.]

*********

When my family was all together a week ago, I got talking with my sister and brother-in-law from Germany. They are the ones who are being directly impacted by the Greek government's fiscal irresponsibility as they are being taxed to pay for their Euro-using cousins down in Greece. In Greece, I read, the average retirement age (and, therefore, the average age for receiving government funds), is 61! In Germany--where they are having to pay for the Greek government's largesse--the retirement age was recently increased from 65 to 67.

It strikes me: When Social Security was first created, the average lifespan of Americans who hit adulthood was significantly shorter than it is today. According to the Social Security administration, the numbers look like this:

Table 1: Life Expectancy for Social Security
Year Cohort Turned 65	Percentage of Population Surviving from Age 21 to Age 65		Average Remaining Life Expectancy for Those Surviving to Age 65
	Male	Female	Male	Female
1940 1950 1960 1970 1980 1990	53.9 56.2 60.1 63.7 67.8 72.3	60.6 65.5 71.3 76.9 80.9 83.6	12.7 13.1 13.2 13.8 14.6 15.3	14.7 16.2 17.4 18.6 19.1 19.6

"As Table 1 indicates," writes the author of the article in which I found the above table, "the average life expectancy at age 65 (i.e., the number of years a person could be expected to receive unreduced Social Security retirement benefits) has increased a modest 5 years (on average) since 1940."

Okay. But/and/so why hasn't the retirement age been raised to match? And considering the fact that our government has obviously over-promised on its ability to deliver, why isn't the retirement age raised a little bit more than a mere match to the obviously erroneous earliest assumptions? Put another way, why aren't we looking at full Social Security benefits beginning only for those who refuse to accept them until age 70? And significantly reduced benefits for those who take early retirement at 62 or 65 or any other age before that?

That kind of change might actually be real "reasonable entitlement reform," to borrow a phrase from Senator Udall!

Let's stop offering false hope to Americans that they (we!) can continue to retire in our 60s and expect to receive the kinds of Social Security benefits our parents or grandparents did. It's not going to happen.

One way or another, our system is collapsing. Let's acknowledge the collapse and make solid plans to move forward.

Big brother doing his job . . . or pushing toward tyranny?

Sounds reasonable enough: biometric Social Security cards to ensure that only legal residents of the United States can get jobs here.

But then you hear the other side--from Texas Representative Ron Paul and John Tate, president of Campaign for Liberty. Tate, in an email I received this afternoon, writes:

This is getting to be like a bad movie.

You know the ones where the villain, dead and buried more times than you can count, somehow mysteriously reappears in a place you don’t expect him?

Well, here comes... a new fight over a biometric national ID card -- and if you don’t have the card, you can’t work.

Right now, . . . Senator Lindsey Graham (R-SC) and Senator Chuck Schumer (D-NY), banding together with other statists from both parties, are scheming to sneak a massive power grab into a new “immigration reform” bill.

This bill [offers] “amnesty” for illegal immigrants and a biometric ID card for virtually everyone else.

That’s right. Instead of controlling the border and enforcing the rule of law, these statists want to control you. . . .

You see, a National ID scheme -- complete with biometric tracking technology -- is embedded in the new “Comprehensive Immigration Reform Bill” being pushed by Senators Graham and Schumer, as well as other Big Government members from both parties.

And if passed, the “Comprehensive Immigration Reform Bill” would require a new National ID card that would:

*** Include biometric identification information such as fingerprints, retinal scans or scans of veins on the back of hands. Depending on the technology used, the ID card could easily be used as a tracking device [though Schumer and Graham explicitly say, "The cards would not contain any private information, medical information or tracking devices." --Can we trust the government? In case you can't remember, government leaders also promised (1913) that the income tax was solely to be levied on only those making "very great incomes" and even they by "never more than three or four percent of their net incomes." --Within three years of ratification, however (1916), the top marginal rate was 15 percent; the next year, 67 percent; by 1918: 77 percent (on all income above $1 million--which was a lot money in those days); by 1922: 58 percent of everything above $200,000; 1942: 88 percent of everything above $200,000; 1944: 94 percent of everything above $200,000. In 1948 and '49, the government mercifully placed a cap on its avarice: no taxpayer would have to pay more than 77% of statutory "net income" . . . See the TruthAndPolitics "Top US Marginal Income Tax Rates, 1913-2003" for the full story. --Do you need more examples of the government's trustworthiness in these kinds of things? How about the RICO legislation that was supposed to be directed solely against mafia-style organizations but was soon turned to use against peaceful anti-abortion protesters? Social Security (which was, originally, conceived as a true form of insurance to be paid out of reserves but that was very soon shifted into a pay-as-you-go system [i.e., as critics say, a Ponzi scheme]? --JAH)

*** Be required for all U.S. workers regardless of place of birth, and make it illegal for anyone to hold a job in the United States who doesn't obtain the ID card;

*** Require all employers to purchase an “ID scanner” to verify the ID cards with the federal government. Every time any citizen applies for a job, the government would know -- and you can bet it’s only a matter of time until “ID scans” will be required to make even routine purchases, as well.

Of course, the most dangerous part of the bill is the biometric tracking technology which would allow federal bureaucrats to track our every move.

Allowing our government to have this much “prying power” in our lives will ultimately result in the TOTAL loss of freedom.

This is exactly the type of battle that often decides whether a country remains free, or continues down a slide toward tyranny.

Government goon squads with all our personal information -– information they do not need and constitutionally should not have –- is a recipe for disaster for our nation.

You see, once “well-meaning” government bureaucrats know exactly how we live our lives, it won’t be long until they try to run them.

In fact, it will only be a matter of time until they spend their workdays making sure you and I don’t go anywhere we “shouldn’t,” buy anything we “shouldn’t,” read anything we “shouldn’t,” eat anything we “shouldn’t” or smoke anything we “shouldn’t.” . . .

[With all the anger being expressed against the federal government's recent power grabs,] the statists are [now] trying a bipartisan “backdoor” scheme to impose more control on American citizens.

They’re hoping that after months of Big Media mouthpieces decrying the “poisonous and partisan politics” in Washington, the American people will jump for joy at the sight of a Democrat from liberal New York and a Republican from conservative South Carolina “working together to solve our immigration mess.”

[Don't buy it!] . . .

Tate concludes his letter by urging us to sign a petition and make a contribution to help stop the Schumer-Graham legislation.

What do you think?

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For a relatively balanced presentation on the issues, see this article in The Wall Street Journal online.

And then there's this more recent update--that suggests immigration reform is "dead" for the remainder of this year.

Who pays for what?

I caught this in World magazine (March 13 issue, p. 68) concerning the Greek debt crisis:

The most likely scenario is a bailout led by the Germans, but such a move is extremely unpopular in Germany. Greece's early retirement age is a big sticking point for Germans, who recently raised their own retirement age from 65 to 67. "The Greeks go onto the streets to protest against the increase of the pension age from 61 to 63," said the Frankfurter Allgemeine Zeitung newspaper in an editorial. "Does that mean that the Germans should in the future extend the working age from 67 to 69, so that the Greeks can enjoy their retirement?"

I think a similar question could be asked about U.S. debt.

Are the thrifty and self-denying Chinese and Indians (for example) supposed to permit Americans to renege on their impossible promises to repay--in good, uninflated money--the trillions of dollars of debt they (our government; we!) have already contracted? Are we Americans supposed to enjoy our "free" health care and Social Security retirement benefits and Medicare while the Chinese and Indians continue to labor for wages worth a fraction of what Americans receive?

Financial storms on the horizon?

Image by Voetmann via Flickr
I receive Gary North's Reality Check every weekday but read it only once every extreme once-in-a-while. And today was one of those once-in-a-whiles. Or, I should say, today I read Friday's "Reality Check." North said Storms on the Horizon by Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, is the scariest speech he has ever read, and "I have been reading speeches for a living for over 40 years."

Things are worse than I had imagined, and my scenario has been bad. This dwarfs my scenario. Coming from the person who delivered it, you had better take it seriously.

I have no further comments. Click. Print. Read.

Coming from Gary North--a guy known as "Scary Gary" for his rampant pessimism and doomsday scenarios--his comments are probably a bit of hyperbole. But maybe not.

Mr. Fisher's comments, certainly, merit attention. I think North is correct: "Coming from the person who delivered [them], you had better take [them] seriously."

Fisher, speaking on May 28th this year, said,

Eight years ago, our federal budget, crafted by a Democratic president and enacted by a Republican Congress, produced a fiscal surplus of $236 billion, the first surplus in almost 40 years and the highest nominal-dollar surplus in American history. While the Fed is scrupulously nonpartisan and nonpolitical, I mention this to emphasize that the deficit/debt issue knows no party and can be solved only by both parties working together. For a brief time, with surpluses projected into the future as far as the eye could see, economists and policymakers alike began to contemplate a bucolic future in which interest payments would form an ever-declining share of federal outlays, a future where Treasury bonds and debt-ceiling legislation would become dusty relics of a long-forgotten past. The Fed even had concerns about how open market operations would be conducted in a marketplace short of Treasury debt.

That utopian scenario did not last for long. Over the next seven years, federal spending grew at a 6.2 percent nominal annual rate while receipts grew at only 3.5 percent. Of course, certain areas of government, like national defense, had to spend more in the wake of 9/11. But nondefense discretionary spending actually rose 6.4 percent annually during this timeframe, outpacing the growth in total expenditures. Deficits soon returned, reaching an expected $410 billion for 2008—a $600 billion swing from where we were just eight years ago. This $410 billion estimate, by the way, was made before the recently passed farm bill and supplemental defense appropriation and without considering a proposed patch for the Alternative Minimum Tax—all measures that will lead to a further ballooning of government deficits.

In keeping with the tradition of rosy scenarios, official budget projections suggest this deficit will be relatively short-lived. They almost always do. According to the official calculus, following a second $400-billion-plus deficit in 2009, the red ink should fall to $160 billion in 2010 and $95 billion in 2011, and then the budget swings to a $48 billion surplus in 2012.

If you do the math, however, you might be forgiven for sensing that these felicitous projections look a tad dodgy. To reach the projected 2012 surplus, outlays are assumed to rise at a 2.4 percent nominal annual rate over the next four years—less than half as fast as they rose the previous seven years. Revenue is assumed to rise at a 6.7 percent nominal annual rate over the next four years—almost double the rate of the past seven years. Using spending and revenue growth rates that have actually prevailed in recent years, the 2012 surplus quickly evaporates and becomes a deficit, potentially of several hundred billion dollars.

He goes on to outline how pessimists have usually fingered the unfunded liabilities of the Social Security system as one of the key factors we need to beware of in the not-so-distant future. But "Social Security is the lesser of our entitlement worries. It is but the tip of the unfunded liability iceberg. The much bigger concern is Medicare," he says.

The amount of money the Social Security system would need today to cover all unfunded liabilities from now on—what fiscal economists call the “infinite horizon discounted value” of what has already been promised recipients but has no funding mechanism currently in place—is $13.6 trillion, an amount slightly less than the annual gross domestic product of the United States. . . .

The infinite-horizon present discounted value of the unfunded liability for Medicare A [what covers hospital stays] is $34.4 trillion. The unfunded liability of Medicare B [which covers visits to the doctor] is an additional $34 trillion. The shortfall for Medicare D [the drug benefit that went into effect not quite three years ago, under the pressure of our current president] adds another $17.2 trillion. The total? If you wanted to cover the unfunded liability of all three programs today, you would be stuck with an $85.6 trillion bill. That is more than six times as large as the bill for Social Security. It is more than six times the annual output of the entire U.S. economy.

Add Medicare to Social Security, and, between those items alone, you have a total unfunded liability of $99.2 trillion.

Let’s say you and I and Bruce Ericson and every U.S. citizen who is alive today decided to fully address this unfunded liability through lump-sum payments from our own pocketbooks, so that all of us and all future generations could be secure in the knowledge that we and they would receive promised benefits in perpetuity. How much would we have to pay if we split the tab? Again, the math is painful. With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four—over 25 times the average household’s income.

Obviously, that's not going to happen.

So what else can we do?

[A] permanent 68 percent increase in federal income tax revenue—from individual and corporate taxpayers—would suffice to fully fund our entitlement programs. Or we could instead divert 68 percent of current income-tax revenues from their intended uses to the entitlement system, which would accomplish the same thing.

Wouldn't that be great? Maybe!

Suppose we decided to tackle the issue solely on the spending side. It turns out that total discretionary spending in the federal budget, if maintained at its current share of GDP in perpetuity, is 3 percent larger than the entitlement shortfall. So all we would have to do to fully fund our nation’s entitlement programs would be to cut discretionary spending by 97 percent. But . . . discretionary spending includes defense and national security, education, the environment and many other areas, not just those controversial earmarks that make the evening news. All of them would have to be cut--almost eliminated, really--to tackle this problem through discretionary spending. . . .

[J]ust to drive an important point home, these spending cuts or tax increases would need to be made immediately and maintained in perpetuity to solve the entitlement deficit problem. Discretionary spending would have to be reduced by 97 percent not only for our generation, but for our children and their children and every generation of children to come. And similarly on the taxation side, income tax revenue would have to rise 68 percent and remain that high forever. . . .

No combination of tax hikes and spending cuts, though, will change the total burden borne by current and future generations. For the existing unfunded liabilities to be covered, . . . someone must pay $99.2 trillion. , , , This is a cold, hard fact. The decision we must make is whether to shoulder a substantial portion of that burden today or compel future generations to bear its full weight. . . .

[L]et me come back to monetary policy and the Fed.

It is only natural to cast about for a solution--any solution--to avoid the fiscal pain we know is necessary because we succumbed to complacency and put off dealing with this looming fiscal disaster. Throughout history, many nations, when confronted by sizable debts they were unable or unwilling to repay, have seized upon an apparently painless solution to this dilemma: monetization. Just have the monetary authority run cash off the printing presses until the debt is repaid, the story goes, then promise to be responsible from that point on and hope your sins will be forgiven by God and Milton Friedman and everyone else.

We know from centuries of evidence in countless economies, from ancient Rome to today’s Zimbabwe, that running the printing press to pay off today’s bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid.

So what should we do?

I found it interesting that Fisher never mentioned a "solution" that I've been scared our government will choose: attempt to extort concessions--"forgiveness of debt"--from other nations through war. How awful would that be?

Fisher concludes,

Purging rampant inflation and a debased currency requires administering a harsh medicine. . . .

Failing to face up to our responsibility will produce the mother of all financial storms. The warning signals have been flashing for years, but we find it easier to ignore them than to take action. Will we take the painful fiscal steps necessary to prevent the storm by reducing and eventually eliminating our fiscal imbalances? That depends on you.

I mean “you” literally. . . . When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You elect them. You are the ones who let them get away with burdening your children and grandchildren rather than yourselves with the bill for your entitlement programs. . . .

When George Shultz, one of San Francisco’s greatest Republican public servants, was director of President Nixon’s Office of Management and Budget, he became worried about the amount of money Congress was proposing to spend. After some nights of tossing and turning, he called legendary staffer Sam Cohen into his office. Cohen had a long memory of budget matters and knew every zig and zag of budget history. “Sam,” Shultz asked, “tell me something just between you and me. Is there any difference between Republicans and Democrats when it comes to spending money?” Cohen looked at him, furrowed his brow and, after thinking about it, replied, “Mr. Shultz, there is only one difference: Democrats enjoy it more.”

Yet no one, Democrat or Republican, . . . wants to see the frightful storm of unfunded long-term liabilities destroy our economy or threaten the independence and authority of our central bank or tear our currency asunder.

Of late, we have heard many complaints about the weakness of the dollar against the euro and other currencies. It was recently argued in the op-ed pages of the Financial Times that one reason for the demise of the British pound was the need to liquidate England’s international reserves to pay off the costs of the Great Wars. In the end, the pound, it was essentially argued, was sunk by the kaiser’s army and Hitler’s bombs. Right now, we--you and I--are launching fiscal bombs against ourselves. You have it in your power as the electors of our fiscal authorities to prevent this destruction. Please do so.

Are you ready to do your civic duty and say no to any candidate who is unwilling to say no to further deficit spending and who is unwilling to say yes to massive cuts in federal entitlements?

If not, who do you expect to to bring the federal deficit under control and the debt back to a level that can actually be managed? And by what means do you think the deficit is to be cut and the debt to be retired?