But I digress. Britain’s Whole of Government Accounts report liabilities for public sector pensions at around 86% of GDP.8 If you toss in various other liabilities—for nuclear decommissioning and the like—a round figure of about 100% is near enough correct. That figure is additional to the gross debt number in the table above. It represents court-enforceable debt obligations which are, from a financial point of view, little different from ordinary government bonds. I’d like to be able to give you similar data for every other country in that table. But I can’t, because those other countries falsify and hide their accounts. That ought to be illegal. It’s a practice which should lead to finance ministers and their civil servants being led away in handcuffs. But, on Planet Ponzi, what ought to be the case and what is the case are two very different things. Shame.
In any case, even if I had the data, they wouldn’t give the whole story. The world is getting older. Baby boomers are aging. People are facing retirement in the expectation that they’re going to collect a pension. But where are those pensions going to come from? To a frightening degree that question has been evaded by both private individuals and their governments. Remember, there is only one way to fund a pension and that is to put a little money aside each and every year of your working life, so there is a pot of money waiting for you on retirement. In principle, it shouldn’t matter whether you do that for yourself, whether your employer does it on your behalf, or whether the government does it for you. What matters is that there’s a pot of money with your name attached to it, waiting for you when you retire.
Table 15.3: The absent nest egg: pension provision as % of GDP, selected countries
Source: OECD, ‘Pension markets in focus,’ July 2011; GDP data from IMF, World Economic Outlook, April 2011.
And (most of) that money isn’t there. Table 15.3 summarizes the total private and public provision for pensions in the West’s principal economies. It’s blindingly obvious from the table that France, Germany, Italy, and Spain have made effectively no provision at all for their aging populations. In effect, all four of these countries are running huge Ponzi schemes where current retirees are taking money from future retirees. When those future retirees come to draw their pensions, they’re likely to find that there’s no money left to look after them. That’s the nature of Ponzi schemes: they always end up causing injury, and the bigger the scheme, the bigger the injury. That Italy and (to a lesser degree) Spain are mismanaging their pension obligations is hardly surprising. That Germany and France are doing so too is much more remarkable. It’s true that this table notes only those savings which are formally held in pension plans. In continental Europe, there exist a variety of alternative pension funding methods, such as book reserves (a terrible idea: see below) and pension insurance contracts. These things, however, would add only a few per cent to the totals for France, Spain, and Italy, all of which effectively deal with pensions on a pay-as-you-go-basis. In Germany, the position is quite simply unclear, which is, if anything, even scarier.9
It’s true, of course, that by comparison with the improvident British, Europeans are more likely to save their household income. It would be tempting to think that the true story of table 15.3 is simply that German savers, for example, are taking care of their own futures without going via some company pension plan. Unfortunately, that’s simultaneously true and not true at all. True, savings rates are significantly higher in Germany than in Britain. But Brits are more likely to buy equities and property, while Germans are more likely to use low-yield savings accounts and euro bonds. The painful result: household wealth in Britain (as a multiple of disposable household income) is substantially higher than it is in Germany or France.10
The blunt truth, therefore, is that for all their apparent thrift, the citoyens and citoyennes of France, and the Bürger and Bürgerinnen of Germany are much less well provided for than they would appear to be. The aging populations of Europe are heading toward a future for which far too little money has been set aside. The principal problem has been one of Ponzi-ish thinking: neglecting future obligations because of the present pain it would cause to take them seriously. That failure alone should be enough to debar any current national leader from regaining office. It’s a betrayal of an entire generation.
It’s worth also noticing, while we’re here, how untransparent the figures are. The OECD, arguably the best statistical outfit in the rich world, doesn’t have data for German pension provision. The OECD doesn’t have them, because no one has them. That’s an amazing fact. We are entering a new era in world history—one with unprecedented numbers of elderly people, each of whom deserves a retirement of dignity and respect—and we don’t even know how much money exists to look after them. That’s appalling. What’s more, the German notion that book reserves on a company balance sheet constitute a safe way to look after pensioners is simply untrue. I don’t want to get too far into the technicalities, but if you happen to be ten or twenty years from drawing a pension, which would you prefer: professionally managed assets in a ring-fenced fund or an accounting reserve in a company’s books, with no assurance whatever that that company would still exist in a decade or two’s time?
In short, it’s pretty clear that continental Europe is woefully and shockingly underprepared for its own near future. The famously thrifty savers of northern Europe are, in practice, in far worse shape than they think they are.
What’s less obvious, however, from the data presented above is that America, Canada, Britain, and Japan are also running huge Ponzi schemes. (I don’t have the data that would enable me to comment on South Korea.) For one thing, there’s often a lot less in those public sector ‘pension funds’ than there appears to be. The US social security fund invests only in Treasury bonds, which are promises payable by future taxpayers—which is all a little like the German arrangement, only less transparent. But even if we take that public sector provision at face value, the sums involved are vastly less than they ought to be. In America and Britain, total pension assets are around 90% of GDP. If you think that’s adequate, please imagine that you are ten or fifteen years from your retirement and that your pension pot—that’s the capital you’ll be able to invest, not the annuity it will pay out—is equal to just 90% of your annual salary. Does that sound like an attractive recipe for retirement to you? Or does it sound like the bitter joke at the end of a Ponzi scheme?11
Needless to say, because Western populations are rapidly aging, the probable future pension bills are mounting. Estimates of the sums involved range from 100% or so of GDP (in the case of the US and UK) to more than 200% for European countries. Those huge liabilities are excluded from the data on gross debt presented earlier in this chapter.12
In the end, the sad truth is that the true level of debt on Planet Ponzi is simply unquantifiable. I’d say that, if you wanted to take a highly conservative estimate for true indebtedness, you would need to add a minimum of 200 percentage points of GDP to every country’s entry in table 15.2. That 200% might just about cover the liability gap facing the UK. 13 In the United States, it would be safer to add a minimum of 400%.14 If you believe Laurence Kotlikoff, whom I quoted earlier, you’d be better off adding a sum closer to 1,000% of GDP. In Germany, France, Japan, and elsewhere—I just don’t know. Until government accounts are consistently, transparently, and honestly prepared, we don’t have a realistic set of figures which would enable us to determine these things.
Two further comments. First, most readers will have noticed some absentees in this chapter. There’s been no mention of China. None of India. No mention of Brazil or Russia. All those countries have their challenges, of course. India has a problem with corruption, with red tape, and with its labor laws. China has a problem with murky accounting, fraud, and bad debt running rampant throughout its banking sector. Brazil has a problem with insufficient tax collection, bubbling inflation, and high social expectations. Russia’s problems are more numerous still: corruption, violence,
lawlessness, Vladimir Putin, murky accounting, murky everything. Putin has effectively been in power for twelve years already and is likely to be there a while longer. High oil prices have created a mirage of prosperity, but the underlying economy has stagnated or gone backwards.
Nevertheless, though all these countries have problems, they don’t have a problem with excessive debt. China, the most indebted of the BRICs, has total gross debt of around 150% of GDP. As before, that figure aggregates the gross debt of government, households, corporations, and banks. Russia, the least indebted of the four, has a debt ratio of around 75%. (Its apparent debt-aversion has something to do with having gone bankrupt a decade or so back. These things leave their mark.)15
The debt-aversion of these four emerging market giants gives them huge strategic strength just as the developed world has chosen, quite needlessly, to incur a vast strategic weakness. I don’t, as it happens, think that the United States and its allies have to watch passively as China and India take over the mantle of global leadership—but we do have some major housekeeping work to do. More about that in the final chapter.
Secondly, a warning. Because these debt numbers are so astronomical, there’s a temptation to suppose that we can go on merrily kicking the can down the road in the hope that we at least will escape catastrophe. We can’t. We’re living in the catastrophe. I’m not aware of any developed country that has hit gross debt-to-GDP ratios of 300% or 400% and survived without turmoil. Memento mori is a Latin phrase meaning ‘remember you will die.’ There’s an entire genre of art dedicated to representing that uplifting thought: a genre having to do with skulls, skeletons, ashes, clocks, and graves.
We don’t need skulls or graves to remind us where we’re headed. We have Japan. We have Iceland. We have Ireland. We have Greece. We have Lehman Brothers and AIG and General Motors and Bear Stearns and all the other casualties of the crisis. This can will be kicked no further. The road has ended at a big brick wall.
Up next: sovereign crisis in Europe and the next phase of collapse.
16
Giants unicycling on clifftops
When, in June 2011, Standard & Poor’s (correctly but belatedly) downgraded its credit rating for Greece to CCC, its press release chirpily reported that the country was now ‘the lowest rated sovereign in the world—[having] fallen below Ecuador, Jamaica, Pakistan and Grenada.’ Greece retorted with fury, contending that S&P’s decision ignored ‘the will of all Greeks to plan our future in the Eurozone.’1
S&P clearly wasn’t all that fazed, nor did the will of all Greeks play a large part in its deliberations, because less than two months later the ratings agency announced another downgrade—this time to CC for long-term debt and to a paltry C for short-term debt. It also reaffirmed its previous estimate that the likely recovery rate for owners of Greek sovereign debt was around 30–50% of principal. (That is, bondholders could expect to recover something between €0.30 and €0.50 for each euro lent.) That recovery rate would place the Republic of Greece, birthplace of democracy, somewhat below Enron in the rankings of the bankrupt. Just to rub salt into the wounds, S&P further commented that the outlook for Greece was negative. No matter how low the country had sunk, in S&P’s eyes the journey to the bottom still had a little further to run.2
It wasn’t long before that dark prediction came true. On September 6, 2011, the country’s deepening recession caused the bond market to worry that Greece wouldn’t even be able to achieve the terms required by the latest European bailout package. Bloomberg quoted Michael Leister, a bond specialist at WestLB in London, as commenting: ‘The consensus seems to be that the second bailout package for Greece might be obsolete before it has been put into law, which is obviously detrimental for sentiment.’3 Either Michael Leister was misquoted or he was campaigning to win Understatement of the Year 2011. Detrimental for sentiment? Yields on two-year Greek bonds are hitting record highs of more than 100%. Greek bonds due for repayment in 2020 are being quoted at under 40% of face value with no real buyers in sight.4 Personally, I wouldn’t be a buyer of those bonds at any price higher than 5% of principal.
You can analyze the Greek disaster any way you like. Blame the falsified national accounts. Pinpoint the hopelessly lax attitude to tax collection. Call attention to the finances of the national railway, or the laws surrounding early retirement, or the feeble performance of an economy blessed with sunshine, shipping, tourism, and agriculture and wonderfully positioned to exploit the opening up of the Balkans. In the end, though, it comes down to these figures:5
Government debt, 2011 152% of GDP
Government deficit, average 2009–12 −9.6% of GDP
Economic growth, annual average 2009–12 −2.2%
You don’t need me to tell you that these are hideous numbers. A colossal debt, an impossible deficit, a shrinking economy. If you want a recipe for sovereign bankruptcy, you’ll find it right here, in these three simple stats. A short lesson in how not to run a country. A poster-child for profligacy.
But Greece doesn’t matter. It’s small fry. It owes $472 billion.6 If we optimistically assume that Greece’s creditors will recover €0.40 on each euro, that represents a total impending loss of some $189 billion—representing, very approximately, a bankruptcy equal to about one and a half Lehman Brothers. If Greece’s sister countries in Europe simply had to manage one and a half Lehmans, they would mutter a few (French and German) swearwords and get on with it, Greece could mutter a few Hellenic thank-yous, and everyone could move on.
Unfortunately, on the European corner of Planet Ponzi, the problem is worse than one small country getting into a mess. There are a few other countries who are watching Greece’s descent into financial Hades with some trepidation. You can see this if we boil the entire debt problem down to the same few simple statistics, adding just a couple more figures to do with the cost of the borrowing and the absolute dollar size of the debts. The ugly facts are set out in table 16.1.
Table 16.1: The ugly facts
Source: IMF, World Economic Outlook, April 2011 (data include estimates for 2011/12); data on bond yields from Financial Times, extracted 6–7 Sept. 2011.
The table is arranged with the grisliest cases (as measured by the degree of panic on the bond market) at the top. I’ve added in Germany, Britain, and the US by way of comparison. I should also add that I’ve drawn my economic growth estimates from the IMF World Economic Outlook database published in April 2011. Without exception, growth estimates have declined since then, and equity markets have plunged, Germany’s by around 30%. The market is currently afraid of a double-dip recession unfolding in both North America and Europe, and I personally suspect that recession has already started.
So, bad as these figures look, the reality is worse. Sorry.
Portugal and Ireland
Table 16.1 makes grim but interesting reading, roughly the way a murder victim must look to a forensic pathologist. Portugal is pretty much gone. It’s not as thoroughly bankrupt as Greece, but that’s hardly a comfort: nobody is as bankrupt as Greece. Even Pakistan looks a better bet. From the bond market’s point of view, the way to think about Portugal is as follows. It owes roughly 90% of GDP. The interest rate on that debt is 14%. So simply in order to pay interest on its existing debts, the country has to hand over 14% of 90% of GDP—or about 12.5% of its annual income. To put that another way, every single person in the country has to work from January 1 to February 14 and hand over every single penny of their earnings to (primarily foreign) bondholders.7 They can’t use any of that money for eating, heating, or anything else. The government can’t use any of that money for health, education, or anything else. Shareholders can’t use any of that money for dividends or reinvestment in their businesses. From January 1 through February 14, the entire national product has to be handed over to bondholders.
That kind of sacrifice is something a country could probably make if it were necessary to get it out of a hole … but the lethal twist here is
that Portugal could do all that and still be at the bottom of its hole. All it would have done would be to have kept current on its interest payments. It wouldn’t have repaid a single penny of its debt; and, worse still, since the economy is shrinking, the sacrifice needed the following year merely to achieve the same stasis would be even greater.
If the Portuguese want to get out of their hole, they’ll need to start repaying principal. Trouble is, in order to do that, the government will need to act more aggressively: raising taxes or cutting spending. Which is where a second vicious little twist arises: each time the government takes these (drastically unpopular) austerity measures, it hammers the economy. Total production in the economy shrinks, while the absolute burden of debt service remains unchanged. You can hardly blame the citizens of Portugal if at a certain point bankruptcy were to appear more attractive than soldiering on.
For Ireland, something like the same logic applies. Ireland is a little better off in that its economy (aside from its banks and its property sector) is flexible, efficient, open, and productive. My own hunch is that the scale of Irish indebtedness, combined with the current cost of borrowing, is simply too much for any country to bear. Nevertheless, at least the Irish can comfort themselves with the thought that their problems are primarily financial as opposed to financial and structural. They’ll be OK in the end. It’s just that the road there will be painful.
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