Ball and Chain

Although I wrote about four key concerns in my March 2007 book, Financial Armageddon -- debt, the retirement system, government guarantees, and derivatives -- all, in fact, are closely related. Taken together, they represent claims on our economy that far exceed the resources available to cover them.

Yet despite the fact that this exposure has already triggered one of history's worst financial crises, as well as the first global downturn since World War II, many so-called experts and policymakers don't seem to have learned from past mistakes. Instead, they believe that taking on many more liabilities than we already have is the only way to get us out of the mess we are in.

Pretty scary, eh?

Anyway, for a more rational assessment of the risks of borrowing one's way to prosperity, I refer you to a post by Paul Kedrosky at Infectious Greed, entitled, "The Big Bill: Debt and Developed Countries," which provides a succinct summary of an unsettling report.

The current cover of The Economist is awfully on-point, with a giant ball and chain attached to a crawling baby. It is, of course, the debt bill faced by the developed world, which is the biggest in history.

The entire associated article is empirical, direct, and highly worth reading:

All told the outlook is bleak. In a few countries, the financial crisis has badly damaged the public finances. Elsewhere it has accelerated a chronic age-related deterioration. Everywhere the short-term fiscal pain is much smaller than the long-term mess that lies ahead. Unless belts are tightened by several notches, real interest rates are sure to rise, as will the risk premiums on many governments’ debt. Economic growth will suffer and sovereign-debt crises will become more likely.

Somehow, governments have to avoid such a catastrophe without killing the recovery by tightening policy too soon. Japan made that mistake when concerns about its growing public debt led its government to increase the consumption tax in 1997, which helped to send the economy back into recession. Yet doing nothing could have much the same effect, because investors’ fears about fiscal sustainability will push up bond yields, which also could stifle the recovery.

The best way out is to tackle the costs of ageing head-on by, for instance, raising retirement ages further. That would brighten the medium-term fiscal outlook without damaging demand now. Broadly, spending cuts should be preferred to tax increases. And rather than raise tax rates, governments would do better to improve their tax codes, broadening the base and eliminating distortive loopholes (such as preferential treatment of housing). Other priorities will vary from one country to the next. But after today’s borrowing binge, doing nothing is no longer an option.

More here.

Comments

[roger]

Ball and Chain= mental stagnation.
Raising retirement age and at the same time increase unemployment?
Economic growth? refer to (worth the look back in time )
unless belts are tightened...who's belts? not the billionaires
that's for sure! Recovery? recovery to what? same old crap?
The Economist is full of it & they still don't understand.
With minds like theirs the future is dismal indeed

[farang]

Yes indeed, we need to work longer, so those "investors" of Wall Strret that gambled themselves silly, then had us worker bees bail their useless, non-productive asses out to the tune of trillions, can sit in air conditioned offices on their fat, pasty asses and write their nonsensical gibberish.

I suppose now that their bought and paid for whores in D.C. have emptied out OUR TRUST FUND, now they want to make us work until we die. After their greedy "Free Market" assassination of the US manufacturing base, the decent wage earning base of folks that actually MAKE something, they dare write this garbage as "intelligent analysis."

HANG THEM ALL, beginning with The Economist editorial and reporting staff.

We'll divvy up their largesse, and pay off the debt.

[Namke von Federlein]

Today I am very sad.

I really like Financial Armageddon and read it every day that I have access to the Internet.

Financial Armageddon is a reporter - a source of news. I would be happy if Financial Armageddon became a source of both news and ideas for solutions (or at least reporting about ideas and actions that help!).

To the comments : The Fed screwed you (and your kids and your grandchildren) and now you talk like they do. Just what they want? An angry person is an easy make? Just my opinion.

Perhaps that's the real plan - make honest Americans so angry that the Fed can use their monopoly on violence and their monopoly on taxation (issuing money) to finish the job?

Thanks for Financial Armageddon for a great blog!