Daily Archives: 29 November 2012

Unfunded Liabilities

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We’ve already seen counties and cities brought low and into bankruptcy by their blithe accumulation of future liabilities that they have no hope of honoring.  Jefferson County, AL, comes to mind, from a bond sale they had every reason to believe, a priori, that they could not honor in the future.

So does Stockton, CA’s bankruptcy, flowing from a public union pension and insurance program that they, also, must have known in advance that they could not support in future.

These are well understood, and the data that would have predicted these failures easily available to any who cared enough to look—and to face the impending problem squarely.

What of our nation’s debts, though?  Chris Cox and Bill Archer describe in a recent Wall Street Journal the hidden—and unfunded—liabilities at the Federal level that make our public national debt of $16 trillion look minor.

These hidden, but too real liabilities—debts—include

the unfunded liability of Medicare, $42.8 trillion

the unfunded liability of Social Security, $20.5 trillion

the unfunded liability of federal employees’ future retirement benefits, $23.5 trillion

But these data are carefully hidden from public scrutiny.  Federal Treasury “balance sheets” don’t include things like the debt represented by those Medicare, Social Security, and retirement unfunded liabilities.  No, the data are carefully squirreled away in the individual social welfare accounts.  You have to know where to look and what to look for—knowledge that heavily trained and experienced folks like Cox and Archer have, but which our politicians know the average American constituent lacks.

This is a time bomb that demands out entitlement programs be brought to heel, our entitlement mentality as a nation to be curbed.  Else we’ll go the way of Stockton.  And for a nation, that won’t be pretty.  Think of Greece today.  Think of Weimar Germany of the last century.

Debt Forgiveness and Bankruptcy

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Christine Lagarde, Managing Director of the IMF, insists as Spiegel Online International reports, that

For Greece to recover…creditor countries would have to forgive the government in Athens a large share of its debt.  “Nothing else will work[.]”

After all,

given that Greece will be unable to reach the target [of debt to GDP, originally 120% by 2020] on its own, European creditors have little choice but to forgive a portion of the debt they hold, Lagarde insists.

Additionally,

Senior troika representatives, including ECB Executive Board member Jörg Asmussen, Thomas Wieser, the president of the Euro Working Group, and IMF representative Paul Thompson, are campaigning for a debt haircut, especially among smaller member states.  Their goal is to reduce Greece’s 2020 debt level from the 144 percent of GDP that it would likely be without any kind of debt forgiveness, to just 70 percent.  To achieve the latter number, creditor countries would have to waive half of their claims.

The proposed haircut (of which the just concluded deal is a down payment) is a default, as was the prior haircut forced onto Greece’s many private creditors.  And here we are again.

These worthies are conflating default and forgiveness with bankruptcy, and that’s why we’re here again.

Default must come through a Greek bankruptcy, not through the EU, or the IMF, condoning irresponsibility by saying, “Forget it; consider our erstwhile loans to be grants.”  Forgiveness, which approaches a bankruptcy outcome, doesn’t achieve the new beginning that a bankruptcy would; it merely condones past irresponsibility without an actual write-off and fresh start—albeit with a poorer credit rating.  But what’s the Greek credit rating, functionally, now?  “The situation in Greece is scaring away private investors.”

And all of this shows the original folly of bailing out Greece.  And the similarly original folly of the tactic in the US.