"Shattering The American Dream": The US Government’s Ponzi Scheme

Tyler Durden's picture

Published in VoxEU.org by Richard Evens, Larry Kotlikoff, and Kerk Phillips,

The sustainability of government finances is very much the topic of the day. But the issue poses serious questions for the future, particularly how well off today’s younger generations will be compared with their parents. This column argues that the Ponzi scheme being played by the US government amounts to "fiscal child abuse" and is close to game over. For today's children the American dream will be just that – a dream.

Fiscal sustainability and generational equity are two of the most pressing policy issues of our times. Yet these two highly related concerns are difficult to clearly define, let alone measure.

The standard metric of long-term fiscal imbalance is official government debt (Reinhart and Rogoff 2009). But, as shown in Green and Kotlikoff (2009), official debt, like time and distance in physics, is not a well-defined economic concept.

In physics, the measurement of time and distance depends on one’s frame of reference, which can be viewed as one’s language. Measurement of debt is also language dependent.

Unfortunately, language is highly flexible. And there is an infinite number of ways to label an economy’s fiscal policy in neoclassical economies with rational agents, no matter how well or how poorly such economies function. Each labelling convention results in a different history and projected future time path of official debt. The same holds true of taxes, transfer payments, disposable income, personal saving, private saving, government saving, private wealth, and government wealth. Each of these measures is devoid of economic content.

With the right labels, unsustainable fiscal policies are compatible with huge and exponentially growing reported surpluses. Likewise, sustainable policies are compatible with huge and exponentially growing deficits.

The timing of policy is also up for grabs. There is no use saying our fiscal problems lie in the future. They do with one set of words (our short-run cash flows look great) and don’t with another (our short-run cash flows look terrible). On the contrary, our fiscal problems lie in the state-contingent policy path being followed, and its analysis defies truncation.

In Kotlikoff (2011), one of us illustrates the ‘economics labelling problem’ with the following completely painless way of running massive surpluses forever. This example shows that even doing nothing can be labelled in a way that completely alters reported deficits, taxes, and transfer payments.

Double income taxes and lend each taxpayer’s extra payments right back to the same person. Then, when each taxpayer makes interest and principal payments on the loan, hand back to that same person these monies as new transfer payments. This policy raises enough revenue to eliminate this year’s deficit, since this year’s taxes rise while this year’s spending doesn’t. Next year and each year in the future, repeat this policy, but with ever larger tax hikes. This will permit the government to run massive surpluses over time, while doing nothing real. Moreover, since money given is money returned, the government can save postage by simply recording the new policy in its books.

If the debt is hopeless as a measure of sustainability and generational equity, what measures make sense? One answer is generational accounting and infinite horizon (ie non-truncated) fiscal-gap accounting (see Auerbach et al 1991; Gokhale and Smetters 2003; Gokhale and Raffelhüschen 1999). Both provide label-free measures of fiscal sustainability and generational policy and present a picture of the fiscal positions of countries that is wholly different from that based on official debt.

For example, US government liabilities (official debt plus the present value of projected future non-interest spending) exceed government assets (the present value of projected future taxes) by $211 trillion, roughly 14 times GDP. This fiscal gap is formed using Congressional Budget Projections and appears, when scaled by GDP, to exceed those of all other developed countries (Kotlikoff and Burns 2012).

Although fiscal-gap and generational accounting teach us important lessons, they are constructs derived from a world of certainty, not a world in constant, unpredictable flux. Measuring fiscal gaps and generational accounts in our uncertain world requires properly discounting for risk. But the difficulty of doing so has led to the standard, but unsatisfactory, practice of discounting with a single fixed rate.


Alternative approach to evaluating unsustainable policies

In Evans et al (2012), we take an alternative approach to evaluating unsustainable policies, namely simulating them. Specifically, we specify a stochastic general equilibrium model and determine via simulation how long it takes for the economy to reach “game over” – the point where current policy can no longer be maintained.

The policy is simple. The government takes (using whatever language it wants) a fixed amount each period from the young and hands it to the old, independent of the state of the economy, given by the size of the capital stock and the level of multifactor productivity. When the hit on the young exceeds their earnings, the game is over, with the government either extracting all the income of the young and terminating the economy or switching to a new policy regime, which leaves the young with something to eat.

Our simulations, based on an “overlapping generations” model calibrated to the US economy, produce an average duration to game over of roughly one century, with a 35% chance of reaching the fiscal limit in roughly 30 years.

The prospect of man-made economic collapse produces realistic equity premiums. Our simulations also show that both the fiscal gap (measured with constant as well as risk-adjusted discount rates) as well as the equity premium rise as the economy gets closer to hitting its fiscal limit, suggesting that the fiscal gap and the equity premium, even with fixed-rate discounting, may be good indicators of unsustainable policy.

So far we have studied “game over” using a simple two-period model. Our goal is to simulate more realistic models using the sparse grid technique of Kreuger and Kubler (2006) and the Generalised Stochastic Simulation Algorithm developed by Judd et al (2012). Yet, even at this stage, it is clear that maintaining unsustainable generational policies of the kind being conducted in the US and other developed countries is playing with fire.

While our current and intended future simulations will teach us about the timing of America’s end game, there is strong evidence that Uncle Sam’s Ponzi scheme has already done tremendous economic damage to the country.

In the lifecycle model, the young, because they have longer remaining lifespans than the old, have much lower propensities to consume out of their remaining lifetime resources. This prediction is strongly confirmed for the US by Gokhale et al (1996).

Hence, in taking from young savers and giving to old spenders, which Uncle Sam has spent six decades doing on a massive scale, the lifecycle model predicts a major decline in US net national saving associated with a major rise in the absolute and relative consumption of the elderly. This is precisely what the data show.

In 1965, the US net national saving was 15.6% of net national income. Last year, it was just 0.9%. And, according to Gokhale et al (1996) and Lee and Mason (2012), the secular demise in US saving has coincided with a spectacular rise in the consumption of older Americans relative to that of younger Americans.

As Feldstein and Horioka (1980) document, US net domestic saving tracks US net national saving. Hence, postwar intergenerational redistribution has not only lowered net national saving; it has also reduced net domestic investment, from 14.0% of national income in 1965 to just 3.6% in 2011. This decline in the rate of net domestic investment is, no doubt, playing a major role in the slow growth in US wages. Indeed, the level of private-sector average real earnings per hour, exclusive of fringe benefits, is lower today than it was 40 years ago.



We call this America’s “fiscal child abuse”. If it continues, it will no doubt shortly drive the national saving rate, which was negative 1.2% in 2009, into permanent negative territory and further reduce net domestic investment and prospects for real wage growth. This, plus the massive lifetime tax bills being dumped on our children, will transform the American dream into something it has never been – just a dream.

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catacl1sm's picture

Shattered or Shat On?

Ahmeexnal's picture

James Tiberius Shatner?

Manthong's picture

..."it will no doubt shortly drive the national saving rate.. into permanent negative territory"...

That is all you need to know. 

The un-repayable debt means permanent ZIRP or some similarly repressive variation of it.  A real lose-lose proposition.

US Fed "Money" has no durable value as savings..

When enough people eliminate "saving for the future", there goes what used to be the surplus to fund  private investment and innovation.

The children have no future outside of the state.

AldousHuxley's picture

The ultimate American Dream is to make millions running a ponzi scheme instead of working and buy more then you ever need.


So what's the problem?

Doubleguns's picture

I thought the dream was to get on SSDI (social security disability) until old enough to retire to regular social security.

smb12321's picture

I seriously doubt that interest rates will ever rise above zero for the obvious reason - the massive payments that would be due in interest on the debt.   The ultimate nightmare has arrived.  To counter inflation the FED would normally raise rates but to do so would tack on hundreds of billions to the debt forcing the FED to buy more treasuries (repeat until crazy)

cranky-old-geezer's picture



To counter inflation the FED would normally raise rates but to do so would tack on hundreds of billions to the debt forcing the FED to buy more treasuries (repeat until crazy).

Inflation is "countered" by stiff limits on currency creation, irrespective of interest rates.  Bernanke himself said this in 2002.  Gotta keep dollars in limited supply to maintain their value.

ZIRP really isn't the problem. Creating more currency to fund open ended growth of government debt, with no limits whatever, is the real problem.

It's absurd that the nation with the world reserve currency is printing currency like crazy and rapidly debasing it, so its government can continue wild out of control spending and banks can pass their irresponsible gambling losses on to the central bank, making the central bank "bad bank of last resort", taking on toxic worthless securities from its member banks.

This is not how the nation with the world reserve currency should be operating, and other nations are getting tired of watching the world reserve currency  lose value because its government is out of control, showing no fiscal restraint at all.

The ultimate nightmare has arrived.

Yes, it has.  And it's not gonna be government default.  Fed can keep printing and keep funding more government debt out into the future.  Fed could be holding $50 trillion of treasuries and keep right on printing and buying more.   Fed could be holding $100 trillion of treasuries and keep right on printing and buying more.  

It's gonna be currency collapse.  US dollar losing world reserve currency status as other nations move away from the rapidly debasing dollar to more stable means of international trade payments, maybe another currency pegged to gold, backed by gold, even redeemable in gold, or gold itself, or gold and silver, something along that line.

Of course when the dollar collapses most Americans will instantly lose all their wealth, because their wealth is in dollars and dollar-based assets. When the dollar collapses, the value of those assets collapses along with it.


Gully Foyle's picture

"This, plus the massive lifetime tax bills being dumped on our children, will transform the American dream into something it has never been – just a dream."

Fuck the children and their dreams!

Every generation has it's issues to work through. Let them work through theirs.

When children learn to emulate people such as Jerzy Kosinski, then maybe I will care.

Then again, if they develop the courage and intelligence to be another Kosinski, it wouldn't matter if I cared or not.


Kosi?ski, who was Jewish, was born Józef Lewinkopf in ?ód?, Poland. As a child during World War II, he lived in central Poland under a false identity, Jerzy Kosi?ski, which his father gave to him. A Roman Catholic priest issued him a forged baptismal certificate. The Kosi?ski family survived the Holocaust thanks to local villagers who offered assistance to Jewish Poles, often at great personal risk (the penalty for assisting Jews in Nazi-occupied Poland was death). Kosi?ski's father received help not only from Polish town leaders and churchmen, but also from individuals such as Marianna Pasiowa, a member of the Polish underground network helping Jews evade capture. The family lived openly in D?browa Rzeczycka near Stalowa Wola, and attended church in nearby Wola Rzeczycka, obtaining support from villagers in K?pa Rzeczycka. They were sheltered temporarily by a Catholic family in Rzeczyca Okr?g?a. The young Jerzy even served as an altar boy in a local church.[2]

After World War II, Kosi?ski remained with his parents in Poland, moved to Jelenia Góra, and by the age of 22 earned two graduate degrees in history and sociology at the University of ?ód?.[3] He worked as an associate professor at the Polish Academy of Sciences. Kosinski also studied in the Soviet Union, and served as a sharpshooter in the Polish Army.[3]

To emigrate to the United States in 1957, he created a fake foundation which supposedly sponsored him.[4] He later claimed that he forged the letters from eminent Polish communist authorities guaranteeing his loyal return, which were needed for anyone leaving the communist country at that time.[4]

After taking odd jobs to get by, such as driving a truck,[4] Kosi?ski graduated from Columbia University. In 1965, he became an American citizen. He received grants from Guggenheim Fellowship in 1967, Ford Foundation in 1968, and in 1970 he received the American Academy of Arts and Letters award for literature[5]. The grants allowed him to write a political non-fiction book that opened new doors of opportunity.[4] In the United States he became a lecturer at Yale, Princeton, Davenport University, and Wesleyan.

In 1962, Kosi?ski married American steel heiress Mary Hayward Weir. They were divorced in 1966, and after Weir died in 1968 from brain cancer, Kosi?ski was left nothing in her will. He later fictionalized this marriage in his novel Blind Date, speaking of Weir under pseudonym Mary–Jane Kirkland.[4] Kosi?ski went on to marry Katherina "Kiki" von Fraunhofer, a marketing consultant and descendant of Bavarian aristocracy.[4]

Chappy's picture

You want our children to get ahead by commiting fraud then marry rich?  Great solution.

Ahmeexnal's picture

And you want children to be obedient slaves who never break rules (which the elite break all the time), then marry their brothers/sisters/cousins (inbreeding)?

AldousHuxley's picture

what do you think $100,000 per child college bill is?


Tax before your kid even starts working.

Gully Foyle's picture


Except Kosinski earned a couple of degrees and was a successful author.

He did write Being There, for the literary challenged.

And he never received welfare.

And he was supposed to be at Tates house the night of the massacre.

So maybe he deserved to marry rich because he earned.

Vlad Tepid's picture

Is he your grandpa or something?  

AnAnonymous's picture

US citizen solution.

Fraud being a delicate issue in US citizenism, marrying rich could be enough.

But hey, too many US citizens, not enough Indians. Even if they are rich.

Wont be solid marriages for everyone.

jonan's picture

i am a part of this group you refer to as children, if you are a boomer, fuck your face for promising my future earnings in exchange for your socialist security...ass

Manthong's picture

Johnson, Nixon and Carter along with an all-Democrat congress screwed the pooch and the country with Social Security. They were the parents and grandparents of the boomers. Those were the ones to get out of the deal with the lowest cost and most benefits. Changes to the system jacked the rates and "tax-max" way up and made SS a socialist money grab the way Obamacare is now.

You ought to be pissing on some graves for that one.

GubbermintWorker's picture

 We were lied to also. So go ahead and place your misguided anger in our direction and see where it will get you.

jonan's picture

just to clarify, but my reply was in response to gully foyle's statement, "Fuck the children and their dreams!" and was directing the, "fuck your face" towards that individual...

James's picture

@ jonan -

I'm evidently old enough (56) to be your father so yes I'm a boomer.

Your anger, while justified, is misdirected.

It should be directed to those that betrayed ALL of US,

That would be the politicians.

I never woke up thinking how can I screw over my own sons and daughters.

Same goes for the employees I had over the years.

Actually I'm proud of you and (some) your peers who were forced to wakeup to the reality much sooner than I. (I was 42)

Being self employed I bitched about political policy for 35 years and here we are.

What's going down affects all of us.

Every generation blames the one before.


cfosnock's picture

You will care when they go on a tax strike or just default on the debt, because they realize that "every generation has it's issues to work through," and old retired folks dying on the street is not one of them.

smb12321's picture

Sorry but something is desperately wrong when a huge percentage of a nation's resources devolves to the elderly who have had a lifetime to save money.  This is a slap in the face of young people.  Why the hell should they save, plan and work if, in the end, they get the lion's share of all social spending? 

We don't even pretend to dream the old dreams - wealth, a big house, huge car, expensive vacations, etc.  Now it's simply keeping ahead of the creditors and grabbing all the government benefits possible.  The ending is like the poet said - with a whimper and not a bang.

Roandavid's picture

Gully, you need to just go out and get yourself laid.


You'll feel a whole lot better about stuff.

chubbar's picture

OT, but looks like the EU wants to become a dictatorship!


SENIOR Eurocrats are secretly plotting to create a super-powerful EU president to realise their dream of abolishing ­Britain, we can reveal.


A covert group of EU foreign ministers has drawn up plans for merging the jobs currently done by Herman Van Rompuy, president of the European Council, and Jose Manuel Barroso, president of the European Commission.

The new bureaucrat, who would not be directly elected by voters, is set to get sweeping control over the entire EU and force member countries into ever-greater political and economic union. ".....

GeneMarchbanks's picture

He busted in
Blessed be the lord
Who believe any mess then read up on the message board --MF Doom

DosZap's picture

The new bureaucrat, who would not be directly elected by voters, is set to get sweeping control over the entire EU and force member countries into ever-greater political and economic union. ".....

Sounds just like the ANTICHRIST............................

OT, but looks like the EU wants to become a dictatorship!( sounds like the ELITE do, not the people).

And WE are headed anywhere differently?.Given four more of what we have seen thus far, and we're TOAST,no way back.

Buck Johnson's picture

Our dream will be third world nightmare, where corruption will be rampant and the rich liviing in enclosed compounds. 

Badabing's picture

some where over the rainbow......

Gully Foyle's picture

"some where over the rainbow......"

Julia, is that you?

GubbermintWorker's picture

I gots my silver slippers :-)

chunga's picture

Where is Issa?

How's he coming with those contempt charges on Holder?

PORTUGALIA's picture

16 TRILLION ....17 TRILLION ....18...19...20... BYE BYE world reserve currency.

EclecticParrot's picture

"Betrayed !  Betrayed !  A false alarm on the night bell once answered, it cannot be made good -- not ever."

    - F. Kafka

imapopulistnow's picture

Who plans to break the bad news to Julia?

Gully Foyle's picture


Can you pull her away from the drum circle?

NEOSERF's picture

Blue pills for all...problem solved...

Paul Atreides's picture

or FEMA re-education camps...

Check page 146 of this US army Internment Resettlement operations document.

7-16. Individual identification photographs are taken of all prisoners. The prisoner’s last name, first name, and middle initial are placed on the first line of a name board, and the prisoner’s social security number is placed on the second line. A prisoner registration number may be added on the third line. Two front and two profile pictures are taken of the prisoner. Fingerprints are obtained according to AR 190-47.




pods's picture

I can almost smell the freedom!

How many fingers Winston?

Paul Atreides's picture

Page 56 information on the PSYOPS program:

3-55. The PSYOP officer in charge of supporting I/R operations serves as the special staff officer responsible for PSYOP. The PSYOP officer advises the military police commander on the psychological impact of military police or MI actions to prevent misunderstandings and disturbances by detainees and DCs. The supporting I/R PSYOP team has two missions that reduce the need to divert military police assets to maintain security in the I/R facility. (See appendix J.) The team—

-Assists the military police force in controlling detainees and DCs.
-Introduces detainees or DCs to U.S. and multinational policy.

3-56. The PSYOP team also supports the military police custodial mission in the I/R facility. The team—

-Develops PSYOP products that are designed to pacify and acclimate detainees or DCs to accept U.S. I/R facility authority and regulations.
-Gains the cooperation of detainees or DCs to reduce the number of guards needed.
-Identifies malcontents, trained agitators, and political leaders within the facility who may try to organize resistance or create disturbances.
-Develops and executes indoctrination programs to reduce or remove antagonistic attitudes.
-Identifies political activists.
-Provides loudspeaker support (such as administrative announcements and facility instructions when necessary).
-Helps the military police commander control detainee and DC populations during emergencies.
-Plans and executes a PSYOP program that produces an understanding and appreciation of U.S. policies and actions.



dizzyfingers's picture

7-16. Individual identification photographs are taken of all prisoners. The prisoner’s last name, first name, and middle initial are placed on the first line of a name board,
and the prisoner’s social security number is placed on the second line. A prisoner registration number may be added on the third line. Two front and two profile pictures are taken of the prisoner. Fingerprints are obtained according to AR 190-47. 

See... http://www.freedomfiles.org/war/r210_35.pdf

Army Regulation 210–35 



Civilian Inmate Labor Program

Chapter 3  Establishing Civilian Inmate Prison Camps on Army Installations,

page 8 Policy statement • 3–1,

page 8  Negotiating with correctional systems representatives to establish prison camps • 3–2,

page 8  Governing criteria civilian inmate prison camps • 3–3,

page 8  Governing provisions for operating civilian inmate prison camps on Army installations • 3–4,

page 9  Procedures for establishing a civilian inmate prison camp on Army installations • 3–5,

page 9  Interservice, interagency, or interdepartmental support agreements • 3–6,

page 10   etc., etc., etc.

It's real, it's coming, life as FREE PEOPLE OF USA is about to be over. Odds on a November election?


carbonmutant's picture

At some point we're going to have to put a stop to this...

Stackers's picture

Lady at the gun show talking in line behind me made the statement " they better not touch my social security" ..... I could not help myself and turned around saying "Lady, they touched your social security 30 years ago when you paid it in. they spent it. It's gone. Embezzled and spent"

Kali's picture

It is amazing how many people really believe that "money" is still there.  Same with retirement or pension funds.  THEY REALLY BELIEVE IT IS THERE!  Unless you cash out now, you get nothing! Of course, good luck "cashing out" your SS contributions.   I see a lot of old people starving to death in the near future. 

NorthPole's picture

Oh comon, you guys in US are such drama queens. The retirees are still going to get something, just enough for sliced bread and jelly. If they fancy some more diversified diet, they can plant carrots in little gardens right next to the barracks.

I am serious, I've seen it first hand just 20 years ago. There were hardly any deaths.

Undermind_'s picture


The policy is simple. The government takes (using whatever language it wants) a fixed amount each period from the young and hands it to the old, independent of the state of the economy, given by the size of the capital stock and the level of multifactor productivity.

Sounds an awful lot like social security...

rwe2late's picture


 ... doesn't sound like public schools and colleges, WIC, AFDC, ... but the aim is misdirection for the simple isn't it?

The whole premise of the "generational" analysis is misdirected.

Old to young, young to old, white to black, men to women, public workers to private workers, agrarian to city, Americans to Chinese, generalize and blame most any handy group

but let's not specifically mention the massive upward transfer of wealth and concomitant power which has occurred. Let's not mention an elite few and the global corporations they head.

Let's just focus on the "debt" and blame ALL the "old people" for the existence of the debt instead of the very elite few who have been bilking everybody else.

Let's not blame ANY of the "young people" who overwhelmingly make up the NSA, TSA, 'Homeland' police, and global military who serve and protect those elite few.

Let's calculate our economic condition making sure to ignore the annual trillion dollar global Pentagon, the trillion$ handed out to banksters, and the protections given to continue the "private health care & insurance" racket.

Jerry Maguire's picture

Well, I think the plan right now is to use Canada as a test case to see if gradually RAISING interest rates might actually provide some stimulus:


This is a deeply flawed approach, of course, simply adding to the already unpayable and unsustainable.

Then again, if the young who bear the brunt of all this get too uppity we'll just lock them up:



It would be better if we started thinking about things like this:



But don't hold your breath.

SheepDog-One's picture

'The thing with the 'American Dream' is you've got to be asleep to believe it' George Carlin.