World Government Debt Will Tax Our Children’s Children

Omaha, Nebraska, USA, 20 June. My mother always used to tell me that when I grew up my Social Security savings would be used to pay for her and other Baby Boomers’ retirements. That sounded really scary at the time. [br]

Omaha, Nebraska, USA, 20 June. My mother always used to tell me that when I grew up my Social Security savings would be used to pay for her and other Baby Boomers’ retirements. That sounded really scary at the time. [br]

But now we have much more to worry about. The global economic crisis has wreaked havoc on the world’s financial markets, plunging them into massive debt. Bail-outs of staggering proportions, stimulus plans of all types, enhanced unemployment benefits, and fiscal relaxation (lowering of taxes) have left most major governments with huge public debt.

Recent IMF data indicate that the public debt of the ten richest nations will increase from 78 percent of GDP in 2007 to 106 percent in 2010, and 114 percent by 2014.[br]

Even once the official reports emerge saying various nations have experienced growth for two consecutive quarters (meaning they are out of a technical recession), there will be a long way to go to pay back this debt.

Economic growth will be slow for a few years after the recessions end, and budget deficits will stay large.

One simple way to remove the debt, or at least reduce it is to inflate it away. This would be done through what is called quantitative easing (essentially printing money), that would be used to buy government bills and bonds. See our special on quantitative easing here)

But the medicine (inflation) might be worse than the disease (massive debt). Remember what happened to Germany after WWI? They slashed their debt through hyperinflation, but cash became cheaper than firewood.

The Bank of England is taking steps in this direction through this questionable form of monetary policy by printing notes. It is said that hyperinflation’s only cause is unrestrained money-printing.

Whether this form of expansionary monetary policy is used, just the thought of it ignites widespread damage. It could cause long-term T-bills and bonds to hit sky-high yields and might mean central banks and the Fed would have to hike interest rates to combat the sudden flow of funds into the market.

And the markets don’t like such instability and volatility.

Another option is to simply default on the bonds – you know, the only guaranteed investment? No major, first-world economy has done this since the end of WWII, but emerging nations have.

Countries such as Sweden, Denmark, Ireland, and Canada have all been successful at lightening their public debt without inflation. But with the widespread contagion and far-reaching effects of this crisis, relying on exports to accelerate growth will not work – nobody’s importing.

The main monetary tool of a central bank is interest rates. Much of Ireland’s incredible recovery was aided by low interest rates, making them competitive on a global scale. But with rates already at rock-bottom that will not be any incentive.

Exacerbating all of this of course is our original point – an ageing population of Baby Boomers. Add to that rising health care costs and you have a public debt condition unlike anything we’ve ever seen in our lifetimes.

According to the IMF, the present value of the fiscal cost of this graying population is ten times that of the financial crisis, which would result in public debt of 200 percent GDP by 2030 in the biggest and richest nations.

My mother was right, but little did she know, me paying her Social Security would be the least of my worries. I will just have to remember to tell my children to pass the message down to their children, because they are going to be bearing the brunt of this astronomical debt.

Vladimir Gonzales, EconomyWatch.com