After the money’s gone


You may ask yourself, what is that beautiful house?
You may ask yourself, where does that highway go to?
You may ask yourself, am I right, am I wrong?
You may say to yourself, my God, what have I done?
 -David Byrne-

When trying to explain the mess we are currently in, the left will decry the greedy ‘Banksters’ and declare a failure of capitalism and the right will point to the Community Reinvestment Act and blame it on government interference.

Both are half right.

To see how we got to where we are it is necessary to start back in 1945 and bring together a number of different threads. After the end of WWII, the industrial base of Europe and Japan lay in smoking ruins and the USA reigned supreme as a military and industrial power. Its industry had ramped up to wartime production while being unaffected by aerial bombing due to the lack of range of bomber aircraft of the time. All of the Industrial countries (by which I mean North America, Western Europe and Japan) took on huge debts to finance the war. Europe began a massive reconstruction program to rebuild its industrial capacity, financed by the Marshall Plan to the tune of $12.7 billion ($152B in todays money) and a similar plan for Asia of $5.9 billion ($70B ITM). The US did this through a mixture of altruism and self interest in that it provided a bulwark to an expansionist Soviet Union, a growing market for its own exports, successful democratic allies rather than permanently subdued and resentful vassal states and in many cases, the money was provided in the form of loans which were repaid. Hard and soft power allowed the US to reshape international trade in a form more to its liking with freer trade with lower tariffs.

Wartime Debt

We can see from the graph above that this was hugely successful with most of the wartime opponents undergoing a ‘post war miracle’ that allowed them, by the mid 1970’s to bring their wartime debts to below 50% of GDP.

The 1970’s saw a number of post war effects come to a head. The baby boomers reached their 20’s and began demanding political influence and a more socialist economic system, through a combination of youthful enthusiasm and Soviet manipulation. This was the time of the communist radicals, the Vietnam War protesters, the 68ers of Paris and the various left wing terrorist groups financed by the Soviets and Libya. While the terrorists mostly failed in their objectives, the political centre ground lurched to the left and more and more social programs and entitlements were demanded and enacted. At first, this was financed through ever higher taxes until it was found that there was a limit to how much you can tax an economy before it began to have a negative effect on growth.

The back slope of the Laffer Curve had been reached.

So tax rates were lowered by Regan in the US and Thatcher in the UK and following their success, by many others worldwide. The public, however, still demanded ever increasing entitlement spending, so the difference had to be found somewhere. This is when national debt rates began to rise again throughout the western world as governments looked to the bond markets to fund the entitlement spending that the public demanded but were unwilling to pay for through taxes. The media, the voters, the political class and academia cheered them on.

While Thatcher’s legacy as a fiscal conservative is secure, having brought Debt to GDP down from 45% to 25% during her tenure while greatly improving economic growth, Regan’s is more mixed. He did reduce taxes and increase economic growth, but he also embarked on an arms race with the Soviet Union rather than use the savings to reduce debt. It can be argued that eliminating the threat of nuclear Armageddon was worth the price, but the fact remains that that debt increased from 30% to 50% during his time. The upward trend continued under Bush Sr who had a gulf war to pay for. Clinton during his two terms reversed the deficit and reduced the debt, but Bush Jr and Obama significantly increased it again.

All of them however, failed to tackle the ticking time bomb of demographic changes that would mean that as the baby boomers reached retirement age, there would be significantly fewer younger workers to pay for their retirement. The baby boomers embraced feminism which brought vast numbers of working age women out of the kitchen and into the workforce. This had a number of long term economic effects. Firstly, working women with newly available birth control, decided to have fewer children in order to better balance home and work life. Two income families bid up the price of property to way beyond what could be afforded by a single salary, forcing more women into the workforce in an ever increasing property price arms race. Rapidly increasing home prices gave an illusion of increased wealth and people began to view the family home as an ATM machine to borrow against for current consumption.

During the last 20 years, an apparent increase in wealth has convinced more and more school leavers to go to university. In the US and to a lesser extent the UK, this has seen them enter the workforce already massively in debt. Young couples, already in debt are putting off having their first child till their mother’s early thirties when fertility rapidly declines and the time available to have subsequent children is greatly reduced. As a huge phalanx of baby boomers rapidly comes to retirement age, this process is now about to create the perfect storm.

The children of the Baby Boomers begat the echo boom of those born in the 70s and 80s, who have had to delay forming families due to their educational indebtedness, their wives’ reluctance to begin childbirth without financial security and the lack of available housing at reasonable cost due to their parent’s generation reluctance to sell up and downsize at a price less than they think their properties are worth due to a fallback after a lifetime of booming prices. This now middle aged generation have produced far fewer offspring than their parents.

It is normal, in the western world, for someone with three or four siblings to have one or two children themselves. Thus a falling population is a mathematical certainty. The retirement system was set up sixty years ago when every couple could expect to have four children and sixteen grandchildren, each earning wages and paying taxes back to the previous generation with a comfortable surplus. This model fell apart in the 90’s and the number of workers per retiree is rapidly dropping to an unsustainable level, i.e. the falling number of new workers can no longer sustain the increasing numbers of retirees.

This demographic problem has been obvious for decades and has been criminally ignored by the political class that preferred to spend now and forget about paying later because it would be someone else’s problem. And the public have only themselves to blame for ignoring the problem and failing to hold their politicians to account while believing the pretty lies. Instead of creating a “You get out what you paid in” system as was put in place in Chile when they took on board this problem decades ago, and as was half attempted in the US with the 401(k) scheme, the political class, with the acquiescence of the people, chose to ignore the problem and will soon have to face it straight on, without a backup.

This will not end well.

Letting the days go by, let the water hold me down
Letting the days go by, water flowing underground
Into the blue again, after the money’s gone

David Byrne


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