By Doug Hornig

Bud Conrad, chief economist at Casey Research, has been predicting (rather correctly) the dire economic consequences that will result from our mushrooming national debt. Of particular concern is the debacle yet to come, from the future’s unfunded liabilities.

Now, however, he is going to have to pass his Mr. Gloom hat to another contender. Namely, Boston University economics professor Laurence Kotlikoff.

In an article published on Bloomberg.com, Kotlikoff writes, “Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.”

This is not a news flash. Former U.S. Comptroller General David Walker has been barnstorming the country for the past several years: appearing on every television show that will have him, delivering the same message, trying to educate the American people about the seriousness of our plight.

If Walker’s warnings have largely fallen on deaf ears, then Kotlikoff’s are likely to receive an immediate ride on the prevailing winds to places far away. Because his conclusions make Walker’s seem like chump change.

Kotlikoff took a hard look at the Congressional Budget Office’s Long Term Budget Outlook, released in June. “Based on the CBO’s data,” he writes, “I calculate a fiscal gap of $202 trillion.”

202 what????

No, that’s not a misprint. Kotlikoff says that, taking into account all supposedly funded liabilities, we’re in hock to the tune of $202 trillion, or nearly a quarter of a quadrillion dollars. Normal minds cannot deal with a number like that. He can’t possibly be serious.

But he is. He’s a serious economist whose ideas are taken seriously. And he’s no stranger to controversy. For years, he’s been talking and writing about the coming generational storm, i.e., the consequences of a worldwide aging population. At some point, the young will no longer be able to support the old. When that happens, well, who knows what will follow?

He also waded into the current economic crisis, proposing a totally revamped banking system in his 2010 book, Jimmy Stewart Is Dead. The proposal, Limited Purpose Banking, “takes the multifaceted fraud out of our financial system by turning all banks, insurance companies, hedge funds, etc. into fully transparent mutual fund companies. Limited Purpose Banking also abolishes over 115 federal and state regulatory authorities and replaces them with the Federal Financial Authority, which verifies, fully and immediately discloses, and independently rates and appraises all securities held by the mutual funds.”

Interesting. But of course banking reform won’t help with the federal debt, which Kotlikoff describes as “a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.”

All Ponzi schemes collapse. They must. That includes Uncle Sam’s, which Kotlikoff says “will stop in a very nasty manner,” the inevitable endgame when you’ve been living beyond your means for sixty years.” As we all have.

What’s the way out of this unmanageable debt overhang? Kotlikoff doesn’t know, but he suggests three actions the government will probably be forced to take:

“The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.”

In his view, “Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.”

And there’s another possibility Kotlikoff doesn’t mention. Default. It seems likely that at some point we’ll essentially have to declare bankruptcy, and some measure of default on the debt will be necessary. That would trigger a worldwide fiscal crisis, with unforeseeable results.

Not a pretty picture, all around. But one we’re stuck with, once Washington’s con game comes to an end.

Read the complete Kotlikoff article here.

Courtesy, Casey’s Daily Dispatch