Monday, March 8, 2010

The Age of Deciding Who is Going to Pay

The Western world is deep in debt. Wealthy European countries and the United States now owe the most - - not the banana republics of old. The external debt of the U.S. in 2009 was 94% of GDP - - by comparison, Mexico was 12% of GDP. China is the world’s banker - - their external debt was just 4% of GDP in 2009. This represented a drop of 20% versus China’s 2008 debt obligations. We have managed to get right up to the economic calamity line - - with chalk dust on our shoes.

This is important because this time it is different. Declining birth rates and aging populations in the developed world make growing our way out of debt seem highly unlikely - - more like wishful thinking. Given our current problems and projected demographics, we really need to be careful with lazy historical analogies that seem to pretend this is 1945. Without substantial growth (fueled by increasing levels of immigration and innovation - - with a primary focus on attracting the best and brightest to the U.S. combined with getting them out of banking and finance and into engineering), the key question that dominates the future then becomes - - “Who is going to pay?” The short list of candidates includes the following - - (1) current taxpayers, (2) public-sector workers, (3) entitlement recipients, (4) foreign investors, and (5) future generations. Public sector worker problems and issues are mainly European - - however, given our public sector Enronesque accounting for retirement benefits, we could also have problems. Whether an engineer that design bridges, or designs F-16s, or planning on retiring in 2020 - - the final outcome of “Who is going to pay?” has some very serious strategic implications for both individuals and organizations.

Who gets to decide who has to pay? Two groups make up the “deciders” - - the political aristocracy and the bond market. The political class - - given the confused navigational skills of our current leaders - - is going to have difficulty embracing the new era of spending cuts and tax rises. If they cannot or will not decide - - as the Greeks recently found out - - the bond market will punish you. There really is no alternative. There is no one else to blame - - “You can’t blame the mirror for your ugly face.” Middle-aged Americans have written checks on the accounts of their children over the past 30-years - - the day of deciding who and how to fund the checks is fast approaching.

This will not be about sharing the pain - - this will be about the fault-lines and power structures among generations. Many nations will have their social cohesion put to a test – with the final exams submitted by our political leaders to the bond markets for grading. If it’s the end of the economic world, you only get to bet on it once. I hope we are all up for the final exam.

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