Something will have to give eventually. The US Government could get away with spending more then it took in because its "immortal". Us simple mortals have to worry about ceasing to exist one day. If we rack up too much debt in our lifetimes, then our estates become worthless when we die. The next generation gets nothing. Since the government cannot "die", the debt can literally be pushed far into the future, where eventually the magic of inflation renders it worthless to the holders of it. Its one of the dark arts of inflationary monetary policy.
The problem is when the debt increases too quickly. When your future horizon moves from 50 years to 2 years, you got a serious problem on your hands. The debt doesn't inflate away into the ether fast enough. The cost of servicing it increases greater then the income coming in. The only way to "inflate it away" quicker is to print more money to pay existing liabilities. Which causes inflation to spike higher.
This has two huge problems. Problem 1 is with how the US funds its liabilities. Especially the BIG ones like Social Security, Medicare/Medicaid, Section 8 housing, Food Stamps/WIC, and Veterans Benefits. These are tied by statute to the rate of inflation. Which means even if the government starts to inflate the currency to mitigate the debt, the amount of their liabilities increase with the rate of inflation. They have to pay more! This is why they've become so creative at defining what the rate of inflation is, leaving out things like food and oil. Its so they don't have to meet the statutory requirements of their benefit programs.
Problem 2 though is even worse. As the currency becomes less valuable, profit margins at the corporate level shrink and income levels at the citizen level shrink too. While people are making more money then they were 20 years ago, its not going anywhere. A Candybar that was 49 cents in 2000 is worth 1.99 today. This has a choking effect on the economy, reducing everything from sales taxes to earned income taxes. Corporations have to write off more and more as business expenses, reducing what they have to pay in taxes as well.
So while liabilities are increasing in value, the governments net tax intake is decreasing.
The only real way to break the cycle is to crash the economy deliberately, like what Paul Volker did. The issue though, as I keep harping on, was that the time to do this was in 2008. Now its too late. 2008 may have resulted in a lost decade and shitty time for all economically, but the recovery would have happened on the back end. Now? If the Fed tried to throttle the engine its more likely to explode complete with little hope of immediate recovery. Because DEFLATION is the only thing that can restore the ship. Deflation would essentially reset the clock backwards, getting the economy back down to earth after it had been taken to dizzying heights.
Which would be an absolute catastrophe for the way the economy is set up. Deflation means no more consumer debt. It means more frugal spending by consumers. The entire international economic order will collapse as it would essentially mean an end to entitlements as the government would be insolvent, the banks would all fail, donkeys will walk up skyscrapers and start flying, the roosters will crow at midnight and the first trumpet will sound.
Needless to say, TPTB are doing everything they can to stave off the apocalypse. And as a last resort they absolutely will end entitlements.
