Greece, the US and the horror of unfunded liabilities

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There’s been a lot of talk about the situation with Greece and the European Union.  Greece is chided for its fiscal irresponsibility as the rest of the EU demands “austerity” measures before entering into any talk of a bailout.  The likelihood of a bailout is still anyone’s guess, but at the moment, neither Germany nor any other EU member looks enthusiastic about helping Greece when their own finances aren’t exactly pristine.  So just how bad are things?  The chart below shows current fiscal imbalance as a percentage of GDP for most of the EU countries, meaning both the national debt and the present value of all future unfunded liabilities.

Spain 244.3%
Belgium 296.5%
Italy  364.1%
Luxembourg 376.7%
Denmark 382.5%
Ireland 405.2%
Austria 409.8%
Germany 418.2%
Sweden 430.7%
United Kingdom 442.1%
Estonia 455.6%
Malta 467.2%
Portugal 491.9%
Lithuania 497.2%
Netherlands 522.8%
Finland 539.3%
France 549.2%
Czech Republic 590.8%
Latvia 619.1%
Slovenia 758.5%
Greece 875.2%
Slovakia 1149.1%
Poland 1550.4%
   
EU-25 Benchmark 434.2%

Source: Jagadeesh Gokhale, “Measuring the Unfunded Obligations of European Countries,” National Center for Policy Analysis, Study No. 319, January 22, 2009 and Eurostat

While these numbers are frightening, a more sobering fact is that the United States is only slightly better than Greece.

The chart below is from the 2008 Financial Report of the United States from the U.S. Treasury, page 137 of 188, showing the total of unfunded liabilities that the United States is currently facing.  This number is a whopping $101.8 TRILLION!

 

Adding this $101.8 trillion to the current U.S. debt of $11.9 trillion, and taking  2009 GDP at $14.26 trillion as reported by the Bureau of Economic Analysis, the United States has total liabilities of almost 800% of GDP!

Spain 244.3%
Belgium 296.5%
Italy  364.1%
Luxembourg 376.7%
Denmark 382.5%
Ireland 405.2%
Austria 409.8%
Germany 418.2%
Sweden 430.7%
United Kingdom 442.1%
Estonia 455.6%
Malta 467.2%
Portugal 491.9%
Lithuania 497.2%
Netherlands 522.8%
Finland 539.3%
France 549.2%
Czech Republic 590.8%
Latvia 619.1%
Slovenia 758.5%
United States 797.3%
Greece 875.2%
Slovakia 1149.1%
Poland 1550.4%

This is the makings of a war between the ages, where the youth of today are born with a massive and unsustainable debt burden, a burden left by their irresponsible parents and grandparents who freely spent more than they could afford and thus mortgaged their childrens’ future.  We’d be well advised to look at how José Piñera, an incredible man who I had the good fortune to spend time with this past week, relieved Chile of a similar horrendous burden.  I highly recommend his website for an understanding of pension reform.

As an investor, keep this in mind.  To cut the debt we need to either increase government revenue (tax receipts) or cut spending.  Arthur Laffer reminds us that increasing tax rates isn’t the clear way to increase tax receipts and in fact can significantly lower receipts and harms GDP.  Cut spending, our government?  Not with this current group of drunken sailors toting self issued no-limit credit cards!  So what’s the one thing the government can do without raising taxes or cutting spending to reduce its debt?  Yes ladies and gentlemen, inflation.  Monetize the debt and YOUR savings into oblivion.  Hold on to your purchasing power, it could get ugly.

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5 Comments on “Greece, the US and the horror of unfunded liabilities

  1. Elle, I heard something over the weekend that made me pause and think things were even worse… adding in unfunded pension liabilities and state debts. Most countries have little debt below the national level, but the US does (state & municipal) Try adding that in (plus public employee pension obligations) and it gets worse…

  2. Thanks, Elle, just what I’m looking for. BTW, I met Jose Pinera once, and relied upon Prof Gokale’s work before. Good choice of experts.

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