An analysis prepared for the Federal Reserve of the U.S. federal debt problem and possible solutions DOES NOT INCLUDE REDUCTION IN THE SIZE OF GOVERNMENT.  The solutions include “confiscation of all physical assets,” “Slash Social Security and Medicare by over half”  (benefits for which most citizens and their employers have paid for in advance during their entire careers), and “68% immediate and forever increase in income taxes” and “Increase the combined employer-employee payroll tax from 15.3% to over 32%.” In other words, the government will do anything except shrink the government, their jobs, their budgets and their power.

“Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few eurozone “troika” officials scrambling to salvage their balance sheets. A joint paper by the U.S. Federal Deposit Insurance Corporation and the Bank of England dated Dec. 10, 2012, shows that these plans have been long in the making…” Full Story: http://seekingalpha.com/article/1306931?source=iphoneappmail

Social Security and Medicare: Scaling the Problem and Proposed Solutions.
The Philadelphia Federal Reserve, December 2, 2005. Kent Smetters, The Wharton School & NBER.

Two Main Problems with the Traditional Federal Budget
(1) Substantially underestimates unfunded liabilities by ignoring long-term liabilities
(2) Is biased against reforms that would reduce these unfunded liabilities

Re: (1) Underestimates Liabilities
*Budget does not track many unfunded obligations
They’re “off balance sheet”
*Examples
Social Security and Medicare
Medicaid
Federal Employee / Military pensions
* Instead, the budget focuses on a particular unfunded obligation: public debt
* Debt Held by Public Misses almost $60 Trillion in Liabilities
* Public debt is only one component of government’s true Fiscal Imbalance (FI)
* FI = debt held by public + PV of all future outlays – PV of all future revenue = $63 trillion
* On 19 March 2013, debt held by the public was approximately $11.888 trillion or about 75% of GDP. Intra-governmental holdings stood at $4.861 trillion, giving a combined total public debt of $16.749 trillion. As of July 2012, $5.3 trillion or approximately 48% of the debt held by the public was owned by foreign investors, the largest of which were the People’s Republic of China and Japan at just over $1.1 trillion each.

*But are these obligations “real”?
*Yes: the only difference between these obligations and regular debt is the policy options available for dealing with them.
*Options for reducing explicit debt:
Monetize it (except TIPS)
Increase taxes
Declare bankruptcy
*Options for reducing implicit debt:
Hard to monetize (since inflation protected)
Control outlays, increase taxes

Easy Fix / Hard Fix
* Social Security: The “Easy Fix”
Smaller problem
Nature of problem is also easier since it is cash payment (e.g., “just” price index)
* Medicare: The “Hard Fix”
7 times large (new Rx plan imbalance alone is larger than Social Security’s imbalance)
Nature of problem is also harder since in-kind payment and driven by tech change

Why Haven’t Fixed Income Markets Reacted with higher interest rates?

Options for Paying for $63 Trillion
* Confiscate all physical capital assets in the U.S. (actually does not go far enough!)
* Increase federal income taxes by 68% immediately and forever, assuming no reduction in labor supply or savings
* Increase the combined employer-employee payroll tax from 15.3% to over 32% and remove the payroll tax ceiling (but don’t credit benefits)
* Slash Social Security and Medicare by over half

Reference: Social Security and Medicare: Scaling the Problem and Proposed Solutions.
The Philadelphia Federal Reserve, December 2, 2005. Kent Smetters, The Wharton School & NBER.

The Government Accountability Office (GAO), the federal government’s auditor, argues that the United States is on a fiscally “unsustainable” path and that politicians and the electorate have been unwilling to change this path. Further, the subprime mortgage crisis has significantly increased the financial burden on the U.S. government, with over $10 trillion in commitments or guarantees and $2.6 trillion in investments or expenditures as of May 2009, only some of which are included in the public debt computation. However, these concerns are not universally shared.[93 link below]

Converting fractional reserve to full reserve banking

The International Monetary Fund published a working paper entitled The Chicago Plan Revisited suggesting that the debt could be eliminated by raising bank reserve requirements, converting from fractional reserve banking to full reserve banking.[50][51] Economists at the Paris School of Economics have commented on the plan, stating that it is already the status quo for coinage currency,[52] and a Norges Bank economist has examined the proposal in the context of considering the finance industry as part of the real economy.[53] A Centre for Economic Policy Research paper agrees with the conclusion that, “no real liability is created by new fiat money creation, and therefore public debt does not rise as a result.”[54] [Links below]

http:/en.wikipedia.org/wiki/National_debt_of_the_United_States

http://www.pgpf.org/Special-Topics/Download-the-Citizens-Guide.aspx

[50] Ambrose Evans-Pritchard (October 21, 2012) “IMF’s epic plan to conjure away debt and dethrone bankers” The Telegraph http://www.telegraph.co.uk/finance/comment/9623863/IMFs-epic-plan-to-conjure-away-debt-and-dethrone-bankers.html
[51] Jaromir Benes and Michael Kumhof (August 2012) “The Chicago Plan Revisited” International Monetary Fund working paper WP/12/202 http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
[52] “Debt-Deflation versus the Liquidity Trap: the Dilemma of Nonconventional Monetary Policy” CNRS, CES, Paris School of Economics, ESCP-Europe, October 23, 2012 http://hal.cirad.fr/docs/00/74/79/04/PDF/12064.pdf
[53 “Credit and debt in Economic Theory: Which Way forward?” “Economics of Credit and Debt workshop, November 2012 http://works.bepress.com/cgi/viewcontent.cgi?article=1009&context=thorvaldgrung_moe
[54] “The economic crisis: How to stimulate economies without increasing public debt”, Centre for Economic Policy Research, August 2012 http://www.cepr.org/pubs/PolicyInsights/PolicyInsight62.pdf
[93] Lynch, David J. (Mar 21, 2013). “Economists See No Crisis With U.S. Debt as Economy Gains”. Bloomberg. Retrieved 25 March 2013. http://www.bloomberg.com/news/2013-03-22/economists-see-no-crisis-with-u-s-debt-as-economy-gains.html