The end is known; the timing is not.
The end is that all governments in the Western world will go bankrupt. This is a sure outcome, as governments have entered into the deadly quagmire of an inescapable debt trap. The result of such an end will be bitter for governments and millions of people who will see their paper money return to its intrinsic value.
I am looking into the future promises by the governments, and their ability to fulfill those. Yes, I am talking about the large off-balance-sheet government liabilities. These are future benefits the government has promised its population. A major chunk of it relates to pension benefits, and the numbers are eye-popping.
Just a few numbers related to the total on- and off-balance-sheet government liabilities (as a percent of GDP) are given below.
The United States has a total debt to GDP of 541%, while the European Union’s number stands at 434%. Just in the case of United States, the Congressional Budget Office estimates for total government debt is until 2018 is upward-trending. These estimates are based on fairly robust economic growth projections. Therefore, will annual budget deficits to stay, where will the off-balance-sheet commitments come from? There is simply no way of funding these commitments.
To add to the woes, an aging population has the potential to mute growth and also increase interest rates. This will put a big question mark on debt serviceability. I can think of few ways in which the coming financial collapse can be delayed further. However, I can’t chalk out a permanent solution to the problem.
Extending the retirement age for baby boomers might be one idea. It just delays the inevitable. It can also lead to feeling of anguish among the aging population -- they sure will feel cheated.
Printing billions and billions of paper currency is another solution. This, too, is highly unethical and almost makes all pension obligations given to retirees worthless. All this could stir a major civil uprising.
I am not trying to paint a gloom-and-doom picture for the future. I think we all just need to be realistic. I am most willing to write another optimistic article if anyone can put forward a solution to this coming crisis. I can think of another solution, but it needs lot of political will, and cooperation of the masses to be executed: The solution is that the government scraps off a majority of the unfunded promises related to Medicare, Medicaid and a few other obligations.
This will immediately erase the pressure of all the future commitments on the government. The painful part here might be years or even a decade of dismal growth or recession.
The above action will lead to people turning into savers than being spenders. They will know that the government is not there to take care of their post-retirement needs.
The issue here is – Will the government take such a step at the cost of losing power? Further, are the developed economies prepared to face years of dismal growth? I think most people will reject my idea. For sure, no one would be happy when they suddenly hear that they have to take care of themselves (rather than the government doing it).
But what is the other way out? If it is money printing, hyperinflation and bankruptcies, then the implications for the masses would be the same. In relation to the off-balance-sheet commitments, one important point to note is that the governments will not allow risky asset classes to decline meaningfully. A lot of the investments of pension funds and others are directed towards one or many of the relatively risky asset classes.
Therefore, in searching for a solution for the coming financial Armageddon, investors can feel relatively safer in equities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.