In response to an FT article by Martin Wolf on 31st March 2016, entitled 'The welfare state is a piggy bank for life'
(THE PHOTO FOR THE ARTICLE WAS A MAN PUTTING A COIN INTO A PINK PIGGY BANK)
That's a chubby little fellow in the photo. Pinky or Perky?
Alas, the photo is rather misleading, as are your suggestions Mr. Wolf. It would all make a lot more sense if we had governments who follow the example of the chap in the photo - by putting money INTO the piggy bank. Governments are all about taking money out, until there is no more to be had...then borrow...then print...then...no more chubby little pig and eventually no bacon either.
1. The Congressional Budget Office has just predicted that the US deficit will be $534 billion this year, which amounts to 2.8% of GDP
2. They predict this will rise to 4.9% GDP by 2026. That is a 75% increase in the next ten years - in nominal terms an extra $9 trillion to the national debt
3. It is estimated that 60% of this will be accounted for by social security, Medicaid and interest on the debt
4. The interest element is forecast to be $253 billion in 2016 - 47% of the deficit
5. The interest element is forecast to be $839 billion by 2026 - an increase of over 200% in ten years
In a nutshell, the baby boom is about to transform into the retirement boom, the new retirees will live longer than any previous generation and the young people who are supposed to pay for all this are NOT swelling the ranks of Janet Yellen's phony employment statistics. They are NOT the 55+ age group people taking two part time jobs...they are the twenty somethings drowning under student debt and living in their mum's basement, trying not to make too much noise whilst Dad is trying to have a nap between his morning job and his late afternoon stint.
In short Mr. Wolf. Where is the money coming from? Who plugs the hole in the Titanic's hull whilst you are busy organising deck games and redecorating the ballroom?
We come back to the problem that politicians and economic policy makers have been ducking for years - how do we resolve this?
1. Through growth - yeah right
2. Through aggressive inflation - this is the lie that the Fed is telling by omission, a long term lie to supplement the short term lie of omission: I.E.: 'we are just trying to get past the election in the hope that Hillary will persuade Congress to spend, spend, spend'
3. Through a deflationary collapse - a golden opportunity for Professor Krugman to whine about not doing enough
4. Through a consciously carried out global reset - a new Bretton Woods. A new 'rules of the game' involving for example: a new reserve currency regime, debt restructuring, debt forgiveness and a change to the way that governments raise debt through the bond markets - debt they have absolutely no intention of ever paying back
No economic issue is more important than this - it is the context within which our other problems and opportunities reside. It affects everything we do and everything we look at; but it is not the furniture or the decor, and it cannot be moved around. It is the colour of the light and it needs to be changed.
A fellow reader replied:
Rubbish. The problem is lack of demand. All signs point to this - how otherwise is inflation at rock bottom at ZIRP?
In this situation, the government should create demand, alternatively reduce supply. This is best done by printing money and giving it to people instead of banks (of course this requires a national currency).
If inflation becomes harmfully high - which should be well over 10% yearly, I'd say 15% - money handouts are stopped. Simple as that. Some people though cannot handle simple solutions, and prefer the unemployed to suffer as punishment for society's debts of sin.
And yes, governments do pay back their loans, which is why government loans are almost always much cheaper than private loans. Investors aren't completely daft about this.
The fundamental problem will be 'lack of demand' on the day that carts pull horses and water flows uphill.
The problem will always superficially look like 'lack of demand' in a monetary system that requires an ever expanding amount of credit in order to stop itself imploding in a deflationary collapse - I.E.: a Ponzi scheme. Such a system takes from tomorrow to pay for today, until people lose faith in tomorrow. Historically this has taken the form of a sovereign debt crisis and a currency collapse. And you're right, 'investors are not completely daft about this' , which is why I expect the collapse of this Ponzi scheme to manifest in the bond market, not the stock market.
The unemployed and the poor ALWAYS suffer most - you are absolutely right on that too. But this is not punishment for 'society's debts of sin'. It is the inevitable consequence of a corrupt system best described as 'crony capitalism' or 'socialism for the rich'. It is rotten to the core, it is approaching its sell-by date, and it will end.