Macro view of western civilization

Debt. Unsustainable debt. Western civilization is structurally bankrupt. Debt will consume virtually all western governments within three decades barring massive structural change. This unalterable fact and its structural causes represent the priority of the age, as they have been for the past generation.

Long term debt burdens are wholly separate from current financial crises facing USA and the Euro Zone and its comparatively short term issues with PIIGS. It is more accurate to understand current short term financing proposals as an attempt to repair the health of those countries enough so they are able to re-enter the ring and fight the final and more challenging rounds for their continued existence.

UK and USA debt projections

Demographics

Demographics is the factor driving the timing of structural viability. To varying degree in each country, fertility rates are significantly below replacement; most estimates of world population forecast issues beginning somewhere around 2030.

Fertility rates

But demographics is not the cause of the debt; it is a symptom. During the last century, western governments to varying degree chose to socialize medicine and pensions, replacing privately induced investment and its compounding effects with taxes and debt (declining currencies) for revenue streams. This strategy works when populations and economies are growing; the Ponzi or pyramid effect hides the inherent structural impossibility of withstanding no-growth economies.

But it is this non-investment strategy which forms a fundamental reason why recessions in current times hurt so much. But now the long term payment for lack of investment is drawing near, which unabated will cause drastic economic contraction and in at least some cases, national collapse.

Measurement

The size of unfunded liabilities is made more difficult because of the deplorable state of government accounting mechanisms across western society. If financial statements of public firms have grown more purposefully obscure over the last few decades, government statements have remained just plain sloppy and derisive of almost all accounting standard, even as they command trillions of taxpayer dollars.

Absent fundamentally reliable measurement systems, private organizations have attempted the forecasting task with varying approaches and degree. All agree the issue is gargantuan. The common estimate is that western nations must reserve 5-10% of current GDP between now and 2040 to fulfill their obligations. Given current debt levels and economic malaise, this requirement seems beyond practical.

Significant variables

Not every country is in the same predicament, although the stories in each case all end in the same place; gargantuan, unserviceable debt. In the case of the larger economies, it is not interest rates that will challenge the outer time bound of their viability (many economists deny debt crisis issues by arguing away the interest payment issues), but that they will begin gobbling up world GDP to turn over their debt obligations. Greece default, with an EU impact roughly the size of Los Angeles, is one thing. USA, at almost 30% of world GDP, is quite another.

Still, interest rates, existing debt loads and alternate havens for capital and labor flight all play a role in the timing of the looming crisis. Especially given that the American dollar is currently the world’s currency, it is difficult to predict exactly when decline turns to crisis. The American ability to export their problems through the dollar is immense.

Debt projections

The debt projections for selected countries as of 2040, expressed as a percentage of GDP, include France at 400%, Germany at 300%, Italy at 250%, UK at 500% and USA at 400%. Those numbers are a baseline scenario and the link provides alternate forecasts and more detail.

The data and resultant forecasts of current unsustainable government spending are aptly summarized in more detail by the BISⁱ. But the data is readily available at individual government sites, the CIA Factbookⁱⁱ, the IMF, OECDⁱⁱⁱ and elsewhere.

Country and government prescriptions have yet to dominate political discussion, especially now given immediate concerns resulting from the current financial crisis. Focus or no, the larger long term problem is quickly becoming the present.

Conclusions

The real question is whether today’s democracies are equipped to deal with the action necessary to avoid their impending future. For with the special exemption of Canada and its caveats, no modern nation has proven up to the task of critical reform. The good news for the USA is that it remains the world’s safest haven, and it retains large tracts of land and other assets which it could sell in order to back stop its unfunded obligations.

But it is time to consider that government debt and tax revenues are not sustainable methods of either developing societies and social nets, or nurturing modern cultures.

Government debt is not unlike giving your child a loan based on his allowance, even in the age of fractional reserve banking and fiat currencies.

More immediately, business plans and organizational strategy should begin taking these massive flows into account in preservation, debt, succession and diversification planning.

I Stephen Cecchetii, Madhusudan Mohanty, and Fabrizio Zampolli, The future of public debt: prospects and implications(Bank for International Settlements, March 2010), http://www.bis.org/publ/work300.htm.

ii “People and Society,” CIA World Factbook, n.d., https://www.cia.gov/library/publications/the-world-factbook/.

iii “Organisation for Economic Co-operation and Development”, n.d., http://www.oecd.org/home/0,3305,en_2649_201185_1_1_1_1_1,00.html.