Friday, September 28, 2012

Yes, we have no canaries

"Canary in a coal mine" is a fairly familiar expression, made so largely because of the Police and their song of the same name, released in 1980. But it refers to a real historical practice of coal miners: bringing a caged canary into the mine as a means of warning the miners about rising toxic gases. The canaries would become sick long before such gases had effected the miners, thus giving the later time to escape the mine. The phrase is now used as a metaphor for any type of early warning system.

But it would seem that the one place where we lack such a system--even though history gives us clear evidence of a need--is the arena of government debt. Because as much as mortgage backed securities played a role in the financial crisis of 2007-2008, so to did the rise in government debt, both in real terms and as a percentage of GDP.

There remains a cadre of neo-Keynesian economists--led by Paul Krugman--who continue to insist such debt is not a problem, that sluggish economies can be revived by government spending, that--somehow--such debt can eventually be paid down, once the economies start growing.

Now to be fair, such a scenario is not wholly ridiculous. It could work, given the right set of initial conditions. And one of those conditions would be--quite obviously--a low or even non-existent amount of government debt. Unfortunately, such is not the case, in the United States or almost anywhere else. Governments have spent decades piling up debt, regardless of how their economy was or is doing. And now, with the annual cost of carrying such debt sucking up huge chunks of government revenues, there has been a turn towards so-called "austerity" measures. And surprise, surprise, no one like such measures in the least.

As I previously detailed, protests against "austerity" are growing in Spain, even as the Spanish government struggles to prevent the nation from following the path of Greece. People in France are none too happy, either. Nor are they happy in England.

But the alternative to reigning in government debt is calamitous. Because increasing government spending--as people like Krugman would have nations do--means increasing the annual cost to governments of servicing their debt. And that means destroying wealth held by the public, either via inflation (which will outpace interest rates on savings) or via increased taxes that simply deplete wealth and savings as a matter of course.

Why? Because this isn't the eighteenth or nineteenth century anymore. It's not even the twentieth. Populations in industrialized nations are aging and either growing slowly or actually shrinking. The tax base, relative to the overall population, is shrinking. There's a point of no return here. I'm not sure how to compute it, but I know it's there, the moment when government debt can never be paid down without truly severe cuts in government spending, cuts that would threaten the very existence of the government.
We all know that when it comes to debt as a percentage of gdp, Greece was and is in serious trouble. But look at this chart and see who the big dog is, when it comes to debt as a percentage of gdp. That's right, it's Japan, with a debt to gdp ratio of over 200%. So why hasn't Japan fallen down the same rabbit hole as Greece? Short answer: savings. The government and the citizenry have more than any other industrialized nation, thus allowing the the government to finance more debt, year after year. To a point.

And that point may be coming in the very near future, as this article in the Atlantic notes. Japan's working-age population is shrinking rapidly now, compared to its retired population. As the government is forced to return to the borrowing well, year after year, Japan's impressive per capita savings rate will fall. Drastically. And then:
The shock felt around the world will result not just from the realization that Japan is unable to meet its pension and other social obligations. Investors will also be horrified to see the disappearance of the private savings previously used to buy government debt, whether through debt defaults and bank failures or through high inflation. For ordinary Japanese, public promises about retirement benefits and price stability will be broken just as their private savings for retirement collapse.
Some might think this to be an overly pessimistic outlook, perhaps banking on the idea of a worldwide economic recovery as means of staving off such a future for Japan. But there are few signs that such a recovery is coming. And even if it is, will it be in time to save Japan? Much is made of the fact that Italy is no Greece, that Spain is no Greece, that economic collapses in these larger nations will be felt throughout the EU, throughout the world in fact. Well, Japan is no Spain or Italy. In fact, it's population is greater than that of these two EU nations combined, as is its industrial output and share of the world's total GDP. If a collapse in Spain will hurt, a collapse in Japan will maim.

So what we have--throughout the industrialized world, with some notable exceptions--are nations with loads and loads of government debt, all experiencing problems because of this debt load. And there have been warning signs for decades, largely unheeded by the powers-that-be. Why? Because noting the potential problems with accumulating such debt would have prevented the continued expansion of government, the continued growth of government spending as a means to pacify populations and buy their political support. There is no Left or Right here, no Republican or Democrat, no Socialist or Capitalist, because the great majority of those in power--until quite recently--have been playing the same game, regardless of their ideological claims.

And again, all of this could have been avoided, with nothing more than a few canaries...

Cheers, all.


  1. You don't live close enough to Kentucky - the canary reference did not need to be reinforced by Sting here (in Missouri).

    How deep it the water table in Florida anyway?

  2. The problem is not just debt, but structural debt. If you know that a certain percentage of your budget _has_ to go to certain things, you have much less room to maneuvre. If these structural things keep growing, you are in for a bumpy ride.