We Owe How Much?
One of the problems with the debate over US national debt is that there’s no generally agreed-upon definition of that term. Is it what the federal government owes, or what it owes foreigners, or what the whole country, private and public sector together, owes? Does it include off-balance-sheet items and contingent liabilities?
There’s a $100-trillion dollar gap between lowest and highest on this spectrum, which allows commentators to choose the measure that best suits his or her point of view. Some use “net debt”—the amount the US owes foreigners—to argue that, since this number is relatively small and slow growing, the US is actually fine. Analysts using broader definitions of debt disagree. Then there are the unfunded liabilities of entitlements like Social Security and Medicare, which dwarf the official national debt.
Debt and unfunded liabilities are treated as separate things because a) doing so allows government to hide its true obligations and b) debt and unfunded liabilities are different in some ways. Debt is a legal obligation that gives the lender recourse, i.e. some way of getting back some of their money. Unfunded liabilities are simply promises that don’t carry a legal obligation. In theory, Congress could cancel Medicare tomorrow.
So how dangerous are US unfunded liabilities? Because they represent a promise to tens of millions of retired baby boomers who expect free money and health care for the last portion of their lives, they’re effectively more real an obligation than a Treasury bond.
Politicians who messes with baby boomers’ health care will be back in the private sector before the polls close in the next election. Compared with the probable repercussions of stiffing China or Saudi Arabia on bond interest, unfunded liabilities have, if anything, a more solid claim on future US economic activity than does interest on Treasury bonds.
True US national debt is government debt plus private sector debt plus off-balance-sheet obligations plus unfunded liabilities. That’s around $500,000 per man, woman and child, or $2 million per family of four.
The US can’t pay this of course, so the next few years will be spent searching for the least painful way of breaking its promises. History is clear on this: a country with a printing press will always use it before exploring the harder options of actual default, whether through non-payment of interest or cancellation of benefits.
Thursday, January 10, 2013
Posted by Unknown at 12:24 PM