While unsustainable government policy drives the bus, two other variables in addition to fertility rates make estimates on eventual crisis difficult.
The variables are existing debt, interest rates, and global alternatives.
Existing debt
The financial crisis beginning 2008 has occasioned significant debt growth in nations almost across the spectrum. Even economies that successfully avoided drastic stimulus programs are currently threatened as the crisis lingers.
Unfortunately many of these stimulus efforts also appear to have become structural, as bureaucracy finds a way to free itself from temporary bounds. This issue is especially true in USA, where even 10 years of declining deficits will bring unsustainable debt to the forefront of national priority.
American size and prominence on the international stage alone guarantees this outcome. Greece default, with a population and economy roughly equal to that of Los Angeles is one thing. American debt is quite another, especially as historic growth rates become more unrealistic.
With attendant difficulties of measurement in mind, popular estimates of government debt as a percentage of GDP for selected countries include Germany at 85%, Italy at 130%, Japan at 200%, Spain at 74%, United Kingdom at 95%, and USA at 100%i. Also refer to the BIS report for more detailed analysisii.
Interest rates
Interest rates are a prime factor in calculating present values. Currently rates as managed by central banks have been historically low for more than a decade, mainly to mask the negative effects of ballooning government debt.
But what will they be in 5 years, or in 2040? Predictions are impossible. Further the markets add little value in this regard; ratings and interest rates are what they are until they are not. They tend to rise and decline in gentle slopes during optimal economies, but vary wildly and abruptly during crises.
And crisis is the point of this article. What we do know is that current debt trajectories are unsustainable even given today’s interest rates. Every uptick makes the situation worse.
Global alternatives
Global alternative is the measure of safe haven; captured labor, capital and resultant innovation.
To illustrate, the Greek economy was fine until it was not. Similarly, American interest rates actually went down after government downgrade for the simple reason that it remains the best of a myriad of riskier alternatives.
As another example, we call them ‘bank runs’ for a reason. Nations may slowly decline, but their fall, like any large organization, is sudden and catastrophic. Europe has governed over a mostly self-induced gradual decline in living standards over the last 40 years primarily because it remained an acceptable investment haven. It is difficult to gauge when that will cease being the case.
Part of the answer involves alternatives. The developing giants of China and India represent increasingly stable and self-sustaining landscapes of opportunity. Each has its concerns, but they are both finding that liberalization and western concepts of property rights and other individual freedoms are now inevitable, even as they are increasingly threatened in the West.
The pockets of stable and responsible nations is growing, providing outlets to capital and labor where there was none. As the OECD fails, these respites look more attractive and will eventually hasten its crisis as prospects dim.
And globalizing technology plays a role. Gone are the days when organizations and governments can indefinitely escape paying for their own mistakes.
As with interest rates, dissipation or flight is impossible to forecast. Decline is always difficult to model. But as Tainter and Olson postulate, life will be fine until one day it is not.
i“Statistics from A to Z – Beta version,” Organization for economic cooperation and development (OECD), n.d., http://www.oecd.org/document/0,3746,en_2649_201185_46462759_1_1_1_1,00.html.
iiCecchetii, Mohanty, and Zampolli, The future of public debt: prospects and implications, 3.
