“It’s not what I want for my grandkids”

Issues

When the global financial crisis spread from banks in the USA to Europe and the liquidity crisis meant the contagion affect went worldwide the speed with which financial markets were affected was frightening.  There is no doubt the crisis had its origins in USA and with a market capitalisation of 50% the USA coughs and the rest of us catch a cold – in this instance, more like influenza.  It won’t be the last time this happens either as the capitalist world obfuscates the fiscal system.  There is a big issue, and that is one of mounting debt.  Both public and private.  Most western countries have borrowed in the billions (including NZ) to maintain consumption (every year since the GFC).  Without liquidity businesses grind inexorably to a stand still – similar to a household budget.  But it becomes even worse as workers are laid off if further borrowing is limited.

At this point mortgages and over drafts become a problem – the mortgagor cannot afford to pay and the bank is forced to foreclose.  So governments step in and borrow and provide banks with liquidity.  The borrowing and lending cycle escalates.  People using credit cards and revolving credit facilities to fund consumption.

In 2013 the gross government debt for the following countries was:

Greece                 182% of GDP (Gross Domestic Product – the combined revenue of the country)

Italy                       128% of GDP

Portugal               124% of GDP

Ireland                  119% of GDP

USA                        112% of GDP

UK                          92% of GDP

Japan                    245% of GDP

You can tick the top one off – it’s bankrupt.  Its citizens forced into oversight from foreign bankers – this from a country which gave us such great philosophers and scholars.

But these figures pail into insignificance when public debt is combined with private: Japan 512%, UK 507%, France 346%, Italy 314%, USA 279%, Germany 278%.  These numbers are two years old.  Countries continue to borrow (including NZ for the last eight years).

My concern lies with the next generation.  The current generation of voters live at the expense of those yet too young to vote or as yet unborn.  Whilst the level of debt cited as public (government) is historically unusually high it does not include far larger unfunded liabilities of welfare.  And each party lusting for the treasury benches will promise more at the next election.

Medical, superannuation and the multiplicity of promised individual and group benefits.  The costs are in the billions in NZ and escalating.  Future fiscal revenues are mind boggling and my generation (the baby boomers) continue to demand more at the ballot box and thus transfer the claim upon their children and grandchildren to find the answers in the future by either increased tax or drastic cuts to theirs and others through reductions in public expenditure.  Someone has to pay or go without sometime.  Austerity follows profligacy.

Rationale

When institutions are ‘too big to fail’ governments bail them out.  I have experienced this on a number of times in my lifetime – in NZ.  Unfortunately when executives of banks know this and they are incentivised to ‘maximise shareholder value’ since their own wealth and income comes from shares and share options in their own institutions – the easiest way to grow was and is to maximise the size of the banks activities relative to their capital.  They lend more and more.  When you combine the High St profit motive (private banks) with government regulation (law) – as occurred in USA with Congress designing legislation to increase the percentage of lower-income families – to own their own homes, the unintended consequence was a Global Financial Crisis.  The problem with the experience of the financial crisis is that it has strengthened the case for using the government deficit as a tool to stimulate the economy in times of recession and in so doing mimics what we teach our kids not to do.  (allowing short term gratification at the expense of the future).  In this instance the next generation.

Recommendation

In running our little financial services company in NZ we are obliged to conform to rigorous compliance and regulatory requirements.  Public companies – even more so.  Specific regulation relating to accounting practices and transparency are paramount.  This is not the case with fiscal policy – how governments spend.  We need to restore the social contract between generations because unless we do we run the very same risk currently experienced in Southern Europe.  The answer lies in a constitutional solution (already adopted in some USA states and in Germany) – a balanced budget amendment which would reduce the discretion of law makers (politicians) to engage in deficit spending – much like the practice of giving central banks independence, and thus reducing politicians discretion over monetary policy.

Unless we slow down the profligacy at government level how can we expect the banks to take more responsibility or liability.  The obvious flow on affect is personal spending, followed by financial anxiety, family relationship issues, health decline and an expanding benevolent society.

When voters are enthused by the next round of government incentives and the government is not committed to the same level of transparency and financial compliance that it expects for all NZ companies – we need to take a moment to reflect.  The environment is worth serious consideration for the next generations, so to is our financial freedom and lifestyle.  An ever increasing burden of debt, both public and private will eventually lead to bankruptcy individually and/or collectively.  It is not what I want for my grandkids.  Gen Y needs to focus on the environment, the community and the monetary/fiscal system and select the politicians who think the same way.  Beware bearers of gifts.