Many will see the headline of this letter and believe it refers to some failed negotiations in Congress. Clearly, Congress is dysfunctional and hopelessly gridlocked. However, I believe they will always be able to produce some 11th-hour, do-nothing, time-buying agreement, no matter how dire things may appear.
No, they won’t “allow” the default to happen. What I’m talking about are the hopeless trends of the imbalance between revenue and spending, and the lack of the will or discipline to do anything about it. Add to that a demographic-destabilizing money-hungry monster rolling down the tracks and you have a perfect recipe for disaster.
First, take a look at the history of U.S. annual deficits. During the 1980s and ’90s, the trend was an approximate increase of $1 trillion every five years. As scary as that sounds, our average deficits for the past five years have averaged more than $1 trillion a year. If you look over the history of the U.S. debt, there are frightfully few years where we’ve managed to push it back slightly. Now, we face a $17 trillion debt.
Here is what is working against us making any headway on that: 1) The economy is on life support (unprecedented rates of money printing — $3 billion a day), and still is incredibly sluggish with no real trend toward growth, and 2) We have a huge swelling in the demographic (us baby-boomers) who soon will be putting a huge stress on Social Security and Medicare. Both of these programs recently crossed the neutral line so that they are spending more than they are taking in, and that trend will continue to ramp up fast. Different estimates exist as to their sustainability but all of them look bad.
So, when will we default? That part is hard to say. It depends on when our creditors wise up and realize that we can’t pay it back. What will default look like? Also, hard to say. We could print money and pay it back, killing the value of the currency, which is effectively, though not technically default.
I believe the most likely scenario (also not technically default) is to cut Social Security and Medicare benefits suddenly and severely. Call them death panels if you wish, or something more palatable if it suits you. The baby boomers probably will be the ones who will feel the default.