Laurence Kotlikoff, a famous American economist and professor of Boston University, says the USA is already bankrupt and the US Dollar has no future! This should have been a sensation but eventually wasn’t… He is the author of numerous bestsellers, a respected expert and a consultant for "The Financial Times", "Bloomberg", "Forbes", "Vox", "The Economist". He says the situation around the US budget and debt ceiling has gone out of the US government’s control. Is it really so? Let’s try to ponder on this question together…
Should We Trust Kotlikoff?
This is the key question. If a major economist or politician announces something that is capable of causing panic in financial markets worldwide and having even more serious consequences, first of all it is necessary to find out to what extent this person is competent.
Obviously, Mr. Kotlikoff is a well-respected person in economic circles. Still, there are some questions and arguments indicating that his point of view looks questionable…
Expert in pension policies. On the one hand, the respected professor of Boston University is one of the leading economic personalities and experts in the world. Still, like most American scientists, Kotlikoff has narrow specialization. The field of his activity can be reduced to the so-called demographic economy. He even developed his own method of economic analysis based on demographic figures. The method implies budget planning with a glance at future demographic dynamics.
He reasoned the necessity of reforming the US pension system in order to ease the tax burden on future generations. At this point, he is busy studying the impact of the US pension system and social policies on the country’s budget policy.
In other words, the well-respected professor studies the field of governmental backing of the US social sector, continuously comparing the amount of the employed and the unemployed. It turns out that he predicts the future ratio between the two groups and makes his global conclusions based on this ratio.
Why Do Many Experts Listen to an Expert in Pensions?
Being an expert in taxation, personal finances and social insurance, Mr. Kotlikoff consulted the IMF, the World Bank, the OECD, the finance ministries of Sweden and Norway, the Bank of England, Japan, Italy, the Russian and Ukrainian governments, the US Department of Labor etc.
Why does an individual scientist get so much attention? It is because the topic studied by him (pension provision) is one of the most urgent issues these days. Whether a certain country is capable of fulfilling its social liabilities determines its solvency.
Let’s recollect last year’s Congress debates on the US debt ceiling issue. If the US Congress hadn’t raised the ceiling at the last moment, millions of Americans would have lost their pensions and other social benefits.
Detroit is a fresher example. In July 2013, it was recognized a bankrupt. It is the biggest bankrupt city in the US history.
Apart from Detroit, other 12 American cities were recognized bankrupts. 350 American towns are insolvent as well.
In 2010, Mr. Kotlikoff warned the USA that neither tax cuts nor spending hikes would help the country to resolve its debt problems. He said the USA should have simplified its, taxation, finances, pension and social systems.
Basing on the data provided by the Budgetary Department of the US Congress, Kotlikoff calculated that the USA’s fiscal gap is 15 times as big as the US debt – 202 trillion dollars. In order to eliminate the gap, the USA will have to reconsider the budget on an annual basis, thereby cutting it by approximately 14% of the US GDP. At that point, the budgetary income was equal to 14% of GDP. In other words, it was necessary to double the taxes.
Kotlikoff urges us to face the truth: the USA is bankrupt. The US government is trying to conceal the truth by excluding pension and unemployment benefits out of the official US debt figures.
Dollar Stays Strong
According to Eugene Olkhovsky, Masterforex-V Academy’s leading experts in financial markets from Canada, all those talks about the end of the USA and its dollar have been going on for decades.
Still, the power of the USA rests on 4 cornerstones:
· The power of its army and navy
· The printing press that prints the world’s reserve currency
· The leadership in numerous fields including space, nanotechnologies, pharmaceuticals, internet, hi-tech, banking etc.
· The hegemony of the US ideology on the global scale
Until these cornerstones remain strong and untouched and other powers (like Russia, China, the EU, the UK) are willing to accept them, the USA will stay the global leader while its currency will be strong.
The chart below, courtesy of Masterforex-V Academy, reflects the current state of affairs in the market of EURUSD:
