17 March 2010

Massive Future Budgetary Gap Looms

CNN Money: U.S. states: Running with the PIIGS

As we watch the Greece situation unfold, the fiscal metrics in the United States become even more concerning. According to my estimates, the United States is running a debt-to-GDP ratio of 84% and deficit-to-GDP of almost 11%.

The United States last defaulted on debt in 1933 by refusing to repay certain bonds in gold as promised. While we are not suggesting that a U.S. debt default is anywhere near imminent, the ratios outlined above are concerning and do place our federal government squarely in the Pig Zone.

Furthermore, dig into fiscal imbalances at the state level and the picture gets even worse. According to a recent study by the Pew Center, a nonpartisan think tank, there is a $1 trillion gap between $3.35 trillion in pension, health care, and other retirement obligations on state balance sheets versus the $2.35 trillion in assets to cover them. This is a massive future budgetary gap, which will have to be funded, at least partially, by debt.

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