The Snowpack and the Avalanche: How to Understand Unfunded Federal Liabilities.

I begin with what I regard as the fundamental fact of modern economic life: the present value of the unfunded liabilities of the United States government.

The economist who has been most vocal about this is Prof. Lawrence Kotlikoff of Boston University. He releases an estimate every year. His estimate is this: somewhere in the range of $210 trillion.

Understand, this is not the future value of the unfunded liabilities of the federal government. This is the present market value of those unfunded liabilities. This is what the federal government should put aside today to invest in profitable investments that will enable these unfunded liabilities to be funded.

Comparable unfunded liabilities face every other Western government, including Japan. This is an international problem. It is a universal problem.

The response of all governments is the same: they ignore the problem.

This number -- $210 trillion -- is so large that it keeps anyone in Washington from discussing it publicly. It is so obvious that this problem cannot be solved that nobody bothers to discuss it. Why should anybody discuss a problem that inherently cannot be solved? So, nobody discusses it. It gets a little publicity each year in the alternative media, but it is off the table as a serious political topic in Washington.

It is the most important of all the political topics of Washington, simply because the numbers indicate the inevitability of a default. There will have to be a default. There is no maybe about it. Washington is not going to deal with this problem.

We like to say that Washington is going to kick the can. I have used that phrase. Lots of financial columnists have used this phrase. The problem is, the phrase is misleading.

The problem with the metaphor of can-kicking is this: the image does not address the fundamental element of the problem, namely, the progressive increase in the size of the can. It also does not convey the concept of a can which will at some point roll backward over the person who is attempting to kick it. We're kicking the can up the hill, and the can keeps getting larger. But this is absent from the metaphor.

What is missing in the metaphor is the great discontinuity Kicking the can sounds like a continuous action that can go on indefinitely. It has gone on so long that virtually everybody believes, as far as his investment portfolio indicates, that the federal government can continue to kick the can indefinitely.

I prefer a different metaphor. I prefer the metaphor of the avalanche.

SNOWPACK AND AVALANCHE

What is happening is more like the snowpack in the Alps.

The snowpack gets larger and larger. The voting public should know that there is going to be an avalanche. But nobody in politics tells voters that there is going to be an avalanche. Everybody in Washington denies there is going to be an avalanche. Yet the snowpack gets larger, day after day.

Almost nobody moves out of the village that is nestled just below the snowpack. Almost everybody in the village agrees that the snowpack is not a big problem yet. Someday, over the rainbow, it will be a problem, but not yet.

Among economists, only the Austrians say that the snowpack will eventually break loose and cascade down the mountain. Every other school of economic opinion says that all change is marginal most of the time. Every other school says that the exceptions to this are inevitable, but these exceptions can only take place later. Much later.

Rival economic positions always believe that it is possible through fiscal policy, monetary policy, regulation, and other forms of government fine-tuning to delay the Great Default. Economists as a group never predict recessions on time. Austrian school economists tend to be more accurate in this regard. Once in a while, they guess right. They certainly did with respect to the 2008-9 recession.

Austrian economists believe that, at some point, a marginal change is going to be like a rifle fired in the valley beneath the snowpack. The sound will shake loose the snowpack. Austrian economists do not tell us who has the rifle, or what he is aiming at, but they are convinced that somebody has a rifle, and when he pulls the trigger, the sound is going to be sufficient to shake loose the snowpack.

The political problem for Austrian economists is that they insist that long-term safety inevitability depends on bringing an end to the constant expansion of the snowpack. This will mandate not simply a balanced federal budget, but a budget in surplus. Congress must melt the snow pack at the edges by means of reduction in the federal debt, but especially a reduction in the unfunded liabilities of Social Security, Medicare, and Medicaid. The only possible way of avoiding an avalanche is to melt the snow pack at the margins.

We all know what is likely to happen. The melting process will dislodge the snowpack. If the federal deficit is to move into surplus, there must be massive decreases in federal spending. There must also be decreases in taxation in order to get the economy growing sufficiently to meet the liabilities. But there is a risk that the act of going into surplus will be the equivalent of a rifle shot.

Austrian economists who are not on the payroll of a university, and who therefore are not afraid of controversy, also say that in one great day of deliverance, the federal government should repeal the Federal Reserve Act of 1913. This is a degree of discontinuity, of snowpack melting, that conventional economists say is not simply the equivalent of a rifle shot; it is the equivalent of a howitzer. This is why there is no other academic school of economic opinion that believes that central banks, all over the world, should be eliminated.

In American economic history textbooks, the greatest economic villain in the textbooks is always the same person: Pres. Andrew Jackson. He vetoed the bill to extend the life of the second Bank of the United States beyond the 20-year limit, 1816-1836. In 1832, Henry Clay and the Whigs in Congress passed a piece of legislation to extend the life of the bank, and Jackson vetoed it. Congress could not override the veto. Clay and the Whigs campaigned in the election of 1832 on this issue. The public wisely reelected Jackson and, in 1836, the Bank of the United States lost its support as a government-supported entity. In that same year, the federal government had no debt. This was the only year in American history when there was no federal debt.

Jackson is universally attacked as an economic ignoramus in the textbooks.

The Federal Reserve System is the third incarnation of the American central bank. It is sacrosanct in the textbooks. It is as untouchable as the Marshall Plan, the G. I. Bill of Rights, the graduated income tax, Social Security, and Medicare.

FROM MARGINAL CHANGES TO DISCONTINUITY

Any program to reduce the size of the snowpack incrementally is likely to be the rifle shot that brings down the whole thing. This is the opinion of all schools of economic thought. I think most Austrian school economists believe it.

The Austrian school economists all say that the recession of 1921 was the "good" recession. Austrian school economists would all agree that any attempts by the central bank to reinflate the economy to postpone that recession would have led to something comparable to 1929. Sadly, this is exactly what happened. After 1925, this is what the Federal Reserve did. Furthermore, Austrian school economists would say that any program like Herbert Hoover's, which restricted price cutting, and which was based on a large federal deficit, would eventually have produced something like 1929. In other words, the government has to bite the bullet at some point. If it doesn't bite the bullet, it is going to put the bullet in the chamber and pull the trigger. The avalanche will come down.

Other schools of economists deny this. They want to defer the recession. They don't want to go through 1921, because they don't think it is possible to go through 1921 without risking 1929. They look at the size of the snowpack, and they correctly conclude that there is no way to get rid of it with out causing the avalanche.

Austrian economists don't want to argue that a fear of triggering a major recession is wrong. Austrian economists know that there has to be a recession. But if all of the policies that will be used to build up the snowpack are abolished, then the avalanche will take place. What policies are these? The FDIC. Social Security. Medicare. Unemployment insurance. All forms of federal subsidies. Bailouts of any kind. Shovel-ready government spending. All of it has to be abolished in order to avoid 1929. In other words, marginal changes in one area will not work. There is going to be a massive default, and this is required to restore liberty and long-term economic growth.

Nobody wants to fire the rifle: a budget in surplus and the Federal Reserve abolished. The problem is, the snowpack keeps building.

Non-Austrian economists say that if the budget is balanced, this will bring down the snowpack. If the Federal Reserve and other central banks stop inflating on a permanent basis, this will bring down the snowpack of debt. Non-Austrian economists are aware that a loud rifle shot will eventually create the avalanche, but they do everything they can to make certain that, as a guild, nobody pulls the trigger. Nobody favors some policy of budget cuts, lower taxes, and a stable monetary base.

The hard-core Austrians believe that there should be a law abolishing the Federal Reserve Act of 1913. That is regarded as revolutionary. There is no question about it; it is revolutionary. Would it bring down the snowpack? I think it would.

The question is not whether or not the avalanche is going to take place. The question is this: how much additional snow will build up before the avalanche takes place?

A much less relevant question is this: when will the avalanche take place?

Why is this less relevant? Because we can see the building up of the snowpack, fiscal year by fiscal year. There is no debate about the building up of the snowpack.

The rival schools of economics think that governments and central banks can somehow drive giant stakes into the snowpack that will link it to the mountain, thereby delaying the avalanche. The general public also believes this. Investors believe it. Since there is no way for everybody to move out of the village, because there is no place for them to go, they choose to believe that government efforts to secure the snowpack will be successful.

There is no way to stop this. You have only one hope: move out of the village at least a week before the avalanche takes place. Just to be sure, it would be wise to move out a year in advance. You just never know.

It is the massive increase of unfunded liabilities that lies at the heart of the inevitability of the smashing of the present order. The unfunded liabilities of every Western government are going to overwhelm every Western government.

The snowpack of federal debt keeps building. There is no way to stop it without pulling the trigger on the rifle that shakes loose the existing snowpack.

Washington is not going to pull that trigger. Washington is not going to stop the buildup of the snowpack. Neither is any other national government.

Snowpack is going to build up.

Hillary Clinton wrote a book, or signed her name on a manuscript, with the title: It Takes a Village.

At some point, you had better move out of the village. How? By ceasing to be dependent on the promises of the U.S. government.

CONCLUSION

Delaying the avalanche is a better image than kicking the can. Kicking the can does not convey the build-up of the can, nor does it convey the fact that the person kicking the can is kicking it up an ever-steeper hill, and that the can will roll back over him at some point, like a steamroller.

The assumption is that Congress can always kick the can a little farther down the road. Congress has done this for so long the general public and virtually all non-Austrian economists believe that it will be able to do so indefinitely. For the economist, there is never a "definitely." The bad news of the day of fiscal judgment will only arrive indefinitely in the future.

The snowpack is going to get larger. Everyone understands this. It is easier to convey the inevitability of the avalanche than it is to convey the inevitability of the can finally rolling backward, crushing anybody who is in its path.

But whichever metaphor you choose, you would be wise to accept the inevitability of the great reversal. The great reversal is going to be the great default. Either the checks will not be in the mail (default) or else the dollar will not buy anything (hyperinflation). This process of delay really is going to come to an end. Anyone who becomes dependent upon federal government programs of protection in a time of economic crisis will find that he is in the path of a crushing disaster.