Belmont Club

"Fair to see yet bound to die"

A newsletter sent onward to me from Morgan Stanley describes the global sovereign debt crisis whose effects will presently be felt. It is no longer a question of whether sovereign debt default is possible; it is almost a matter of when and how bad.  The current sovereign debt crisis is different from the high periods of  indebtedness in the past in that it is going not to acquire assets but to pay for consumption. And not only present consumption, but future entitlement.

There is little prospect that the borrowings will ever be paid back from the objects of their expenditure. The only hope is that enough revenues from other sources will be available to retire the debt eventually. But the size of the debt is staggering and it is growing like a metastatic tumor.

The trillions owed by sovereign governments do not, for example, value unfunded government pension liabilities.  The Morgan Stanley paper says, “the main problem is in the future.” The motto of Washington may once have been “I’ll gladly pay you Tuesday for a hamburger today.” Then they discovered pate de foi gras or just lobster, lobster, lobster.  Although Washington was designed to play a smaller role among the fifty states than London or Paris in their respective countries, it has decided to match them in terms of services and entitlements. High speed train for high speed train, national health service for national health service, titanic bureaucracy for titanic bureaucracy. The result of that ambition is that the Federal Government is indebted for 358% of its tax revenues, with the UK and France at 162% and 169%, respectively. The US Federal Government has taken the path of borrowing money to meet its expenses because it cannot acquire as large a proportion of GDP as centralized European governments.

This path may lead to ruin. One way to think about the US Federal Government is to imagine it’s notional balance sheet.

Assets Liabilities
Net Power to Tax Net present value of present and future entitlements and
expenditures
Real assets (buildings, land, etc) Debt

Each of the Obama administration’s flagship policies can be examined in the light of how it has contributed to the deficit. From this it may be seen that the liabilities have the potential to grow far faster than the assets.

Program Effect
Bailouts Propping up losing firms with borrowed money, increase in structural deficits
Health care Net increase in future entitlements
Immigration “reform” Net increase in future and current entitlements
Cap and Trade and Carbon regulation Reduction in economic activity, increase in structural deficits

The effect of a recession or depression on the deficit would be to reduce the taxation power of government, once again making it necessary for them to borrow to meet their promised entitlements and service the debt. This further distorts the balance sheet. Eventually if something can’t go on then it won’t. Morgan Stanley goes on to say that because structural debt (the degree to which governments outspend their tax base) and the effects of demographics on entitlements are so high that sovereign debt can no longer be regarded as completely safe. One day, maybe soon, the music will stop playing and then what?  The crisis is global but it is particularly acute in countries like Greece and threatens to bankrupt the USA.

Although there are still some who believe that President Obama’s Keynesian cures will work, the counter-thesis may be that the supposed “cures” are in fact the cause of the disease. That the attempts to create European-style “rights” enforced by Euro-scaled bureaucracies on a Federal tax revenue base has created a bureaucratic monster in Washington sustained principally by borrowed money.

Whether President Obama’s decision to literally bet the farm on bigger government, more entitlements and greater regulation is to be regarded as his greatest achievement or the most fantastic blunder in recent history is what history will judge. As the economy begins to wilt under the weight of debt there will be a temptation by government to borrow even more to keep the moribund patient twitching under the artificial stimulus of money injected directly into the veins of particular economic enterprises. Whether it is possible to outrun your own shadow remains to be seen. Logic says that you cannot. It brings to mind the fate of the World War 1 German raiders who were living on borrowed time.

Admiral Maximilian Graf von Spee, along with SMS Scharnhorst and the other ships of the German East Asia Squadron, led the Royal Navy on a breathtaking chase across the Pacific, around Cape Horn, and finally to the Falkland Islands before being stopped. But it was only a matter of time before the superior numbers of the Royal Navy caught up with von Spee. As Winston Churchill said after the death of von Spee, “To steam at full speed or at a high speed for any length of time on any quest was to use up his life rapidly. He was a cut flower in a vase; fair to see, yet bound to die, and to die very soon if the water was not constantly renewed.”

It Always Catches Up With You


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