As the world economic system strives to right itself from what has been called the Credit Crunch or the Great Recession, or any other euphemistic tag designed to understate the significance of what we face, one of the very interesting recent trends has been the increasing willingness for large establishment organisations to begin talking honestly about the ‘really big numbers’.
Two examples of particular note studied the overall US situation through the eyes of the IMF and the Congressional Budget Office (CBO).
As I pointed out back in January in my look at the United States, rather than messing around trying to understand the danger of a Federal debt level heading rapidly towards 100% of GDP at US$13 trillion, sooner or later we would need to face up to the really big numbers due to the under-funding in superannuation and medicare that threatens to seriously derail the expectations of retiring ‘baby-boomers’ everywhere.
I stated the following: “if you take the present estimated shortfall in unfunded government promises in superannuation and medicare and add that to the present US Government debt, this together comes to around US$114.7 trillion. Next you take the total outstanding personal debt, then the 50 States, together with net corporate; this all amounts to about a further US$40 trillion; now add all this together (US$154.7 trillion) and divide by the population of 300 million and every person in the USA has somehow to shoulder their burden of a debt present and coming of US$515,666.”
Well, as fantastic as it may seem, I was wrong – a new figure calculated from CBO estimates by Professor Laurence Kotlikoff suggests the number should be closer to US$202 trillion, or 15 times the present GDP.
This represents what is called the ‘fiscal gap’, and is the present value of the difference between projected spending (including servicing official debt) and projected revenue in all future years. The IMF adds that the “closing of the fiscal gap requires a permanent annual fiscal adjustment equal to about 14% of US GDP”.
Now it just so happens that the present federal revenue is about 15% of GDP. So the IMF and CBO are together effectively saying that to close this fiscal gap requires a doubling of all federal taxation. This is both a political and an economic impossibility.
(And this is before we even look at the implications of an OTC derivatives market that is even now at least 15 times the size of the entire global economy, even though we don’t apparently talk about this anymore).
The question arises, how could the US fiscal gap get this enormous? The answer is very simple – the entire Western world has promised itself in retirement far more than the system can possibly provide and no-one has been brave enough to face this. It’s a political no-no everywhere. In America they have 78 million baby-boomers who when fully retired expect to collect entitlements in social security and medicare that on average exceed per-capita GDP.
As Professor Kotlikoff puts it: “This is what happens when you run a ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old, while promising the young their eventual turn at passing the generational buck.”
Or as Henry Lamb said: “Democracy collapses when the majority discovers it can vote for itself treasure from the public coffers. Democracy is the last plateau of social order before anarchy!”
And the sad truth is that our politicians have been fully complicit in this fraud on future generations for the entire period of its genesis. In fact they have encouraged it, competing with each other in the clear knowledge that the greater their promises, the more likely they are to govern.
Unsurprisingly, the waspish Mark Twain had perhaps the best line on this subject too: “Every election is a sort of advance auction sale of stolen goods.”
I’ve concentrated on the US so far for three reasons – they’re the biggest, they have the most weapons and their numbers are being studied with the greatest vigor – the rest of us are just hoping it’s all not true, and particularly, that it isn’t going to impact us personally.
Well there’s shocking news coming for anyone who thinks what they’ve been promised is what they’ll be getting. There isn’t a single chance that the deep-seated reality of demographics will not ultimately overwhelm the federal budgets of every Western country, and that the present economic crisis will one day be seen as the beginnings of such a process.
It is only now, almost three years from the first signs of trouble, that the discussions on the implications of demographics are bubbling to the surface, although it has been obvious for maybe 30 years that the numbers were simply not going to work.
The OECD has recently chimed in on the topic and its calculations bring no greater comfort – being the OECD the figures will almost certainly be conservative but for example suggest unfunded liabilities of 330% of GDP for France, 190% for Germany, 150% for Japan and 130% for Italy.
These are in addition to the existing sovereign, banking and personal exposures to debt that I have detailed in earlier posts, and which alone appear sufficiently large to permanently alter the present concept of economic (and maybe even social) normality.
When one considers that history suggests a country’s population never recovers once the birth rate drops to lower that 19 births per 1,000 and that most Western countries are in the range of eight to 14, then some serious re-thinking of the efficacy of the present capitalist model is long overdue. The evidence is that it appears to work only by the application of larger and larger dollops of debt for every participating sector, and this debt has served to mask the failure of the global system as presently constructed.
So we’re caught in a cleft stick – the planet is struggling to support more of us, but our economic system can’t function with any less of us. Japan is the clear example of a country unwilling to consider immigration but unable to maintain economic momentum based on its natural population growth alone.
It is because of this understanding that I have been banging on about these unpalatable thoughts for well over five years now, and I can’t pretend it’s been an awful lot of fun for me either. But those of us who were lucky enough to be born following World War II have a responsibility to cut the BS we’ve been feeding each other and come very sharply to our senses. We have collectively constructed financial, economic and political systems on a global basis that are unsustainable, regardless of the way the numbers are cast.
In the past the discovery of such a devastating truth has generally stimulated widespread protectionist trade policies, followed inevitably by xenophobic antagonism that has always finally led to outright war. Surely this time we will have the wits to conjure up some appropriate alternative to such a horrific result. If not then history will have taught us absolutely nothing, and not only will we actively impoverish our young, we’ll then send them off to slaughter as well.
Wayne Lochore
Some good points here. Long on the problem and short on answers.
Our mantra has always been more is better. We need a better economic philosophy which better defines “progress.”
The problem can only be solved through massive debt forgiveness or we print more money and devalue everyone’s assets once again.
There will be a period (a whole generation or two?) of concerted social action for those who have no hope of providing for their retirement, healthcare and education.
Prices will be adjusted across the board. Doctors might have to get used to being paid in chickens. Monopolies will have to be broken.
Expectations of what is a “comfortable living” are going to need recalibration. Either way it is going to be forced on us sooner or later.
All true but where every citizen of these demoncracies is directly responsible in knowingly allowing govts to continue with such policies..and that is also before you get to the myriad of social policies that are costly huge sums of cash every year at the cost of investment in a country’s development and education i.e. We have all been allowing, and knowingly, Govts to literally asset strip our economies to pay for these programs which for the most part offer no return to the national economy whatever; and where in this NZ has been particularly culpable. You should perhaps also mention Australia which seems to have successfully established a saving for retirement scheme and where each individual has their own account and whereby the “scheme” is effectively self funded. By data of now over 18 months ago there were accumulated savings, which can only be accessed at retirement, equivalent to AUD55,000 for every man woman and child in the country. So there are alternatives. But more significantly is that each country, and NZ in particular, given the stupidity of its citizenry in thinking they could sustain a standard of living based on money borrowed from the rest of the world without having to account for that, or manage it competently, to now having successfully escalated the country into a comparable frame as Greece on both its fiscal deficit and its indebtedness at 90% of GDP, and where the country continues to pay blns every year in social policy programs on borrowed money….the fundamental reality is that borrowed money can only be used for investment purposes where the project rate of return is higher than the cost of the borrowed funds….NZ in chosing to (knowingly) ignore that fundamental fact and to continue to allow the country’s successive govts to borrow huge sums to pay for social programs which for the most part to not stand up to serious rational scrutiny, and additionally to asset strip the country to pay for these is quite frankly criminal in the extreme..but which is an act to which every NZealander who has not had the courage to stand up and question those policies and practices is accountable…and where it still seems to be showing a reluctance to bite the bullet…as the best defense in the wider context to the developments outlined in your article is to at least ensure that you are debt free and have a self sustaining economy. Keep up the good work but where the absence and difficulty in getting the information essential to healthy debates about such issues is simply contributing to the pretense that we don’t know and therefore cannot do anything…and are also not responsible for that. If anything has been learned from the current crisis surely it is that transparency in all matters financial including those of governments is the absolute prerequisite starting point. Sadly it appears that NZ has not even learned that basic lesson.