One night last month I just could not sleep. This was not the normal tinnitus induced slipping in and out of slumber. This was a wide awake, staring into the dark affair. In any case, I have become used to tinnitus. Some wise old fellow sufferer told me once that we were lucky: God was talking to us. Okay. But does He have to talk so loud and so fast!
I was tossing and turning because Time (March 1 edition) had just published an article on saving Greece from bankruptcy and exposing a massive public debt problem in virtually the whole of the developed world.
Public debt relates only to government and all of its tiers such as local, provincial and national. It excludes private debt (individuals and companies) and trade debt which is owed by importers to their foreign suppliers.
Of course, countries can’t go bankrupt. Wouldn’t that be fun? Let’s get the local sheriff to attach the Parthenon! Mind you, what will we do with a pile of ancient rocks? Not as valuable as the stuff we are digging up at Sterkfontein revealing 2-million year old bones, and proving once and for all that we all came from sub-Saharan Africa. We can stop trying to interpret history to prove which race is indigenous and which not. Some of us just travelled a bit and lost our tans before returning home.
But governments can go bankrupt. By spending more than they are earning in taxes and letting the shortfalls run up until they can no longer borrow to cover it. Then they “default” and rating agencies like Standard and Poor (I’ve often wondered where the “poor” are in S&P”) rat on them and no-one, not even local investors with or without global ties, will touch their I.O.U’s (For the economic students: that’s Treasury Bills, Government Stock, and gilts). You could print your own money to address the debt and end up like Zimbabwe with rampant super inflation. Do you now understand Bob?
Avoiding inflation means higher interest rates, increasing taxes, and cutting spending which reduces economic activity and leads to job losses. This is tough stuff. Already the Greeks are hurling ancient stones at the “enemy”.
Why the scare?
There used to be a kind of rule to avoid investor frowns. A developed economy’s public debt should not exceed 60% of the value of the country’s annual domestic production of goods and services. (For the economic students: that’s Gross Domestic product or GDP.) If you are a developing economy, then it’s 40%. It’s a nonsense rule. Like an individual, the older you are, the more you should avoid debt, but the younger you are, the more you need to borrow to buy things like a home. Older and developed economies need less money to invest in long term things such as infra-structure. Younger economies need that type of spending to grow and become competitive. A rich country that borrows may be borrowing within its means, but it is certainly borrowing way beyond its needs. And so the gap between rich and poor just gets wider.
Having the 60% prudence rule in mind, it’s indeed scary to see that it’s not only Greece that’s flirting with 100% but most of developed world, including the United States, Britain, and virtually all of the rest of Europe. Deutsche Bank sees them reaching if not topping that level within a year. (I’m not including messy links to sources here. Google “Public debt” and its all there.)
Also check out the web version of the United States public debt clock in Manhattan. (www.usdebtclock.org). It’s spinning at a rate where millions of dollars pass in seconds and at $12 trillion it’s at about 90% of GDP. That’s a lot of loot! Imagine if it was the jackpot at the Casino and you hit it! I could replace my run down Peugeot 406 and with the change buy a few countries…probably a continent like Africa and parts of other continents. In fact I could probably buy a whole year’s production of China. Don’t know where I would put all those GWM’s though.
Even if the 60% and perhaps the 100% warning bells can be ignored, or we change the goal posts to suit us, and certainly there have been times in the past when these limits have been well exceeded (Japan is just under 200% at present), there are a number of reasons why we should be afraid…very afraid.
This could indeed be the next major shock and even bigger than that of 2007/2008.
- There are many more rich countries involved at one time than in the past.
- These nations have maxed out more on credit card type spending (consumption) than on infrastructure or repairs such as that needed after natural disasters or war.
- The debt has been built up largely over time from budget deficits such as America’s more than $1 trillion currently.
- True, they are hoping for some payback from the bailouts or perhaps even higher revenues from bailout investments, but I have yet to see a serious argument that this will make much of a difference.
- Deutsche Bank argues that at 100% economies have no option but to curtail economic growth through higher taxes, less government spending, and higher interest rates. It calculates that surpluses of 1% of GDP on budgets before loans and debt servicing will take an average 20 years to restore balance. If these primary surpluses average about 10% it will take about 5 years to restore balance.
- High debt levels have made economies incredibly vulnerable. Not only has Greece revealed the underlying insecurity, but things like Icelandic ash and possible future reflections of nature’s wrath, could bring the whole thing crashing down.
- And along come the “baby-boomers”. (Hello! Someone call my name?). We old fogies want payback for the years of toil and creating such a wonderfully abundant world for you youngsters. (You listening Gerard my son?!) So we will draw on our pensions, stop adding value to the economy, need more health care and have more and more joining us as you youngsters find better ways of keeping us alive for longer.
So now we have a new phobia to add to xenophobia, homophobia, racism, elitism, sexism and chauvinism. It’s ageism. Ja, Ja! Burn their blerrie kieries and wheelchairs! Mug them in the malls! These useless bags of metabolising tissue are dragging us down!
Why is there no panic? Why no public debate?
In my broadcasting days I constantly fought with bulletin editors and news chiefs to get greater recognition of economic stories. They would blame me for being esoteric and I would chastise them for being stupid and underestimating the intelligence of the listeners and viewers. But this story is different. And it has largely been ignored by even the print media and their specialist pages. Perhaps we should ask RSG’s Cobus Bester of Monitor or Freek Robinson of Praatsaam why they haven’t confronted some dial-a-quote economist to explain what’s up. Forget the rest of the media. They are too obsessed with Malema and fermenting some fictitious race conflict, despite Futurefact finding that things are much better than in 1994.
And it’s also not as if the signs of pending turmoil have been absent. They have been around for a while. I am reminded of the crash of 2007/2008. I finished my book Value through Values in 2007 and outlined many severe imbalances in the global economy, only one of which was wealth creation without any real value being added. This referred to easy loans, speculation, and the explosion of derivative type investments. I launched the book in early 2008 and within a few months…crash! The book was dated and immediately consigned to the “past-sell-by-date” trash heap. Of course I believe the solutions suggested are still relevant and the publisher wants me to update. But I have found a new toy on the web!
The current aloofness to this threat can only be a “King-with-no-clothes” syndrome.
Countries are hiding behind a screen of things like: “Things are improving”, “The recession is over”, “Consumers are upbeat”, “Growth forecasts revised up”, “Stock Markets are recovering” etc. They seem to be relying on the hope that economies will recover quick enough to generate revenue to help reduce debt. It reminds me a bit of the infernal pull start motors, of which I have plenty here and which are constantly threatening to dislocate my arm. You tug at the cord and hope the engine starts. If it does, you hope it won’t stall in a few seconds, and then you hope further that you have enough petrol to keep it going for a while.
But while we have been hiding behind upbeat events and talk, suddenly, like some goddess, Greece breaks ranks and flaunts her assets and ample liabilities. Now all are luring her back with conditional aid. Until of course, Greek citizens rebel at the austerity needed and the real problem of correcting overwhelming debt becomes obvious to all.
Is there an answer? If you are looking for safe haven investments, don’t look at me. I have consistently been wrong, especially in timing. In fact, my former colleagues would tell people: “If you want to know what to do, ask Jerry and then do the opposite!” It shows you the value of consistency. Wish rugby referees would take note!
It could take years for the crash to happen. But it could also happen tomorrow.
Did we honestly think that decades of overindulgence would not come back to bite us? Even after the exposure of the fallacy of Friedman legitimising in the 80’s the second deadliest sin of greed, we continued on an eight year binge. We are simply and irrevocably addicted to consumption and acquisition. Unable to deal with cold turkey withdrawal, we are scrambling for the next drink.
If we stand back just a bit, it becomes obvious that over many years, we as a species have taken out far more than we have put back. We have created severe imbalances in this world, of which the financial system is only one, and perhaps the most manageable.
As individuals there is only one response: reduce expectations dramatically, and increase our willingness to give. For after all, we are always more in control of our contribution than we are of the reward that follows.