In the 1970's, America made the transition from net exporter to net importer. During this decade, our country was no longer energy self-sufficient and out of necessity, began to increasingly rely on oil production from the Middle East. Social programs and entitlement spending expanded even as military expenditures increased in order to combat communism in the battle for global supremacy. Deficits began to threaten the economy as the method of payment was tied to gold. In 1971 President Nixon ended the gold standard and the dollar was made the world's reserve currency. This structural change made it possible for the United States to finance the current entitlement and military spending. The deficits showed up as surplus dollars in foreign accounts who then purchased US Treasuries (American debt) enabling the cycle to continue. Rinse. Repeat. This system has worked for some 39 years now, but it will end fairly soon (See Black and gold: oil and the US dollar).
Running deficits of $100-$300 billion led to concern of long-term sustainability, but trouble appeared to be several decades into the future. That time line changed dramatically with the housing/derivative collapse in 2008. Now, instead of $300 billion dollar deficits, the United States is running deficits around one and a half trillion dollars annually. The template used for the past four decades is broken. Even if foreigners continue to buy US debt, they simply don't have enough dollars to buy the enormous supply of treasuries. At this point, the government is in a quandary. Either spending must be drastically reduced or the deficit must be financed internally. If the latter is chosen, that means Americans must purchase US treasuries or else the debt would have to be monetized.
Assuming monetization is not implemented, where will the money come from? The money would come from retirement accounts. The government would require a portion of retirement funds to be comprised of US Treasury holdings. The government would take the proceeds of the treasury purchases to pay for the deficits in exchange for the promise of delivering an annuity to the retiree at some point in the future (perhaps age 70?). Just as with social security, once the money is spent, it no longer exists other than an entry on an account promising to pay at a later time.
Such a policy will not be popular, but the likely alternatives given to the populace will be collapse or the ending of all current entitlement programs. Sparks will fly, but I think the government will win the battle. Who's going to pay for it? We will.
