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A look at our future, when our $promises$ to ourselves come due

25 March 2010

Summary:  A few pictures tell the story, describing our bleak government finances.  The solutions are not complex, requiring only our common sense and cohesion.

Contents

About the deteriorating condition of government finances, the next problem to confront after we recover from the recession.

  1. Debt – the result of past spending
  2. Liabilities – the result of past promises to spend in the future
  3. What does the simple solution look like?

We need to understand the problem in all dimensions before crafting solutions (quite a change from our recent practice).  It’s taken years to dig ourselves into this hole.  It’s worth taking the time to research alternatives.  This is one in a series of posts as a small part of that great process.  Let’s do it right; any solution probably will take decades to implement.  

(1)  Debt – the result of past spending

Our debts are just the prelude to the coming events, the result of past spending.  The future looks more interesting.  And not just for America, but for most (not all) developed nations.  As seen in this graph from Société Générale:

The rest of this post will focus on government spending, debts, and liabilities.

(2)  Liabilities – the result of past promises to spend in the future

We have made big promises to ourselves, via our governments.  These don’t increase the deficit (present spending) or the deficit (from past spending); they (plus the debt) are liabilities.  Big liabilities.  And they begin to come due during the next few years.  As shown by this graph, from report by Albert Edwards, Société Générale, 12 February 2010:

(3)  What does the simple solution look like?

For an analysis of possible solutions we can turn to “The future of public debt: prospects and implications“, Stephen G. Cecchetti, M. S. Mohanty and Fabrizio Zampolli, Bank for International Settlements, February 2010 — Abstract:

Since the start of the financial crisis, industrial country public debt levels have increased dramatically. And they are set to continue rising for the foreseeable future. A number of countries face the prospect of large and rising future costs related to the ageing of their populations. In this paper, we examine what current fiscal policy and expected future age-related spending imply for the path of debt/GDP ratios over the next several decades. Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability.

A graph based on Table 3, from a report by Dylan Grice, Société Générale, 23 March 2010:

This shows the government surplus (as % gdp, before interest payments) required after 2011 to return each government’s consolidated debt/gdp ratio back to its level as of 2007.  These would be difficult under good circumstances.   For example, for the US this means moving the primary balance from estimated 7.1% deficit in 2011 to a surplus of 4.3% for the next 10 years.  Either big cuts in spending or large tax increases.

But the coming few decades will differ from those we’ve just finished.  The liabilities shown above will come due, mostly payments for pension, social security, and medical care.  This requires large increases in spending, unless we default on those promises (defaults come in many forms).  The resulting stress will be severe — politically, socially, and economically.  For those nations on the left side of this graph the changes will be of near-revolutionary scale.

About the authors

  • Cecchetti is Economic Adviser at the Bank for International Settlements (BIS) and Head of its Monetary and Economic Department, Research Associate of the National Bureau of Economic Research, and Research Fellow at the Centre for Economic Policy Research,
  • Mohanty is Head of the Macroeconomic Analysis Unit at the BIS,
  • Zampolli is Senior Economist at the BIS.

For more information on the FM website

To read other articles about these things, see the FM reference page on the right side menu bar.  Including About the FM website page. Of esp relevance to this topic:

About the debt supercycle:

  1. We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007  — A long list of the warnings we have ignored, from individual experts and major financial institutions.
  2. Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  3. The most important story in this week’s newspapers, 22 May 2008 — How solvent is the US government?
  4. A picture of the post-WWII debt supercycle, 26 September 2008
  5. Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
  6. Another crack in the foundation: the maturity of the government’s debt, 30 October 2009
  7. Government economic stimulus is financial heroin, 26 December 2009
  8. A look at our government’s debt – rising because we like to spend, 29 December 2009
  9. Would a default by the US government help America?, 21 February 2010
  10. Can Obama turn America into something like Zimbabwe?, 22 February 2010
  11. A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
  12. Worry not about America becoming like Zimbabwe. Worry about becoming like Argentina., 4 March 2010
  13. We might default on our governments’ debt in the future. Do you know how often we’ve done so in the past?, 5 March 2010

Afterword

Send emails to fabmaximus at hotmail dot com (note the spam-protected spelling).

Also — you can now subscribe, receiving posts by email — see the box on the upper right.

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