The modern lifestyle: supported by our children

Every so often my thoughts turn to the curious economic situation we have built for ourselves here in the Western world, over the last century or two. The greatest building and economic boom in history has been hurtling along for some time now, but there are some serious issues that are starting to become difficult to ignore, even though we might like to. Most of these revolve around a four letter word which is the cure to all evils to some, and the cause of all evils to others: debt.

Around two hundred years ago, governments in Denmark and Germany started raising money for building projects by issuing bonds: asking people for loans which would be paid back over a long time period (say 30 years); which paid a generous rate of interest; and which were backed by the buildings themselves. Since then, the bond market has blossomed into a huge industry with many variants, but the basic principle remains constant: the public/government borrows money from rich citizens to spend on needy projects, and promises to pay back, with interest, sometime in the future. The rich citizens win–they get a sure and safe return on their money, often with a better return than they could otherwise expect from other investments. The public wins: they get shiny new buildings, roads, airports, armies, hospitals or schools, and generous pensions for civil servants. The governments win: they get credit for providing essential services, a happy populace, and money to spend promoting re-election. It seems like a win-win situation: but are there really no losers?

Unfortunately, there often are. They are called children, grand-children, and great grand-children. Boiled down to its essentials, the basic equation is this: we borrow from our children to support a lifestyle we otherwise could not afford. The beauty in this arrangement, from the point of view of the generation making it, is that the approval, or even the awareness, of the future generations who will pay for it is not required! With the the modern financial, legal and government set-up, we are able to simply legislate monies into existence. This is a modern kind of financial sleight of hand, as if from the Ministry of Magic in Harry Potter world. Need an extra few billion dollars? Wave the legislative wand, and lo!, it is there.

In time, the borrowing inevitably starts to escalate: it is all too easy. We find ourselves always requiring more money, each time to cover not just our bigger and bolder plans, but also the interest charges of our previous loans, which grow more and more onerous. Once we get used to the idea of an inevitable “national debt”, we don’t resist when the politicians jack it up yet a little bit more—in our best interests, naturally.

After a while, successive generations become simultaneously victims and beneficiaries of the system, which comes more and more to resemble a Ponzi scheme (first-in get paid, last-in lose). Each new generation, as they become conscious of the state of affairs, looks backwards with annoyance at the previous cohort for having gotten them into the mess, and then looks ahead at ways of passing the buck to the next lot. Government debt getting into stratospheric levels? Let’s just sell off a bit more of the public domain; our roads, our power systems, our hospitals, our airports, our public lands. Still not enough cash to support all the lavish entitlements and retirement plans that we all so richly deserve? Borrow more money from our ever-more-wealthy wealthiest citizens, or perhaps the Asians, or just print some more.

With the baby boomer demographic bulge moving into retirement, and life expectancies still on the rise, many commentators are now starting to realize that the pressures on the current generation of young people to keep the system going is shortly going to become acute, perhaps even unmanageable without serious alterations to expectancies.

Governments are raising retirement ages, pension plans are, in many places, starting to look wobbly (my own UniSuper superannuation scheme here in Australia has started making rumblings about not enough cash to meet future committments), and while the mainstream media maintains their reluctance to acknowledge and assess the problem fairly, more and more discontent is registering in alternate forums on the internet. The prospect looms of future action by younger people to rein in the lavish retirement packages that the baby boomers have lined up for themselves. What legislation can give, legislation can take away.

In the university sector here in Australia, I joined a few years too late to enter the “old superannuation scheme”, which overly generously allows my older colleagues to have retired in their late fifties with essentially full salaries as pensions. My cohort will have to work well into their sixties to receive possibly only 1/2 to 2/3 of our salaries. Does this seem fair? Well not to me, but then again to an already-retired person it is probably quite acceptable. And future generations? What kind of weight will my daughter’s demographic group have to collectively bear? It’s a question.

3 thoughts on “The modern lifestyle: supported by our children

  1. Peter Lund

    Yes, it does seem fair… to you. Not to your daughter. But it doesn’t seem fair at all that the older ones get so much more.

    Your terms seem very generous compared to what I would end up getting (in Denmark).

    Reply
  2. paul

    Hi. Thankyou for all you are doing in maths education. You are clearly one of the good guys.

    Re economics: I used to think like you. Turns out I was being suckered by the right wing media.

    As Wynne Godley, head of Applied Economics at Cambridge University, pointed out: in a closed economy, government debt = private sector savings …. to the penny. So if the government runs a zero deficit in a closed economy in a given year, then the private sector in aggregate will be unable to net save in that year. For an open economy the accounting relationship is – government debt – external trade debt = private savings … again to the penny.

    You will not have heard of this because whilst on the surface this is a neutral accounting relationship, in fact it tends to lead to conclusions inimical to those who wish to limit state spending – even in a crisis.

    What will determine the real wealth of future generations – and you in your retirement – is the real investment in real physical and human assets that takes place now. Leaving 50% youth unemployed like e.g Spain is doing will not lead to a prosperous future for Spain. The government may well have no “debt”. That will mean the private sector will have no savings and Spain will have built far fewer hospitals and will have far fewer nurses.

    Warren Mosler’s “Seven Deadly Innocent Frauds …” is an ideal start for you to find out how the money system, and thus the real economy operates.

    Bill Mitchell, (blogs at billyblog) is an economics professor at your university. He studied maths as an undergraduate, which might help explain why he actually understands what is going on.Here is a link – http://bilbo.economicoutlook.net/blog/?p=29831. Tell him I sent you!

    In short: look up Modern Monetary Theory and be prepared to have your understanding of the world turned upside down.

    Reply

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