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The Biggest Bill In History

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http://www.economist.com/opinion/displayst...ory_id=13829461

Slowly the penny is beginning to drop. First the truth is surfacing in intellectual publications such as The Economist, New Statesman and selected journos in the broadsheets. Over the next year it should permeate to the mainstream, and hopefully be a real theme for next year's General Election.

This is the kind of thing that was postulated by some people on this forum over 3 or 4 years ago. They were dismissed as Tin Foil-Hatters then, but its all playing out as predicted. These are scary times :unsure:

Monty

PS Protect yourself (had to say it ;) )

The biggest bill in history

Jun 11th 2009

From The Economist print edition

The right and wrong ways to deal with the rich world’s fiscal mess

Brett Ryder

THE worst global economic storm since the 1930s may be beginning to clear, but another cloud already looms on the financial horizon: massive public debt. Across the rich world governments are borrowing vast amounts as the recession reduces tax revenue and spending mounts—on bail-outs, unemployment benefits and stimulus plans. New figures from economists at the IMF suggest that the public debt of the ten leading rich countries will rise from 78% of GDP in 2007 to 114% by 2014. These governments will then owe around $50,000 for every one of their citizens (see article).

Not since the second world war have so many governments borrowed so much so quickly or, collectively, been so heavily in hock. And today’s debt surge, unlike the wartime one, will not be temporary. Even after the recession ends few rich countries will be running budgets tight enough to stop their debt from rising further. Worse, today’s borrowing binge is taking place just before a slow-motion budget-bust caused by the pension and health-care costs of a greying population. By 2050 a third of the rich world’s population will be over 60. The demographic bill is likely to be ten times bigger than the fiscal cost of the financial crisis.

Will they default, inflate or manage their way out?

This alarming trajectory puts policymakers in an increasingly tricky bind. In the short term government borrowing is an essential antidote to the slump. Without bank bail-outs the financial crash would have been even more of a catastrophe. Without stimulus the global recession would be deeper and longer—and it is a prolonged downturn that does the greatest damage to public finances. But in the long run today’s fiscal laxity is unsustainable. Governments’ thirst for funds will eventually crowd out private investment and reduce economic growth. More alarming, the scale of the coming indebtedness might ultimately induce governments to default or to cut the real cost of their debt through high inflation. [i WONDER WHICH ONE THE US / UK IS AIMING FOR...........? ;) ]

Investors have been fretting on both counts. Worries about default have been focused on weaker countries in the euro area, particularly Greece, Ireland, Italy, Portugal and Spain, where the single currency removes the option of unilateral inflation (see our special report). Ireland’s debt was downgraded for a second time on June 8th. Fears of inflation have concentrated on America, where yields on ten-year Treasuries reached nearly 4% on June 10th; in December the figure was not much above 2%. Much of this rise stems from confidence about economic recovery rather than fiscal alarm. Yet eye-popping deficits and the uncharted nature of today’s monetary policy, with the Federal Reserve (like the Bank of England) printing money to buy government bonds, are prompting concerns that America’s debt might eventually be inflated away.

Justified or not, such worries will themselves wreak damage. The economic recovery could be stillborn if interest rates rise too far too fast. And today’s policy remedies could become increasingly ineffective. Printing more money to buy government debt, for instance, might send long-term bond yields higher rather than lower.

What should policymakers do? A sudden fit of fiscal austerity would be a mistake. Even when economies stop shrinking, they will stay weak. Japan’s experience in 1997, when a rise in consumption taxes pushed the economy back into recession, is a reminder that a rush to fiscal tightening is counterproductive, especially after a banking bust. Instead of slashing their deficits now, the rich world’s governments need to promise, credibly, that they will do so once their economies are stronger.

Lord, make me prudent—but not yet

But how? Politicians’ promises are not worth much by themselves. Any commitment to prudence must include clear principles on how deficits will be shrunk; new rules to stiffen politicians’ spines; and quick action on politically difficult measures that would yield future savings without denting demand much today, such as raising the retirement age.

Broadly, governments should pledge to clean up their public finances by cutting future spending rather than raising taxes. Most European countries have scant room for higher taxes. In several, the government already hoovers up well over 40% of GDP. Tax reform will be necessary—particularly in places, such as Britain and Ireland, which relied far too much on revenues from frothy financial markets and housing bubbles. Even in the United States, where tax revenues add up to less than 30% of GDP, simply raising tax rates is not the best answer. There too, spending control should take priority, though there is certainly room for efficiency-enhancing tax reforms, such as eliminating the preferential tax treatment of housing and the deductibility of employer-provided health insurance.

The next step is to boost the credibility of these principles with rules and institutions to reinforce future politicians’ resolve. Britain’s Conservative Party cleverly wants to create an independent “Office for Budgetary Responsibility†to give an impartial assessment of the government’s plans. Germany is poised to pass a constitutional amendment limiting its structural budget deficit to 0.35% of GDP from 2016. Barack Obama’s team wants to resurrect deficit-control rules (see article). Such corsets need to be carefully designed—and Germany’s may prove too rigid. But experience from Chile to Switzerland suggests that the right budgetary girdles can restrain profligacy.

Yet nothing sends a stronger signal than taking difficult decisions today. One priority is to raise the retirement age, which would boost tax revenues (as people work longer) and cut future pension costs. Many rich countries are already doing this, but they need to go further and faster. Another huge target is health care. America has the most wasteful system on the planet. Its fiscal future would be transformed if Congress passed reforms that emphasised control of costs as much as the expansion of coverage that Barack Obama rightly wants.

All this is a tall order. Politicians have failed to control the costs of ageing populations for years. Paradoxically, the financial bust, by adding so much debt, may boost the chances of a breakthrough. If not, another financial catastrophe looms.

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http://www.economist.com/opinion/displayst...ory_id=13829461

Slowly the penny is beginning to drop. First the truth is surfacing in intellectual publications such as The Economist, New Statesman and selected journos in the broadsheets. Over the next year it should permeate to the mainstream, and hopefully be a real theme for next year's General Election.

This is the kind of thing that was postulated by some people on this forum over 3 or 4 years ago. They were dismissed as Tin Foil-Hatters then, but its all playing out as predicted. These are scary times :unsure:

Monty

PS Protect yourself (had to say it ;) )

The biggest bill in history

Jun 11th 2009

From The Economist print edition

The right and wrong ways to deal with the rich world’s fiscal mess

Brett Ryder

THE worst global economic storm since the 1930s may be beginning to clear, but another cloud already looms on the financial horizon: massive public debt. Across the rich world governments are borrowing vast amounts as the recession reduces tax revenue and spending mounts—on bail-outs, unemployment benefits and stimulus plans. New figures from economists at the IMF suggest that the public debt of the ten leading rich countries will rise from 78% of GDP in 2007 to 114% by 2014. These governments will then owe around $50,000 for every one of their citizens (see article).

Not since the second world war have so many governments borrowed so much so quickly or, collectively, been so heavily in hock. And today’s debt surge, unlike the wartime one, will not be temporary. Even after the recession ends few rich countries will be running budgets tight enough to stop their debt from rising further. Worse, today’s borrowing binge is taking place just before a slow-motion budget-bust caused by the pension and health-care costs of a greying population. By 2050 a third of the rich world’s population will be over 60. The demographic bill is likely to be ten times bigger than the fiscal cost of the financial crisis.

Will they default, inflate or manage their way out?

This alarming trajectory puts policymakers in an increasingly tricky bind. In the short term government borrowing is an essential antidote to the slump. Without bank bail-outs the financial crash would have been even more of a catastrophe. Without stimulus the global recession would be deeper and longer—and it is a prolonged downturn that does the greatest damage to public finances. But in the long run today’s fiscal laxity is unsustainable. Governments’ thirst for funds will eventually crowd out private investment and reduce economic growth. More alarming, the scale of the coming indebtedness might ultimately induce governments to default or to cut the real cost of their debt through high inflation. [i WONDER WHICH ONE THE US / UK IS AIMING FOR...........? ;) ]

Investors have been fretting on both counts. Worries about default have been focused on weaker countries in the euro area, particularly Greece, Ireland, Italy, Portugal and Spain, where the single currency removes the option of unilateral inflation (see our special report). Ireland’s debt was downgraded for a second time on June 8th. Fears of inflation have concentrated on America, where yields on ten-year Treasuries reached nearly 4% on June 10th; in December the figure was not much above 2%. Much of this rise stems from confidence about economic recovery rather than fiscal alarm. Yet eye-popping deficits and the uncharted nature of today’s monetary policy, with the Federal Reserve (like the Bank of England) printing money to buy government bonds, are prompting concerns that America’s debt might eventually be inflated away.

Justified or not, such worries will themselves wreak damage. The economic recovery could be stillborn if interest rates rise too far too fast. And today’s policy remedies could become increasingly ineffective. Printing more money to buy government debt, for instance, might send long-term bond yields higher rather than lower.

What should policymakers do? A sudden fit of fiscal austerity would be a mistake. Even when economies stop shrinking, they will stay weak. Japan’s experience in 1997, when a rise in consumption taxes pushed the economy back into recession, is a reminder that a rush to fiscal tightening is counterproductive, especially after a banking bust. Instead of slashing their deficits now, the rich world’s governments need to promise, credibly, that they will do so once their economies are stronger.

Lord, make me prudent—but not yet

But how? Politicians’ promises are not worth much by themselves. Any commitment to prudence must include clear principles on how deficits will be shrunk; new rules to stiffen politicians’ spines; and quick action on politically difficult measures that would yield future savings without denting demand much today, such as raising the retirement age.

Broadly, governments should pledge to clean up their public finances by cutting future spending rather than raising taxes. Most European countries have scant room for higher taxes. In several, the government already hoovers up well over 40% of GDP. Tax reform will be necessary—particularly in places, such as Britain and Ireland, which relied far too much on revenues from frothy financial markets and housing bubbles. Even in the United States, where tax revenues add up to less than 30% of GDP, simply raising tax rates is not the best answer. There too, spending control should take priority, though there is certainly room for efficiency-enhancing tax reforms, such as eliminating the preferential tax treatment of housing and the deductibility of employer-provided health insurance.

The next step is to boost the credibility of these principles with rules and institutions to reinforce future politicians’ resolve. Britain’s Conservative Party cleverly wants to create an independent “Office for Budgetary Responsibility†to give an impartial assessment of the government’s plans. Germany is poised to pass a constitutional amendment limiting its structural budget deficit to 0.35% of GDP from 2016. Barack Obama’s team wants to resurrect deficit-control rules (see article). Such corsets need to be carefully designed—and Germany’s may prove too rigid. But experience from Chile to Switzerland suggests that the right budgetary girdles can restrain profligacy.

Yet nothing sends a stronger signal than taking difficult decisions today. One priority is to raise the retirement age, which would boost tax revenues (as people work longer) and cut future pension costs. Many rich countries are already doing this, but they need to go further and faster. Another huge target is health care. America has the most wasteful system on the planet. Its fiscal future would be transformed if Congress passed reforms that emphasised control of costs as much as the expansion of coverage that Barack Obama rightly wants.

All this is a tall order. Politicians have failed to control the costs of ageing populations for years. Paradoxically, the financial bust, by adding so much debt, may boost the chances of a breakthrough. If not, another financial catastrophe looms.

yep biggest bill in history

about to be followed by the biggest wealth transfer in history

deflation in leveraged assets needs to make a few more of the masses bankrupt first though and take them out of the game

its all one big scam

bermuda-triangle-of-currency

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I read that article over the weekend, a very good assessment of where we are now.

As a 25-year old, I'll be spending much of my working life paying for this, and paying for the baby boomers who didn't make adequate provision for their retirement. I can't imagine my generation being particularly civil when we're asked for fork out so much to help a generation that had such little regard for us when it came to HPI.

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yep biggest bill in history

about to be followed by the biggest wealth transfer in history

deflation in leveraged assets needs to make a few more of the masses bankrupt first though and take them out of the game

its all one big scam

bermuda-triangle-of-currency

So glad you re-posted the entire 72 lines of the topic to add your 5 lines of comment.

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Guest Skinty
As a 25-year old, I'll be spending much of my working life paying for this, and paying for the baby boomers who didn't make adequate provision for their retirement. I can't imagine my generation being particularly civil when we're asked for fork out so much to help a generation that had such little regard for us when it came to HPI.

Yes I still smile at the thought of faces of the baby boomers in HR when I went into cancel the pension that I had been automatically opted into on starting a new job. Found out a week later that I had made the right choice when a statement was sent round to all the contributors. Turned out to be one large fund and liabilities had already started to outpace contributions.

I reasoned that it's more important to pay off debts first than to start saving for the long term. And when I do that, why pay some idiot in the city to blow it all on ferraris, ego trips and short term targets when they don't have the same sense of responsibility that I would with my own portfolio of stocks?

Edited by Skinty

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yep biggest bill in history

about to be followed by the biggest wealth transfer in history

deflation in leveraged assets needs to make a few more of the masses bankrupt first though and take them out of the game

its all one big scam

bermuda-triangle-of-currency

A 40/50/60% crash in house prices over the next 5 years would help ease the burden on us younger generations.

Seems a bit rich for the government to use the fruits of our own present and future labour to deny us a stake in society i.e. affordable housing, decent pension, etc.

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Yes I still smile at the thought of faces of the baby boomers in HR when I went into cancel the pension that I had been automatically opted into on starting a new job. Found out a week later that I had made the right choice when a statement was sent round to all the contributors. Turned out to be one large fund and liabilities had already started to outpace contributions.

I reasoned that it's more important to pay off debts first than to start saving for the long term. And when I do that, why pay some idiot in the city to blow it all on ferraris, ego trips and short term targets when they don't have the same sense of responsibility that I would with my own portfolio of stocks?

What we need is for employers to offer to pay their pension contributions into a personal pension if desired. Then you could just use a SIPP to manage your own investments. At least that way if it all goes tits up you know it's your own fault and wasn't done by some other, overpaid idiot.

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Will we all go the same as Latvia ?

Just how long will it take for us all to go down together ?

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George Osbourne on Sky just now "trying to start the debate" on UK budgetary constraint.

The Tories are flawed, but at least they are bringing this in to the mainstream. When the man on the street realises that the debt is still there and still has to be repaid, they will sh!t themselves. Had a chat with a London cabbie the other week. Usual stuff, he had to work longer for the same pay, but said it was now picking up as "the downturn was over". When I pointed out that the debt remained and had simply been transferred to the government for all us and our children/grandchildren to repay he refused to speak to me again.

Public sector workers are also about to be brought in to the real world.

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POLITICIANS HAVE BEEN PASSING THE BUCK for ages.

Now The Bill is going to be presented, and only the painful choices are left.

So finally, at last, some tough decisions are going to have to be made.

Some folk, are going to have to find their expectations unmet. They will be angry,

and may become violent.

The politicians are unlikely to do what is fair, since someone is going to find every

tough choice is unfair. They are going to have to do what is possible.

That will probably mean:

+ Keep playing the game the old way, until it becomes impossible to keep on

shunting the problems into the future.

+ When you hit a wall, spread the pain as widely as you can manage, so the

voters see that their group, whatever it may be, is not being singled out for

special punishment

+ Look to see who has the weakest political power, and shift as much burden

to that group as you can

Brutal, yet pragmatic. Have you considered politics?

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POLITICIANS HAVE BEEN PASSING THE BUCK for ages.

Now The Bill is going to be presented, and only the painful choices are left.

So finally, at last, some tough decisions are going to have to be made.

Some folk, are going to have to find their expectations unmet. They will be angry,

and may become violent.

The politicians are unlikely to do what is fair, since someone is going to find every

tough choice is unfair. They are going to have to do what is possible.

That will probably mean:

+ Keep playing the game the old way, until it becomes impossible to keep on

shunting the problems into the future.

+ When you hit a wall, spread the pain as widely as you can manage, so the

voters see that their group, whatever it may be, is not being singled out for

special punishment

+ Look to see who has the weakest political power, and shift as much burden

to that group as you can

You could add

+ find a scapegoat to detract from what the government is doing. Jews have been tried once already. Bankers, public sector employees or BNP would be suitable.

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The public borrowing bill is irrelevant.

Inflation will erode it.

It's the pension black hole that's going to cause civil war.

£5 trilllion in unfunded civil service/state pension liabilities, index linked to RPI.

The timebomb is now going off and noone knows what to do.

The entitlement generation is about to demand that their grandchildren pay them all the money they promises themselves.

There is no way out... it's slavery for everyone under 40 or the death of everyone over 60.

Roll-up, Roll-up, place your bets!

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Anyone ever read "Maxwell: The Final Verdict" by Tom Bower? The middle section is a day-by-day account of the fiddling and fudging, photocopying share certificates to stand as "security" on new loans, all as the interest burden grew greater and greater and the transactions costs brought the whole thing down. It's actually quite traumatising, as any of us who have run a business will understand what it means to juggle money when times weren't quite as good as it might be now.

I rather have this picture that this is what is coming to a government near you.

Any chance they'd fall of a yacht in the Altantic and save us the trouble?

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George Osbourne on Sky just now "trying to start the debate" on UK budgetary constraint.

The Tories are flawed, but at least they are bringing this in to the mainstream. When the man on the street realises that the debt is still there and still has to be repaid, they will sh!t themselves. Had a chat with a London cabbie the other week. Usual stuff, he had to work longer for the same pay, but said it was now picking up as "the downturn was over". When I pointed out that the debt remained and had simply been transferred to the government for all us and our children/grandchildren to repay he refused to speak to me again.

Public sector workers are also about to be brought in to the real world.

Osbourne is trying to sel us all on the idea o fpaying the bankers debts.

****** him.

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Anyone ever read "Maxwell: The Final Verdict" by Tom Bower? The middle section is a day-by-day account of the fiddling and fudging, photocopying share certificates to stand as "security" on new loans, all as the interest burden grew greater and greater and the transactions costs brought the whole thing down. It's actually quite traumatising, as any of us who have run a business will understand what it means to juggle money when times weren't quite as good as it might be now.

I rather have this picture that this is what is coming to a government near you.

Any chance they'd fall of a yacht in the Altantic and save us the trouble?

It would need to be a very large Yacht.

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So glad you re-posted the entire 72 lines of the topic to add your 5 lines of comment.

+1, annoys the crap out of me. :angry:

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Public sector workers are also about to be brought in to the real world.

When? How? I am getting annoyed with the smugness of my public-sector acquaintances. I realise Labour won't dare anatagonise their last remaining loyal consituency before 2010, but after that, when and how will the public sector get the backside-kick it deserves? Hiring freezes and raising the retirement age for new employees won't be enough. Will even the Conservatives dare to take them on?

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When? How? I am getting annoyed with the smugness of my public-sector acquaintances. I realise Labour won't dare anatagonise their last remaining loyal consituency before 2010, but after that, when and how will the public sector get the backside-kick it deserves? Hiring freezes and raising the retirement age for new employees won't be enough. Will even the Conservatives dare to take them on?

Whyever not?

They need to take a leaf out of the Mrs T book of War and make sure all necessary preparation is done beforehand, and avoid the Edward Heath soultion.

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When? How? I am getting annoyed with the smugness of my public-sector acquaintances. I realise Labour won't dare anatagonise their last remaining loyal consituency before 2010, but after that, when and how will the public sector get the backside-kick it deserves? Hiring freezes and raising the retirement age for new employees won't be enough. Will even the Conservatives dare to take them on?

Just think how many of your smug friends are helping to keep this artificial economy going.

Once they fall it will get interesting.

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When? How? I am getting annoyed with the smugness of my public-sector acquaintances. I realise Labour won't dare anatagonise their last remaining loyal consituency before 2010, but after that, when and how will the public sector get the backside-kick it deserves? Hiring freezes and raising the retirement age for new employees won't be enough. Will even the Conservatives dare to take them on?

No the Tories will waffle and posture like Brown about cost savings, but will just implement hiring freezes in the end.

The legal framework surrounding public-sector jobs is too strong, it's too much trouble to fire people after a couple of years.

That's why you can't afford to create public-sector jobs you don't really need, and probation periods need to be taken very seriously. This was rarely the case when I worked for the MOD.

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