Saturday, February 6, 2010

Globalizing the Australian Intergenerational Report – thinking about long term sovereign solvency in Australia, the US, New Zealand, Japan and China

In the financial crisis governments seemingly regularly guaranteed their banks to stop their banks from collapse. This worked in preventing mass bank collapse and a consequent Great-Depression-Event. But it transferred the risks to government. Since then yield on bank debt has tended to converge with yield on the domestic sovereign. And the financial crisis has morphed into a sovereign debt crisis.

The crisis-of-the-moment is Greece. Greece runs a fiscal deficit which is a low teens percentage of GDP (a couple of points worse than America) but unlike America it does not control its printing press* (Greece uses the Euro) and (believe it or not) its political system looks more dysfunctional than the US.

I do not want to blog about Greece. I blogged about the issues with Spain and the issues are the similar. It is just that Greece was first to the breaking point.

This post is not about short term sovereign solvency. Short term a sovereign is insolvent when it can't find anyone to lend to it and it is seemingly impossible to pick the moment of panic. People have talked about Portugal, Italy, Greece and Spain (the so-called PIGS) being insolvent for many years. It is not as if the collapse of one was unlikely. [I thought it would be Spain first – but hey – I was wrong...] Today people add Ireland to the list (since it guaranteed huge banks) and talk about the PiiGS. If you picked that it would be Greece first and that it would be 2010 that the crisis happened then you are better a the short term stuff than me. (Italy always struck me as a marginal member of the PIGS but I could be wrong about that too.)

This is a post about long term solvency – the things that we do now that determine whether we have an economic crisis in twenty or thirty years. In that sense this is a post about Australia, the US, New Zealand, Canada and Japan and possibly even China. The PIGS have rolled their dice. Most the rest of us are still shaking the dice in the tumbler.

I will start with the Australian Treasury Intergenerational Report – a report required of the Australian Treasury every five years. Whilst the projections (including economic growth projections for forty years) are to be taken with a grain of salt the basic tradeoffs are the ones detailed in the report. Let me summarize quickly:

Australia – like much of the developed world – has a demographic problem from aging baby boomers. Our dependency ration (the ratio of people of non-working age to working age) is increasing and likely to increase dramatically. Moreover the dependent group will shift from young people (who impose schooling expense) to old people who impose nursing home and medical expense. Old people generally cost more than young people and as we live in a country with (semi) socialised medicine that expense is likely to fall (heavily) on the Federal Budget.

Australia's national budget will thus become a little tighter each year. [This is in contrast to the glory days of the 70s and 80s where economic growth and baby boomers going through their years of peak productivity made the budget just a little easier to balance every year.]

The net effect is that something has to give. Either

(a) Australia cuts benefits to old people (and with socialized medicine that means deciding when you turn the respirator off) or

(b) Australia sharply increases taxes or

(c) Australia sharply change the mix of our population by having more babies or importing more people through immigration.

Some smaller things can work at the margin. For instance Australia can change ages at which people qualify for various pensions. This should keep old people in the workforce longer and hence reduce the dependency ratio. Also – as the working age population become the scarce factor wage levels for those still working should rise. The higher wages will attract some older people back into or into staying in the workforce. However these are effects are likely to be too small to overwhelm the main thesis.

With a good size baby boom and old people driving government expenditure (something that is certainly the case in the US) the problem is real and will remain intense.

The problem could be solved with very rapid economic growth – but the Australian Treasury models a quite high real rate of growth and Australia still has a problem. If economic growth were to decline to Japanese levels the fiscal imbalance by (say) 2030 would become very intense. [Australia could get very lucky with sharp increases in commodity prices. That sort of luck is possible because Australia is small – however that sort of luck will not bail out the US.]

By far the easiest solution is (c) - changing the mix of the population. Societies are not good at rationing health care expenditure for the elderly and there are limits to the ability of smaller open economies (such as Australia) to keep increasing taxes. [Though in my view a little of both these things will happen.]

Everyone that matters in Australia knows that the easiest solution is (c). Peter Costello – Australia's last Treasury (in the US context read Secretary of the Treasury) knew this and advocated women having three children – one for mum, one for dad and one for the country. **

Costello had his eye on the future fiscal balance (as he should) but there is an undertone of racism in his pronouncement. Australia's population is a matter of choice because there is an endless supply of skilled and/or needy immigrants who want to live in Australia and the main case for having babies over importing people is that the babies are probably white.

Anyway the core way that Australia is balancing the long term budget is through immigration. If you want to solve the problem that way you need very large immigration now so that in 30 years the you get the right dependency ratio. That – for better or for worse – is what the government is currently doing. Australia's immigration rate is massive – roughly 1 percent of the population per year. That level of immigration will have Australia on the path to a 50 million population (currently 21 million) by the year 2050. Australia will – in resource use and population over fertile areas – look about as crowded as the US.

Obviously if Australia chooses to go the high population path (and there seems little doubt that Government is adopting that path) then environmental pressures (of almost all kinds) will increase sharply. The Report focuses on greenhouse gas pressures (population growth will make it harder for Australia to meet any given emissions target) however it could focus on almost any environmental amenity. Dr Henry (the Secretary of the Treasury) is known to be personally in favor of rationing Australia's limited water with pricing – but also said to be in favor of replacing petrol taxes with congestion taxes on Australia's (and particularly Sydney's) overcrowded roads. Whatever – the high population path will increase pressure on Sydney – a city that is becoming famously dysfunctional with poor public transport and congested road systems.

By going the high-population route Australia replaces intergenerational financial pressure with a litany of environmental and resource use problems.

But by going the high population route the government can remain solvent even with the baby boom. The government is currently running too high a deficit – but most of that is temporary. And the longer run seems to work (albeit with environmental costs described).

The same position sort of applies to the US. Medicare (the US version of single-payer socialized medicine) ensures that an aging population will put enormous stress on government finances. (Whereas US Social Security funds are nearly solvent the Medicare equivalent is unambiguously bankrupt.) However with enough economic growth and some population growth the US will get through. The starting budget position in the US is considerably worse than (say) Australia – but it is only really worse by the cost of the Bush tax cuts, the excess Bush-and-terrorism induced military expenditure and maybe one smaller tax hike. None of those would be hard to achieve with a functional political system (though it is becoming increasingly hard to argue that the US has a functional political system)...***

On the plus side, the US – more than almost any other country – has the sort of economic system that might produce the innovation-led economic growth that would help solve the problem. Australia could luck into a solution (through commodity prices). But the US has – I think – a higher background level of innovation. Not enough to solve the problem entirely – but probably enough that the current level of immigration is almost enough. Things have to give – but with functional politics solutions could be found.

On the minus side – the US with a much larger population than Australia – would require many more immigrants to adopt the population growth solution. Also the US seems very poor at pricing and protecting environmental amenity – and that is in my view a key part of the population growth solution.

New Zealand – a country where I used to be a senior Treasury official – is alas long run insolvent by any count. Its population doesn't grow much even with immigration – and net migration has resulted in sharp negative productivity per head of population as skilled workers tend to move (to Australia) and unskilled workers are imported. The tax and welfare system also does not add up. [New Zealanders are paranoid about Australia as the response to this joke showed. However in truth New Zealand will one day beg to be the seventh Australian state and we will refuse. Also the Treaty of Waitangi is deeply inconsistent with the Australian sensibilities and (I think) law– but that is the subject of another post...]

Far more serious than New Zealand is Japan. They too have a baby boom – but unlike the either Australia or the US they have very limited immigration. The underlying reason is racism. Japan is a deeply racist country.

I know I am going to get into trouble for saying that – so I will defend it. I was walking through downtown Fukuoka. The area my hotel was in looked like a red-light district. I peered into a brothel (which the Japanese call “soaplands” and which was illustrated with the pictures of a Turkish bathhouse). The doorman rushed out – and almost violently – and in broken English – said “ no foreigners”. Brothels that will not take your money because you are the wrong race set a new standard for racism. A country that does that is hardly likely to solve it's demographic problem with high immigration.

Now in all of this I did not mention the country with the largest forthcoming shift in dependency ratio. That country is China – and the explosive ratio change (which will occur later than the US) was self-induced – a product of the one-child policy. China is – of course – not going to solve that problem by massive immigration. China is too big – and even with a population crash will remain too crowded. The forthcoming population crash in China is one reason why Chinese elderly can never get the sort of Western socialized medical care or old age social security that people in Australia just expect. But there is something to make the Chinese budget balance in their forthcoming population crash. And that is that the Chinese – more than all other people – have accumulated vast piles of claim-checks from rest of the world in form of Treasuries and direct ownership of equities and other property. One day they will need to cash them to produce what their aging population with its high dependency ratio cannot.

The economic problem of our time is – as much as anything – excess Chinese savings and how the world deals with them. I blogged about that – when – to slightly exaggerate the point - I blamed the financial crisis on the Chinese one-child policy. The economic problem of a future time will be huge Chinese dis-saving as they deal with a massive increase in the dependency ratio. Unlike Japan however the sovereign will not go insolvent because unlike a Western country the Chinese will never get committed to state support of the elderly.

John

Post notes:

*One of my German friends – a well-to-do guy worried about the future of Europe – notes with alarm that one of the printing presses for the Euro is physically located in Greece. He seriously believes that Greece –through control of the press – could blow apart the whole of the European economy. I have no opinion on this – other than to note my friend is nervous about European monetary zone expansion.

**Just so people get the titles right – the Treasurer in Australia is the senior political appointment in economic policy – the equivalent of the Secretary of the Treasury in the US or the Chancellor of the Exchequer in the UK. The Secretary of the Treasury in Australia (Dr Ken Henry) is the senior public servant in the area of economic policy. There is no obvious equivalent in the US but the Permanent Head is the equivalent in the UK.

***I note that almost everything I suggested to balance the budget is a tax hike. Get used to it. True deficit hawks know that you can’t fix a US budget without either large tax hikes and/or large cuts to defense and benefits to old people. There is not enough “waste” or “discretionary expenditure” to solve the problem any other way. If you are prepared to cut defense and turn the respirator off on medicare expenses then you can do with lesser tax hikes. But unless you are prepared to deal with such things you are not really a deficit hawk – more a deficit peacock.

-----------


Finally a little post-script is required. The PIGS (or is it PIIGS) are bundled together but they look different. Greece is a fiscal disaster area. Spain looks like one now (running a large government deficit) but it has not always been one. Spain looks more like Latvia - a fixed exchange rate and a profligate private sector. Bundling them together oversimplifies the problem.

The one thing they all have in common is a fixed (Euro) exchange rate and large current account deficits.


A second postscript: Ampontan (Bill Sakovich) writes a blog about Japan which I have been (irregularly) reading for some time. He obviously has not been reading me as he refers to me as "some Australian blogger". He suggests I should observe Australian racism (something incidentally I have commented on several times on this blog). He uses the usual glass houses line.

The question in this post was whether Japan would be willing to import anything like enough people to offset its demographic crash. That looks unlikely to me. Japan is famously xenophobic (a word with lesser connotations than racist) and that xenophobia has manifested itself over very long periods of Japanese history. That said the BBC has suggested that attitudes to immigration are beginning to change for reasons outlined in this post - and if Bill Sakovich wants to take up attitudes to immigration I am very willing to listen as he knows far more about Japan than me. (He is an immigrant in Japan so his knowledge would be detailed and specific.)

Finally if you read Ampontan he lets you know his viewpoint - check out his "what readers say" section...

42 comments:

Andy said...

It's impossible to consider the long term future without considering the peak oil phenomena. According to studies, the retreat from high intensity petroleum economies might actually decrease population. On the downside of the peak oil curve growth will only exacerbate economic problems. This is the century of the big crunch, when the world realizes that the petroleum economy was just a blip in the history of humanity.

John Hempton said...

Andy - I sort of agree. If we do not collectively work out a way of running transport with $500 oil (ie without oil on a grand scale) then you are right.

Oil is - unfortunately - one of a myriad of environmental and resource constraints that any of these futures entails. And probably a harder-than-average one to solve.

J

Jim Fickett said...

In the US at least, the solution is likely to come largely by indirect means, the politics being too difficult otherwise. So there are likely to be tax hikes via inflation and failure to fix the AMT, and medicare rationing via inadequate reimbursements that will cause more doctors to turn medicare patients away.

Jim

John Hempton said...

I do not think the tax hikes via inflation and AMT will be sufficient though I have not modeled this anything like as carefully as I would have when a Treasury official...

--

There may be a reason the US will fall into an abyss of its own making - and that is that the Republicans are so caught up in tax cutting ideology that they cannot increase taxes - and on spending they are all just deficit peacocks who strut about waste but are not prepared or able to cut core programs.

The Democrats are triangulators who will not or cannot stand up to a filibuster on any of these issues.

US politics is awful. And that - more than anything - is the reason why the US has a long-run problem.

===

PS. Are you prepared to turn the respirator off on old people supported by medicare? Are you prepared to sharply raise taxes? Are you prepared to sharply reduce benefits to older middle Americans. Are you prepared to gut the defence budget?

If the answer to most those questions is no then you are not a deficit hawk - you are just a peacock.

J

Charles Butler said...

John,

The wrench in the works is that it was assumed that we would enter into the era of retiring boomers from a position of economic strength. Current events certainly place this belief in doubt.

Peak oil's fine, but my secret suspicion is that technological progress has entered into the zone of diminishing marginal returns - with the unfortunate exception to this trend being medicine.

Ben said...

It seems to me more likely that the U.S. will take the most political expediant route to disaster - that route is money printing so substantial that the currency is debased and the standard of living of Americans is obliterated. After that happens, perhaps we'll figure out a way to pick up the pieces. The good news is this could help Australia with their budget via the commodity luck you discuss.

Ilya said...

An excellent post. The other solution is reverse migration. New Zealand's problem is that people leaving the country are young professionals - if we could get old people to migrate to warmer climes in retirement, the dependency ratio would improve. As long as in the NZ case, they don't migrate to Australia!

It is important we focus on China's demographic problems: if one listens to the commentariat in Australia (and elsewhere), one would think there is a law of nature that China will continue growing indefinitely. This is simply no going to happen for exactly the reasons in your post (plus the horrendous 122/100 boys/girls ratio). Good to see the RBA bring up how much better a position India is in.

By the way, that was an unjustified and unfair swipe at Costello, his comments were not in any way racist: any country faced with a choice between encouraging the natural birth rate and mass immigration, would choose the latter. It's only natural, immigration is risky from a social cohesion point of view.

CrisisMaven said...

I wish Australia and New Zealand all the best, having my doubtts though: This is going to get a lot, lot worse later in the year and all through 2011 when the adjustable rate mortgages are beginning to reset across the board and we'll see government debt default (by the way, not for the first time in US history).

Anonymous said...

A great read and a great summary of the IGR. I would like to make two points -
One, the wildcard here is technology. Rightly, no-one is relying on a technological breakthrough (or various breakthroughs) that will increase productivity and perhaps ease the strain on tax-payers, productivity gains and/or care delivery for the aged. Technology has the potential to be a game-changer and it would be of benefit to drill-down into areas where we should potentially be funneling some R&D $$.
Second, I know all the focus is on the impact of the Baby Boomers and the ageing population, however it would be interesting to think about the world 30-50 years past that again, when Australia has a lower and more balanced population where WASP's are likely to be simply another cultural sub-sector of a nation of immigrants. Will the "aussie culture" be maintained through an on-slaught of foreign cultures? Will our society become polemicsed or can we successfully integrate a multitude of cultures, religions and practices into a truly tolerant and homogenous nation? Will we have depleted the natural resources (ie, soil) in our limited fertile areas from feeding a larger population?

Hmmmm.....

John Hempton said...

Alas I think Charles Butler's comment is right. That the technological innovation is going to be in Medicine - something that will exacerbate the financial problems in this post.

If you had to pick the science that matters most to the next century it will be genetics. But we are outside my field of expertise.

And 40 year projections pretend we know more about the future than the past and present.

J

Anonymous said...

John

Does the baby bonus have an effect on birth rates?

And do you think this is a smart policy?

John Hempton said...

I would not know how much effect that the baby bonus has on birth rates. The birth rate in Australia per woman bottomed about 1.7 and has risen almost to 2.0 but I doubt the baby bonus was responsible for a large part of that.

==

As I said in the post - the advantage of having babies here rather than importing people is that the babies are white. Whether it is smart policy in that sense depends on your view of race and culture.

I don't think it - but some people have the opposite view...

J

CrocodileChuck said...

Excellent post and comments. Not only is transport leveraged to cheap oil, but agriculture as well, eg http://en.wikipedia.org/wiki/Haber_process
In my lifetime the world has gone from 3B people to 6.8B. What will life be like in a world with v expensive ammonia ($500 oil in John's example)
Charles Butler hits the bullseye-the key will be to develop technologies with 'increasing returns', to minimise Andy's 'big crunch'.......

Jim Fickett said...

Well that deficit peacock question ruffled my hawk feathers a little! :-) I place far more value on quality of life than on prolonging infirmity, and I'd be fine with, say, a $200k lifetime cap per person on medicare benefits. But I am far out of the mainstream on that one.

Since inflation (1) reduces all accumulated debt, and (2) allows nominal-dollar rules to creep into unexpected places (as for the AMT), it is quite powerful. But I admit I haven't run the numbers either.

Jim

John Hempton said...

Nitrate fertiliser and its link to natural gas is something I have nightmares about.

J

Steve said...

As someone whose day job is to turn respirators on and off I found this an interesting and thoughtful post. It may just be excessive cynicism but I’m unconvinced that any community gets good value from resources allocated to health care. All systems of health care delivery are marked by perverse incentives for clinicians. The incentive for clinicians in fee-for-service medicine is to.... service. The incentives in salaried (socialised) medicine are to do as little mundane work as possible but as much interesting work as possible. Clinicians, being ambitious and competitive with their peers, drive socialised systems to do new procedures, build bigger departments, and have access to new expensive drugs.

A major and consequential difference between health care and most other economic activities is that the relationship between marginal cost and marginal benefit can be, and frequently is, irrational. This occurs because of the combination of these perverse incentives with the agency relationship (clinicians tell patients that a treatment is needed) and the illusion that health care that is free at the point of delivery is actually free. I can’t proffer sensible solutions but it is at least plausible that reform of the way that health care is delivered could have a substantial beneficial impact on intergenerational transfers

Ilya said...

By the way, on the Chinese saving and demographics, here is another interesting take on the reasons: according to this, the savings rate can be explained by the imbalanced marriage market. Families with boys (a fair chunk of whom will go unmarried) seem to be saving more than those with girls.

http://www.voxeu.org/index.php?q=node/4568

dearieme said...

"Are you prepared to turn the respirator off on old people supported by medicare?" In Europe (I include the UK) you will see an increase in measures to legalise euthenasia. It's not just greedy children who will gain when the codgers fall off their perches.

狂猪 said...

Does the demographic study take into consideration productive growth? Assuming a productivity growth rate of 1.5% annually, an individual 30 years from now is 156% more productive than an individual today.

US live births data:
Baby Boomers (1945-1965) is 78 million
Gen X (1965-1985) is 70 million
Gen Y (1985-2010) is 100 million

It seems Gen X will have the difficult time in the next 20 or so years. After that shouldn't the Gen Y save the day? Couple Gen Y population and productivity growth, maybe they'll have some left over?

John, on a separate note, can you share your view on China? Perhaps a separate blog entry such an analysis would require?

Right now, there is a lot of concern regarding the asset bubble in China, in particular housing. However, the data seems very conflicted. Here are the stuff I know and questions I have.

1. China's current housing bubble is very different in nature than the US sub-prime bubble. In China, there is no sub-prime mortgages.
- All first time home buyers must put down 20% down. For buyers of 2nd home and beyond, they must put down 40% payment.
- The average down payment for home purchases is 50%
- The Chinese are famous for their frugal ways (savings rate is nearly 40%).
- Rental price in China are dirt cheap relative home price.

Over leverage is the primary cause of pain during an asset bubble. From data on Chinese home buyers, they are not the one's taking on excess leverage. Which economic players (the central gov, the local gov, the banks, the developers, and the home buyers) are taking on excessive leverage in China? Also, how/why is the excessive leverage taken on?

2. There is also a lot of concern of growing non-performing loans in China.
http://www.bloomberg.com/apps/news?pid=20601080&sid=aJhBD4AeX8WA

At what point the the ratio of none performing loan relative to GDP becomes a problem? How close is China to that danger? At least to me, the damage from a trillion RMB non performing loan doesn't seem that big when the economy is almost 5 trillion _dollars_.

Can the Chinese use it's 2 trillion foreign reserve to help directly or indirectly with the excess non-performing loan problem and how?


3. There are complains that speculation in China is driving up global commodity price. Given China's growth rate is consistently higher than 8% a year, strategically, it seems very logical to stockpile on commodity when the price is relatively low. Why should China hold pieces of US treasury paper that can be inflated away instead of holding commodities that it needs for it's growth? As such, how does one distinguish between speculation vs. strategic stockpiling? Is the demand from China for commodity a speculative bubble that will pop? Or is it simply smart investing?

Peter Rickwood said...

Doesn't the problem largely go away if you assume historic trend (or thereabouts) productivity growth? I don't mean go away as in there will be no impact of aging, I mean in the sense that we will be able to cope with the costs involved without big tax hikes or spending cuts.

John Hempton said...

The Australian report models a real growth per capita of about 1.5 percent. 2.5 percent solves the problem provided new spending initiatives do not crop up (national broadband network anyone).

I doubt 2.5 percent will be achieved. I think the Treasury model is realistic... doesn't mean it is right - but I do not think it is ex-ante biased. If Andy is right and we get the mother-of-all-hydrocarbon shocks then the Treasury growth numbers will be wildly optimistic.

J

John Hempton said...

As I said - we need 30 year growth ABOVE the 30 year post-war growth per capita to solve the problem that way.

If you get Japanese growth rates its a debacle of the first order. The Treasury models a reasonable growth rate - but high growth rates do make the problem go away.

J

John Hempton said...

Best comment via email -

I have a neat (final) solution... make smoking cool again.

Bring back the Winfield Cup, candy cigarettes, smoking camels. Sit back and watch your aging problems disappear...

Peter Rickwood said...

I don't follow how 1.5% productivity growth doesn't solve the problem:

Lets assume for the moment Treasury is more-or-less right, and 1.5% productivity growth happens. So in 2050 the average worker = 1.81 current day workers. Which means the effective dependency ratio is really 2.7*1.81 = 4.9. Compared to 5 now. So, fiddling around the edges (boosting retirement age, etc) fixes the rest easily. In fact, seems sideline fiddles like this could handle a bit of under-trend productivity growth too.

So the real dangers appear to be:

1) Growth in per-capita medical expenses.
2) Big shocks that will derail us from 1-1.5% productivity growth.

But I'm no economist.... what am I missing?

John Hempton said...

Per capita medical expenses have grown... a little has to be included.

dependency ratio is not the key - its people in last two years of life to population... that is much more of a determinant of cost. that ratio rises far faster than the dependency ratio...

There are other effects about age of the population on tax base.

2.5 percent does the trick as Treasury has modelled a few times (there is a Ken Henry speech to that effect). 1.5 means the problem is manageable - but not quite the dice.

But your back-of-the-envelope was my first attempt too.

J

Anonymous said...

what about the cost of a housing crash?

What impact on growth would that have?

John Hempton said...

A housing crash - at least a sustained one - would be a profound negative. Howevever a 3-5 year housing cycle - like what I think the US is experiencing now - would not really matter over 40-50 years. It washes out.

The chance of a SUSTAINED housing cycle depends critically on the population path taken. If Australia takes the high population route then nice houses near good transport in Sydney should not suffer over the long term. (My overpriced pad in Bronte should be fine.)

However - if Australia takes a lower population path then the family house is a disaster area. There will be radical changes in the mix of houses wanted by a much older population - and - the three to four bedroom house in suburbia will suffer the problem of too many (old) sellers and not enough (younger) buyers.

I think we should consider the depth of any sustained housing cycle endogenous to this model.

John

MikeT said...

John,

This is somewhat OTT. But I'd be really interested in your thoughts about the impact of a "localized" failure of a PIIGS on the European monetary union and financial system.

Theoretically, there is no reason Greece can't have a "localized" failure. The EU doesn't have a "hard" reason to bail them out automatically. However, what is the potential for contagion?

For example, in a Greek failure, Greek asset prices are going to fall. Asset prices in Portugal, Italy, UK, Ireland and other vulnerable countries are going to fall in sympathy as well. Credit will tighten. There will be banks with exposure to these countries, some of whom will suffer losses. Given the smaller capital ratios in Europe versus the U.S., how does this play out? The ECB will have to draw a line somewhere and stand behind key financial institutions. But how much is that going to cost and how far will the crisis progress before then?

I am not a European investor but this scenario scares me. I've been looking for a cheap hedge against that... The best I can think of is finding some U.S. insurance companies with significant bank preferred exposure to the EU (maybe AFL?)

John Hempton said...

I think Germany has to buy the Greek debt for the next two to three years (cost about 80 billion). It could do that a number of ways.

They can do this IF and ONLY IF the Greek government were to put itself on a severe austerity program.

If they do not do this nobody else will roll their debt. Greece is small vis Spain...

J

Simple Simon said...

Good Post
Re Japan: For a number of years Japan imported Brazilian Japanese (descendents of the mass emigration at the end of the 19th century). These immigrants did not speak Japanese and were herded into ghettos servicing the big exporters. When the crash of 1998 hit, the response of the manufacturers was to lay off the Brazilians and the government gave these folks $3,000 and a one-way ticket back to Brazil. I don't think these ethnic Japanese would be willing to return to Japan under any circumstances. Racism? Xenophobia? Call it what you please but the fact remains Japan is a dying country and the Japanese would prefer to sink into decrepitude rather than act decisively to fix the situation. The impact on the young from living among so many old people is worthy of study, social, political and psychological as well as economic. Good stat: the biggest demographic segment amongst Japanese voters? At 11% females over the age of 71.

Simple Simon said...

sorry should be 2008 not 1998. Don't know what Freudian depth that slip of the pen came from

Laban said...

If you import people there's a short term fix, but what happens when their (or their descendants) fertility declines to host levels ? Import more ? How long can you keep that up ?

And if their fertility stays high, then that may imply cultural separation.

Social cohesion is key. (The following from a UK context, but the issues are not dissimilar).

"Pierre Cailleteau, Team MD of Moody’s sovereign risk group, and Mares’ boss, says, safe havens’ triple-A status, "depends on two potentially unstable notions: continued public trust in government institutions, including the currency, and sustained inter-generational solidarity mechanisms." It is the latter of these that gives the US, Germany, Japan and the UK such huge room for manoeuvre"

What they're talking about in the end is a stable political culture plus intergenerational solidarity, which means the UK can run up debts now and be confident that future taxpayers will pay them off.

"Sustained inter-generational solidarity mechanisms" - well that phrase tends to imply that we're talking different generations of the same group of people. This will be less and less the case in the UK.

Right now 23% of the children in primary schools (England and Wales figures) are 'ethnic minority' and the proportion rises every year, with natives forecast to be a minority by 2073. How will these 'sustained mechanisms' pan out in such a scenario ? Will new generations of all cultures and colours put up with being heavily taxed to pay for the healthcare and pensions of the elderly natives ? While I'm not forcasting Armageddon, its at least a question worth asking.

In the UK we also have major funding issues - the government's been funding its hefty deficit by buying its own debt with virtual cash for the last year - coupled with increasing calls for the legalisation of euthanasia. I don't like the trend ....

Anonymous said...

"And that is that the Chinese – more than all other people – have accumulated vast piles of claim-checks from rest of the world in form of Treasuries and direct ownership of equities and other property. One day they will need to cash them to produce what their aging population with its high dependency ratio cannot."
Please correct me if I am wrong but it would seem to me that all the Treasuries you mention are held by the(Chinese)Central Bank and their equivalent in yuan are already in the hands of the local
Chinese population.Thank you.

MikeT said...

John,

Thanks for your reply. But I have a follow up:

If Greece were to adopt severe austerity measures as "payment" for a bailout, wouldn't the local economy be trapped in a classical deflationary spiral? And wouldn't that defeat the entire point of the bailout?

Of course, what they actually need to do is to clean up the corruption and inefficiencies etc. But that will take way too long.

And if Greece's economy spirals down, wouldn't that precipitate a domino effect to the other PIIGS anyway?

Nathan said...

Your Spanish banking post was prescient. For your sake, I hope you held onto that BBVA short. (I wish I'd entered one too.)

Fungus FitzJuggler III said...

Expensive medical care, using "the latest" is not always good medical practice and is certainly poor fiscal practice as far as socialized medicine is concerned.

The US is hopelessly lost in this debate as most of its citizens have been primed to regard social as communist!

Anti-biotics are frequently inferior to teetree oil. But corporations cannot profit as much as they would like from teetree oil! Hence there are bureaucratic and legislative barriers to its use. Artemisia is now an expensive anti-cancer drug, yet nature makes it abundantyl available. It is like banking, a money machine for psychopaths!

There are signs that electricity is being re discovered, as a health treatment, as original equations using Hamiltonian quaternions and not the adulterated Heaviside ones. The breakthroughs will be from China, away from US influence, and may be revolutionary. Anything that threatens oil threatens the interests of the company.

Fungus FitzJuggler III said...

I do not think that there will be much of a problem. As years go by, we will see what other solutions are adopted elsewhere as they face worse effects of this apparent challenge before they affect Oz.

I am more worried about what short term policies may be justified by politicians influenced by other considerations but using this to validate them.

We will triangulate the solution. Makes for a good article though.

Stephen Yeo said...

Looking at the demographic projections it seems that by 2050 pension age will increase by 2 years, while life expectancy will go up by 5.
If pension age was increased in line with life expectancy (or even faster) not only would there be a saving in direct costs (of pension), but more importantly working lives would be extended. There is a rate of increase, which I'll accept is probably politically unacceptable, that would keep the tax burden stable. I'm surprised the IGR doesn't explore the sensitivity of the results to such a change.

John Hempton said...

Mr Yeo -

I am not sure it is very sensitive to that... the number of real pensioners in Australia will not be that high - because the country has a pretty extensive privatised social security system...

The driver is medical expense more than anything else... but the sensitivities generally could be explored more...

John (I assume you are the guy with TradePartners...)

tooearly said...

Steve who posted above: thanks for the insightful analysis. As a physician i concur wholeheartedly.
Do you blog? I would like to read more of your thoghts.

Sean said...

I think with Japan a large part of the solution of an aging population will be through the use of robotics. Robots are already becoming more widely used for the care of elderly in Japan. Maybe be an interesting area for Japanese equities.

Japan is the country most likely to pull of a cybernetic revolution to address the issue of supporting the aged. Personally this is where Australia should be putting its money rather than relying on unsustainable population growth.

Patrick F said...

In the long run, we are all dead, as the old saying goes. Perhaps I am looking further than we all need.

But: are we not creating an endless immigration cycle?

Our immigrants tend to assimilate pretty well and one of the nasty habits they could pick up is having a small family. After all, family life in Aus is getting more expensive each year and social structures immigrants saw in their homelands do not exist here.

They adapt.

So, in 20 to 30 years, we will be going through this again, yes?

Perhaps Costello was not dabbling in a racist undertone. It is cheaper to grow at home. And at one point, our new brothers and sisters are "home" with us.

Perhaps we need to change the social view of publicly funded care.

Raising taxes scares me - not just from a hip pocket perspective, but from the way governments waste so much of what they collect.

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