Saturday, March 13, 2010

Overpromising and Underdelivering

The New York Times recently ran a piece demonstrating the extent of the looming retirement problems across much of the Western world, using the Greek financial crisis as the kick-off, in Patchwork Pension Plan Adds to Greek Debt Woes.

Here is the key excerpt:

According to research by Jagadeesh Gokhale, an economist at the Cato Institute in Washington, bringing Greece’s pension obligations onto its balance sheet would show that the government’s debt is in reality equal to 875 percent of its gross domestic product, which is the broadest measure of a nation’s economic output. That would be the highest debt level among the 16 nations that use the euro, and far above Greece’s official debt level of 113 percent.

Other countries have obscured their total obligations as well. In France, where the official debt level is 76 percent of economic output, total debt rises to 549 percent once all of its current pension promises are taken into account. And in Germany, the current debt level of 69 percent would soar to 418 percent.

Mr. Gokhale, like many other economists, says he believes that this is a more appropriate way to assess a country’s debt level because it underscores the extent to which the cost of providing for rapidly aging populations, if left unchanged, will add to already troubling debt burdens.

“You have to look ahead and see how pension expenditures are rising in comparison to the revenues needed to finance them,” he said. “It’s not just Greece; all major European countries are facing pension shortfalls. It is a very difficult challenge because it involves selling pain to current voters.”

He estimates that to fully finance future pension obligations, the average European country would need to set aside 8 percent of its economic output each year, a practical impossibility given that raising already high taxes so much would impose a crushing economic burden.

Mr. Gokhale has done a similar calculation for the United States and estimates that the truest measure of federal government debt, incorporating Medicare, Medicaid, Social Security and other obligations, is $79 trillion, or about 500 percent of the nation’s output. Currently, its public debt is equal to about 60 percent of its domestic output.

I would question whether an additional 8% tax burden is "crushing", but it might be difficult to collect. If something like that were instituted across many countries, where are people going to go? More likely, something would be worked out so that parents don't harm their children's living standards.

The bigger issue is demographic. Greece has been reported to produce 1.3 children for every 2 adults now living. Recent data I have seen show that only France (Catholic and Muslim) and the U. S. are above replacement rate. China and Japan are aging societies as well.

There are no easy answers. Because of the strains on resources as more people in India and Brazil enjoy air conditioning and the comforts of the oil age, as well as the electricity hog called the Internet, either major changes in productivity need to come, global population needs to stop growing nearly as fast, and/or standards of living need to stop rising globally.

If we add demographic facts of more retirees to be supported (unless we all become greeters at stores in our old age), the reasons to become more and more optimistic about an improving economy (hope vs. facts) appear vagues. Yet reports:

Record Advance in S&P 500 Futures Shows Confidence in Economy, saying:

The longest-ever gain in futures linked to the Standard & Poor’s 500 Index shows growing investor confidence in the U.S. economy.

“It’s a bullish indication,” said Stephen Lieber, chief investment officer of Alpine Woods Capital Investors LLC, which manages more than $7 billion in Purchase, New York. “There’s greater confidence in the equity market. Earnings have been relatively positive.” . . .

“People are looking to buy stocks,” said Mark Bronzo, an Irvington, New York-based money manager at Security Global Investors, which oversees $21 billion. “Risk appetite seems to be growing as people become more comfortable with the sustainability of the economic recovery.”

BBB-rated corporate yields are at cyclical lows even as nominal retail sales are still well below their peak, not to mention inflation-adjusted and per capita-adjusted retail sails. Most stock charts look "healthy", with very few stocks below both their 50-day and 200-day moving averages.

All that has really happened is that all the money-printing has made its way into the financial markets. We can expect it to eventually trickle down into the real economy. As it does that, the inflation will transition from financial assets to consumer and capital goods. Until organic population growth replaces population growth largely due to adding retirees, technical increases in productivity will tend to be offset by an increasingly unproductive populace.

The real economy in the Western world is suffering from too many cans being kicked down too many roads.

The effects of massive money-printing must wear off, just as a lost weekend of drinking must give way to reality or else a descent into a personal hell. Investors should be careful about euphoria when all that has happened is frantic leak-plugging in an old ship. Just as today's Greece is nothing like that of Homer's time, today's America and its phony manipulated markets are nothing like those of 100 years ago that gave rise to the alleged stellar long term stock market results.

Buy and hold?


Think different.

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