Why the young are forced to pay the old's debts
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Bill Bonner Guest blogger
$100 billion down鈥�
$40 trillion left to go!
Hey, don鈥檛 hold us to those figures. But yesterday European sages cut another deal to stave off the truth. Instead of defaulting openly and honestly 鈥� as Greece has done over and over again ever since 1827 鈥� the Greeks will be 鈥榬escued.鈥�
Sayeth Lucas Papademos, the technocrat leading Greece through its vale of deceit:
鈥淚t鈥檚 no exaggeration to say that today is a historic day for the Greek economy.
He鈥檚 right. It鈥檚 no exaggeration. It鈥檚 an outright lie!
What鈥檚 historic about the 15th rescue?
And as soon as the Greeks are fished out of the water, they鈥檙e to be given a shave and a haircut. No kidding. They鈥檙e supposed to shave off more public employees, more spending, and more benefits.
Already, one of 5 people is out of a job鈥ith 2 out of 5 unemployed among young people. In November alone, 126,000 Greeks lost their jobs 鈥� the equivalent of 3.5 million job losses in the US, in a single month.
But the Greeks aren鈥檛 the only ones who are suffering. Their creditors are supposed to suffer a $100 billion haircut, too. Sounds like a default to us.
And what鈥檚 important about Greece鈥檚 6th major default on its foreign debt? It defaulted for the first time in 1827. Since then, it鈥檚 made a habit of it.
The important thing, from our point of view, is that the Europeans are de-leveraging鈥etting rid of debt 鈥� at least a little, around the periphery of Europe.
Trouble is, there鈥檚 a whole lot more. And the level of debt, generally, is still increasing 鈥� thanks to the very same officials who just cut the latest Greek deal.
Here is where the numbers get a little unreliable. No, heck, they鈥檙e totally unreliable. But at least they give us a sense of the scale of the problem.
If you have debt equal to 100% of your income you can probably handle it. If the interest rate is 5%, you devote one twentieth of your revenue to debt service.
But if your debt goes to 200% of your income, the burden of the past begins to weigh on the future. You have to cut spending and investing, because so much of your income must be used to pay for things that have already been produced and consumed. Growth slows. The economy groans.
At 5% interest, you鈥檇 have to devote a full 10% of your income just to pay the interest. At 10%, you鈥檙e in real trouble鈥ith one of every 5 dollars already spoken for, even before you get it.
The world produces about $50 trillion worth of output per year. Some countries 鈥� usually poor ones 鈥� have very little debt, for the simple reason that no one would lend them money. Others 鈥� such as the UK and the Netherlands 鈥� have total debt burdens over 500% of GDP. (Much of it is mortgage debt, which is a special case鈥ince it may be considered an on-going expense, a substitute for rent.)
Even at 200% of GDP, debt doesn鈥檛 have to be a permanent and irreducible drag. If the economy grows faster than the debt, the burden becomes lighter over time. That is what happened in the US, for example, after WWII鈥nd again, during the Clinton years.
The problem now 鈥� grosso modo 鈥� is that the growth is in the countries with little debt鈥nd the debt is in the countries with little growth. In the US, for example, debt increases two to three times faster than GDP.
Most of the developed world is not so different from Greece. Some have more debt. Some have less. Overall, they have government debt equal to 100% of GDP. Household debt adds another 200% of GDP鈥r more; the typical developed country has total debt somewhere around 300% of GDP.
Total GDP is about $40 trillion. So in order to get total debt even down to 2 times GDP they need to wipe out $40 trillion of debt.
A long way to go鈥 tough row to hoe鈥�
Austerity comes to the USA?
Not exactly. But The Wall Street Journal reports that taxes are set to go up:
First, the top marginal personal tax rate rises to 39.6% from 35% as the Bush tax cuts expire at the end of 2012.
Second, a limit on itemized deductions will add a further 1.2 percentage points to the top rate.
Third, a new 0.9% Medicare tax on incomes over $200,000 gets imposed ($250,000 for joint filers).
Fourth, the top 15% rate on long-term capital gains rises to 20%.
Fifth, dividends will once again be taxed at ordinary rates 鈥� 39.6% for the top income earners.
Sixth, a new 3.8% tax on investment income gets introduced for incomes over $200,000 ($250,000 for joint filers).
Seventh, the top estate tax rate goes from 35% to 55% (60% in some cases).
The estate tax exemption falls to $1 million from $5 million (the gift-tax exemption also drops to $1 million and the rate adjusts hither to 55%).
Unless action is taken, these tax increases will take some of the metal out of America鈥檚 already-anemic 鈥榬ecovery.鈥�
And here鈥檚 something else that鈥檚 blocking the path to genuine recovery: Young people no longer start off in life with a clean slate. They鈥檙e heavily burdened with debt. They can鈥檛 spend. They can鈥檛 buy.
Bloomberg reports:
As outstanding student debt approaches $1 trillion, it鈥檚 one more reason record-low interest rates aren鈥檛 doing more to boost housing. The tighter lending standards that have emerged in the wake of the recession weigh particularly on younger, first-time home buyers, according to a Federal Reserve study sent to Congress on Jan. 4. These households tend to be younger, often have relatively new credit profiles, lower-than-average credit scores and fewer economic resources to make a large down payment, the report said.
鈥淧otential first-time homebuyers have been disproportionately affected by the very tight conditions in mortgage markets,鈥� Federal Reserve Chairman Ben S. Bernanke said at a homebuilders conference last week. 鈥淔irst-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly.鈥�
The Fed鈥檚 white paper said 9 percent of 29- to 34-year-olds got a first-time mortgage between 2009 and 2011, compared with 17 percent 10 years earlier. 鈥淭hese data suggest a large decline in mortgage borrowing by potential first-time homebuyers due to not only weaker housing demand, but also the effect of tighter credit conditions,鈥� the Fed said.
Outstanding education debt surpassed credit-card debt last year for the first time, according to Mark Kantrowitz, publisher of FinAid.org, a student loan website. Recent college graduates carry an average debt load of more [than] $25,000 each, which can limit their ability to qualify for mortgages even if they鈥檙e fortunate enough to land a job in a market with an unemployment rate of 9 percent for 25 to 34 year-olds.
Calling it a 鈥渟tudent-loan debt bomb,鈥� the National Association of Consumer Bankruptcy Attorneys warned Feb. 7 about the effects of rising student debt on recent graduates, parents who cosigned their loans and older Americans who have gone back to school for job training.
鈥淛ust as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,鈥� John Rao, vice president of the NACBA, said on a conference call.
Normally, the housing 鈥榚scalator鈥� works like this. Young people buy starter houses from older people. The older people move up to the family homes, buying the houses of people who are selling out so they can buy retirement houses. If the starter houses aren鈥檛 bought, the escalator stops. Young people can鈥檛 buy; so, older people can鈥檛 sell.
The other part of the story 鈥� not widely reported 鈥� is the enslavement of the young to the old. In effect, instead of families paying for their children鈥檚 education, they force the children to borrow the money from the government. Then, paying it back, the money is recycled to old people 鈥� through Social Security, Medicare, and so forth. Meanwhile, the government borrows trillions more to fund their giveaway programs. In the US, the total is over $15 trillion and rising 鈥� most of it destined to pay benefits for people over the age of 50.
And guess who鈥檚 supposed to pay for all this debt? The young, of course!
How long before they revolt?
Regards,
Bill Bonner
听蹿辞谤 The Daily Reckoning
