The World As We Knew It
by HERBERT LONDON
February 13, 2013
For elderly women who cut coupons in order to survive in their Florida apartments; for pensioners accustomed to monthly checks; for those who were saving for that condo in Tucson, the world as they have known it will be gone. Although politicians cannot say it for fear of generating public panic, the globe is so awash in debt that fiat money, cash reserves and savings will all be in a perilous state in the not too distant future.
Consider the following: There is $320 trillion of debt globally and about $80 trillion of assets. With the exception of a few outliers, e.g. Canada, most nations spend much more than they generate in revenue. In some sense, Japan foreshadows what will soon be the case in the United States and Europe.
Japan's debt is 250 percent of its gdp. In 2013 financing of the debt will be equivalent to the entire productive output of the nation. The newly elected Prime Minister, Shinzo Abe, contends Japan must ease the yen, i.e. print money, in order to offset the problem. But since the debt is so great easing of the currency will create out of control inflation eliminating much of the nations' wealth.
Moreover, the demographic nightmare of an aging population exacerbates the problem since an elderly citizenry tends to be less productive than a population in the prime working years. It is now a cliché to note that there are more adult diapers sold in Japan than baby diapers. In fact, Japan's effort to sell bonds based on government credit is nothing more than creating yen out of thin air. This is a scenario out of a Woody Allen movie. On one side of the fork in the road is default and the other is Weimar-like inflation.
Although this may seem extreme, Western Europe isn't far behind Japan. The bailout of Greece by the European Central Bank and the I.M.F. is merely a band-aid. Several Europeans nations with insolvency over the horizon are hoping for assistance. Yet remarkably, the Europeans have neglected to refinance and restructure their banking system. Even Germany, often cited as the European strong horse, has banks deeply in debt. Rather than engage in retrenchment of social spending, a condition European leaders find anathema, inflationary trends are being introduced, albeit when the printing presses should stop hasn't been established.
The United States has its own financial bubble with which to cope. Aggregate debt including state debt is about 120 percent of gross domestic product. If one includes unfunded liabilities for pensions, Social Security, Medicare and Medicaid the total sum is over $100 trillion or more wealth than exists on the entire globe. If debt continues to grow at the present level, it will take the present defense budget to finance the debt by 2020.
Needless to say, there is always hope, but it doesn't seem as if we will realize it. So far down the slope of indebtedness has the world gone that recovery is not likely. Fiat money is a fraud inflicted on the public by politicians and banks who, like the Wizard of Oz, give the people what they want and refuse to reveal the price tag. Disaster awaits us.
When people wake up one day soon - in Japan's case probably next year - and realize their savings haven't any value and their retirement arrangements have vanished like soap bubbles, there will be open rebellion, not unlike what we are starting to see in Greece. It isn't coincidental that extremist parties have gained a foothold with these conditions and are likely to do so across the globe.
Living beyond one's means has allowed for the illusion of affluence. But creating money as if life is a Monopoly board has its consequences. This will not be a pretty picture since pols of various stripes must lie to ease the pain. As a result, the public is in the dark. I have argued that people aren't lemmings. When they come to a cliff; they don't jump. However, I now believe I was wrong, especially if they cannot see the cliff.
Mixing metaphors, the ship of state like the Titanic has hit an iceberg and is about to sink. All the emergency measures are too late. This will be an era in which everything we have known to be true isn't. Although there isn't any way to describe what historians will call this era, I have a suggestion, "the end of illusions."
Herbert London is a Senior Fellow at the Manhattan Institute and the President of the London Center for Policy Research. He is president emeritus of Hudson Institute and author of the book The Transformational Decade (University Press of America).