Given World War III might’ve started by the time you read this, I’ve got to be careful what I say. Especially with a UK partner visa application in the works.
And so, let’s take a look at the premise of government debt. Not the figures. Everyone knows those. And nobody can agree on them. Instead, consider what they actually mean. And what that implies about the future.
It’s quite clear that government debt all around the world is on an unsustainable trend. Cuts will have to come. Throw in unfunded liabilities, demographic decline and lots of other factors and you get a whoppingly large promise that cannot be kept.
Take for example this inconvenient figure from the Office for National Statistics: central and local government have unfunded pension liabilities of £5.3 trillion, 279% of GDP. That’s just the unfunded part of government pensions.
You can slice and dice the figures any which way. The point is, these promises will not be kept. Where does that leave us? When just about every nation has an enormous lie at the foundation of its fiscal future, what does that mean for our future?
It’s fascinating that this problem could emerge in the first place. How does a nation get to the point where it is impossible to pay for its future promises? And why do people fall for it? What’s the point in voting for promises that can’t be kept?
Politicians lashed bankers with criticism for their short-term thinking after 2008. They never realised it applies to themselves. The election cycle and the political career cycle are short. Actual responsibility is short-lived too.
That leads to some dodgy behaviour. Can you imagine Tony Blair warmongering today after the Iraq episode?
Oh wait, he is. But he probably wouldn’t do it if he was still running in elections. Instead, we have a new politician happily walking into the same blunder that she will never be held accountable for either. And that allows the same mistakes to repeat indefinitely.
Back to money.
It’s disappointing that the British voter is so easily fooled by the promise of money they could never actually receive. Even if politicians are not held accountable for those impossible promises, the voters who voted for them will be. They simply won’t get the money they voted for.
As the American historian of the bathtub H. L. Mencken explained, “Democracy is the theory that the common people know what they want, and deserve to get it good and hard.”
But it’s not that simple. The government’s promises and debts are a transfer of wealth from one group to another.
Unfortunately, the people who voters expect to pay their pensions were never asked about the matter. They were too young to vote when the decisions were made.
Where does that leave the young people of today? They’re expected to somehow pay for their elder’s retirement. And in all sorts of different ways too.
They’ll have to buy your stocks, property and other investments so retirees can cash out. They’ll have to pay taxes to fund healthcare and welfare. And they’ll have to live up to the ordinary fiscal burdens of paying for defence and infrastructure too.
But there’s less of these young people than ever before, relative to how many expect to be on the receiving end of their cash. It makes the fiscal impossibility of actually paying even more implausible.
What’s the outcome of all this? What does the future hold?
The incentive structure of politics isn’t exactly promising for solving the problem. The people on the receiving end of the money will hold a huge portion of political control.
The risk of a backlash from the younger generations is extreme. What’s the premise for saving and investing in a stockmarket that’ll see a huge generational outflow? Why not boycott?
It sounds absurd, but it happened in Japan.
The young won’t hold enough sway in politics to have a deciding influence there. That’s where the retirees will make their mark. Taxes will have to surge to fund all those pensions at least partially.
If the government budget does move to a more sustainable course, cuts will have to be part of that. Don’t forget, unfunded liabilities included, a sustainable course requires a massive fiscal adjustment. What’ll be cut?
The obvious one is defence. In a world where populations aren’t set to expand and natural resources are not the determinant of wealth, defence loses much of its relevance. That’s ironic given the current news cycle.
Perhaps the pensioners of the future will turn to the central bank. Monetisation of pension liabilities certainly has the potential to drive inflation. Not in asset prices, like the last few years. But traditional inflation. The sort that got Britain into trouble in the 1970s.
Perhaps the greatest fear is the most hidden one. Interest expense is incredibly low for governments thanks to low interest rates.
But the European sovereign debt crisis showed how quickly that can change. Especially if your debt boomed during the low interest period.
If the interest bill on national debt starts to squeeze the rest of the budget, that’ll provide its own outrage. But a default would mean a default on all those pensions too, because they hold government bonds.
The path of least resistance is once again inflation. The central bank can finance the government budget and keep rates low.
Ironically enough, Japan has seen steady deflation. The government has lived up to the burden by borrowing huge amounts.
To find out what happens next, watch Japan.
War in Syria?
Who would’ve thought we’d be on the brink of another war without the evidence to justify it? Not that the use of chemical weapons would justify it anyway. But even if that’s the premise, it doesn’t hold up.
Hamish de Bretton-Gordon, formerly of the UK’s Chemical Biological Radiological and Nuclear Regiment, explained the nature of the evidence we do have: “If the US strikes that will be an indication of irrefutable evidence” of the Syrian government’s culpability for the chemical weapons attack.
We don’t know what chemical was used. We don’t know who used it. But if the Americans start a war, we can assume they have a good reason for it, so we should join in.
Is this not the very definition of wrong? Assuming an attack is justified because it was carried out is the worst reasoning ever.
Does it not ignore glaringly obvious historical comparisons?
Yes, I do understand this is all just a political stunt. War benefits the ruling politician. However, at some point the electorate must be able to see through that ruse.
If the Syrian debacle can become the moment from which interventionism is no longer politically profitable, the world would change dramatically.
That is the platform Donald Trump was elected on. If even he fails to uphold it, wars will continue.
Until next time,
Nick Hubble
Capital & Conflict
Related Articles:
- The investment power of politically incorrect
- The prospects of the US dollar
- The implausibility of a crash
Category: Geopolitics