I'm a fan of Ray Dalio's Debt Cycle Theory (excellent video here--31 minutes long). Mr. Dalio's describes three economic trends that have dominated capitalist economies since the 16th Century.
First is long-term economic growth, driven by technological progress along with the population increase that enables. This has been pretty much straight line up for centuries, and shows no signs of slowing down in the foreseeable future (though population growth seems to be going into reverse).
The second trend is the short-term debt cycle, also known as the business cycle. People like to buy things and capitalists like to sell things. As long as people have jobs they will buy as much as they can, and since they always want to buy more, they'll borrow money. Capitalists (specifically, banks) are happy to lend it to them. More and more buying takes place, production grows, employment grows, and everybody is happy.
Until, of course, the loans have to be paid back. That reduces consumers' purchasing power, forcing production to decline, and leading to higher unemployment. That exacerbates the problem. The result is a recession. Recessions occur every six to twelve years.
Eventually the loans are repaid and the cycle can repeat--at a higher level since underlying productivity has continued to increase.
But not all of the debt is repaid during a recession--some of it is long-term debt, such as home mortgages. This long-term debt continues to grow, even during recessions. But eventually it, too, becomes unsustainable. This leads to the long-term debt cycle, which repeats every 80 to 100 years.
The accumulated long-term debt is too big for consumers to ever pay back, so ultimately it results in a deleveraging, otherwise known as bankruptcy. A vast amount of debt is simply wiped off the books--debtors are spared the worst of their sins, while creditors end up taking big haircuts. After which the process can begin anew--again at a higher level because of underlying productivity growth.
The last great deleveraging was during the Great Depression, during which creditors famously jumped out of buildings. (Some debtors did too, since bankruptcy wipes you out.) That was about 90 years ago--we're due for another great deleveraging!
Some suggest that the financial crisis of 2008 was a deleveraging, and to some extent it was. After all, mortgage debt had become unsustainable and it was obvious it would never be paid back. Home "owners" were defaulting left and right.
And to some extent it really did deleverage--a lot of underwater people lost their houses, after which their debts were wiped clean and they received rather generous tax subsidies. The problem is the creditors never took a haircut--the debt was merely transferred from the banks to the government, i.e., taxpayers. In macroeconomic terms that solved nothing.
In a word, we got bailed out and the deleveraging never happened. Politically that was very convenient--Obama and Bernanke took credit for "saving" the economy. In practice, they didn't save anything--all they did was store up a bigger disaster for the future.
So where is all that mortgage debt hiding? Some of it is student loan debt--now over a trillion dollars, much of which was used to finance consumption. The government has now taken over the student loan program, and there is considerable political pressure to simply forgive those debts. That will likely happen--leaving taxpayers to take the haircut. Beyond this, both auto loan and credit card debt are both over a trillion dollars each. Indeed, total consumer debt (including home mortgages) stands at about $13 trillion, or about 60% of our $19 Trillion GDP.
The bulk of the debt is in entitlements and pensions. The current federal debt is $19 Trillion, to which one needs to add $3.5 Trillion owed by state & local governments, but those numbers surely understate the problem. This article claims the government really owes about $210 Trillion in entitlements. That figure is controversial--it depends on how long you extend the timeline into the future (I confess I don't understand the calculation).
By comparison, the total mortgage debt in 2007--that precipitated the Financial Crisis--was about $14 Trillion. But much of that was collateralized (the banks could repossess and sell the houses), while pension debt is not. So the numbers are not comparable.
In other words, all those pensions will never get paid. Some pensions will simply go bankrupt. Social security benefits will be cut, as will Medicaid and Medicare payments. (The latter may affect doctors and hospitals more than consumers.) The welfare state will shrink.
When does the house of cards collapse? Who knows--could be tomorrow; might not be for thirty years. It depends on when bondholders lose confidence. Bondholders have every reason not to acknowledge reality--it's tantamount to a bank run. They'll do it only when they're forced to. It's noteworthy that the bankruptcy of Puerto Rico has not had much effect. We'll see if the impending implosion of Illinois will be similarly received. If so, then what about Kentucky, New Jersey, Connecticut...?
At some point bondholders run for the hills. States will not be able to refinance their debt and they'll default. The government will not be able to bail them out without causing massive inflation. Bitcoin will be worth millions!
So will it be like the Great Depression all over again? I think not, and here's why.
- We are much richer today than in the 1930s. Food & clothing cost only a fraction of what it cost then. Housing is also cheaper. There will not be the mass destitution that occurred in the '30s.
- The population is shrinking, which means we increasingly have a labor shortage. During the Depression unemployment spiked to over 20%. During the Recession it went up to 12%. I think the labor shortage is with us for a long time, so I expect unemployment will remain relatively low--especially for skilled workers. But wages will decline and benefits will go to zero.
- There will be no bailout, which in the short term will make things much worse. But long run the economy will do much better. The reason the Great Depression lasted so long was because of misguided government meddling during the recovery, i.e., the New Deal.
The "creditors" in this case will be anybody owed a pension, welfare, or social security. They won't be wiped out, but they'll definitely feel the pain. The "borrowers" will be governments, who will no longer be on the hook for benefits they can't afford to pay. Over time taxes will go down and government services will improve. The welfare state will gradually be reinstated at a more modest level.
After deleveraging comes dawn. The economy will recover smartly! There will be zero debt, so everybody will start borrowing again, and consumption will grow like gangbusters. It will be similar to what happened just after World War II, except better.
And that brings me to the private pensions described in The Militant's article, mostly covering coal miners and teamsters. These plans were mostly Ponzi schemes, where today's workers pay benefits to today's retirees (like social security). That works as long as the active workforce keeps growing. But as The Militant points out, "[t]he UMW 1974 Pension Plan is expected to go bust by 2022, sooner if the capitalist economy goes south. It covers 87,000 retired and 20,000 working miners." Clearly the plan is in trouble when the ratio between workers and retirees becomes so lopsided.
So the unions had a demonstration in Columbus, Ohio. Not sure what good that does--they're marching against arithmetic. I feel sorry for them--they put their life savings into a fraud perpetrated by both their unions and the companies they worked for.
Further Reading:
So the unions had a demonstration in Columbus, Ohio. Not sure what good that does--they're marching against arithmetic. I feel sorry for them--they put their life savings into a fraud perpetrated by both their unions and the companies they worked for.
Further Reading:
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