Skybird
01-05-12, 12:13 PM
http://www.spiegel.de/international/world/0,1518,druck-806772,00.html
(...)
Economists use the term "Ponzi scheme" to describe a disastrous mechanism in which someone pays off old debt by constantly taking on new debt. The repayment of the debt -- the most recent loans, plus interest -- is deferred into the distant future, fueling an eternal process of debt refinancing.
It's the classic pyramid, or snowball scheme practiced by thousands of con artists after Ponzi. The most spectacular case was that of New York financier Bernard Madoff, who was responsible for losses of about $20 billion by 2008. Snowballs are set into motion, becoming bigger and bigger as they roll along. In the worst case, they end in an avalanche that takes everything else with it.
Western economies have not acted much differently than the fraudster Madoff (http://www.spiegel.de/international/europe/0,1518,806469,00.html). In 2011, they were virtually inundated with bad news and old sins. Almost everyone -- in Europe and in the United States -- has been living beyond their means, from consumers to politicians to entire countries. Governments have become servants to the markets upon which they have become dependent.
On an almost weekly basis, the reports have become more worrisome and the sums of money involved more staggering. Many are now concerned that as 2012 begins, the snowballs will only get bigger -- and roll faster:
There are the banks in Europe, which had to repay about €725 billion in combined debt in 2012, including €280 billion in the first quarter alone. With the private market largely off-limits to them, the banks have had to rely on the European Central Bank (ECB) to bail them out. The ECB is now lending them fresh money -- as much as they want -- at minimal interest rates.
There is a country like Italy, which has an exorbitant amount of debt to service at the beginning of the year. About €160 billion in debt will mature between January and April; the total for the entire year is about €300 billion. The government in Rome is already having trouble finding buyers for its bonds.
There is the ECB, which is creating billions essentially out of nothing (http://www.spiegel.de/international/europe/0,1518,805135,00.html). On an almost weekly basis, it is acquiring bonds that no one else would buy from Portugal, Spain and Italy, and in the process is turning into a reluctant financier of nations. This financial aid already amounts to €211 billion.
There is the European Commission, whose president, José Manuel Barroso, supports the use of so-called euro bonds. These bonds, which would be issued jointly by the countries in the monetary union, would amount to an accumulation of collective debt on top of national debts.
There is the €440-billion euro bailout fund, of which €150 billion are already promised to Greece, Ireland and Portugal. But because this amount is still not enough, the finance ministers have decided to "leverage" the fund, a seemingly harmless term for bringing in additional lenders, thereby multiplying the volume of credit.
And thenthere is the United States (http://www.spiegel.de/international/world/0,1518,779179,00.html), which only remains solvent because the Congress in Washington keeps raising the debt ceiling. The American government already owes its creditors about $15 trillion. Stay tuned for the next installment.
In other words, there are plenty of snowballs that have started rolling and getting larger with each rotation. Some aspects of the economic system in the industrialized countries resemble a gigantic Ponzi scheme. The difference is that this version is completely legal.
(...)
The fact that nations are continually spending more than they take in cannot turn out well in the long run. The word "credit" comes from the Latin "credere," which means "to believe." The system will only function as long as lenders believe in borrowers. Once the belief in the creditworthiness of borrowers is destroyed, hardly anyone will be willing to buy their securities.
When that happens, the system is finished.
(...)
Just how much the German government struggles with financial planning is evident in its handling of pensions for the country's 1.7 million civil servants. The 16 German states already spend about 15 percent of their tax revenues to pay for the retirement benefits of government employees, a percentage that Bernd Raffelhüschen, an economist in the southwestern city of Freiburg, predicts will grow considerably. In fact, he sees a veritable wave of costs rolling toward Germany in the middle of the coming decade.
All of the civil servants who were hired in the 1970s and 80s will soon go into retirement. German federal, state and local governments hired so many people between 1970 and 1980 that personnel costs tripled to about €75 billion.
Raffelhüschen, working for the Market Economy Foundation, regularly investigates which financial obligations the government and the social insurance agencies enter into without establishing any reserves for the time when the benefits will come due. His conclusions represent Germany's true debt burden.
In addition to the official national debt of roughly €2 trillion, there are €4.6 trillion in future benefit promises to retirees, the sick and people requiring nursing care -- commitments that are not documented anywhere. When these commitments are included, Germany's real debt is not 80 percent of GDP, as quoted officially, but 276 percent.
Next to pensions, health insurance is the second-largest item on Raffelhüschen's list, accounting for a shortfall of €2 trillion. The inevitable aging of society will only exacerbate the problem. With age or, more precisely, with the number of old people, healthcare spending rises dramatically.
In Germany, a gainfully employed person under 65 costs the government health-insurance system an average of €134 a month. The average for people older than 65 is €379, or almost three times as much.
As a result, an invisible mountain of social insurance debt rests on every German citizen's shoulders. According to Raffelhüschen, to pay off this debt each citizen would have to pay the government €307 a month throughout his life -- all because the government makes financial promises that it cannot keep. It even touts its promises as benefits, and yet citizens are the ones paying for them in the end. The method has been part of the system for generations.
(...)
Why is this the case? For Lars Feld, the answer is short and unambiguous: "political failure." The 45-year-old Freiburg academic, the youngest member of the German Council of Economic Experts, which advises the government on economic issues, combines economic expertise with insights from other disciplines, especially political science. For Feld, the concept of "fragmentation" is essential to explaining the tendency to accumulate debt.
According to the fragmentation concept, debt levels increase the more parties are involved in the government -- and competition there is for funds among cabinet ministers to satisfy their respective clientele. The Americans refer to this as pork barrel politics. Each tries to take as much as possible while contributing as little as possible.
For politicians, this means: "Every member of parliament tries to bring as many public projects as possible into their election district in order to secure reelection, hoping to distribute the costs across the entire population," Feld explains. It is also true that the more often a government is replaced, the faster the government debt increases.
The reverse is also true. Strong governments with absolute majorities have the lowest tendencies to incur debt, especially when a powerful finance minister remains in control for a long period of time. Does this suggest that parliamentary democracy, which naturally promotes fragmentation, is to blame for unsound fiscal policy? Or, to put it cynically: Is a dictatorship more responsible when it comes to fiscal policy?
Aside from the fact that dictators have also been known to devastate their countries financially, voters ultimately have themselves to blame for the excesses. Scientists refer to "rational ignorance" when citizens deliberately avoid dealing with uncomfortable issues. People overestimate the benefit of current tax cuts and fail to recognize that today's debts are automatically tomorrow's debts, as well. In other words, people want to be deceived.
Politicians are all too happy to adhere to this pattern of behavior, while at the same time mercilessly taking advantage of it. In his dissertation, Berlin economist Gerrit Köster found that between 1964 and 2004, German finance ministers tended to plan tax cuts so that they would come into effect in election years.
Perhaps this also explains why the Social Democratic heads of government in the city-state of Bremen remain popular, despite the fact that Bremen, with a per capita debt of €27,000, is Germany's most heavily indebted state. It is often precisely those municipalities that can least afford it that are the most lavish spenders.
(...)
It is not as much a question of putting a stop to speculators or penalizing rating agencies. Such skirmishes are merely a distraction from the responsibility that politicians bear when they constantly incur new debt to service old debt -- and the responsibility that voters bear for rewarding such behavior, or banks when they depend on the government consistently bailing them out whenever they gamble away their money.
(...)
Economists use the term "Ponzi scheme" to describe a disastrous mechanism in which someone pays off old debt by constantly taking on new debt. The repayment of the debt -- the most recent loans, plus interest -- is deferred into the distant future, fueling an eternal process of debt refinancing.
It's the classic pyramid, or snowball scheme practiced by thousands of con artists after Ponzi. The most spectacular case was that of New York financier Bernard Madoff, who was responsible for losses of about $20 billion by 2008. Snowballs are set into motion, becoming bigger and bigger as they roll along. In the worst case, they end in an avalanche that takes everything else with it.
Western economies have not acted much differently than the fraudster Madoff (http://www.spiegel.de/international/europe/0,1518,806469,00.html). In 2011, they were virtually inundated with bad news and old sins. Almost everyone -- in Europe and in the United States -- has been living beyond their means, from consumers to politicians to entire countries. Governments have become servants to the markets upon which they have become dependent.
On an almost weekly basis, the reports have become more worrisome and the sums of money involved more staggering. Many are now concerned that as 2012 begins, the snowballs will only get bigger -- and roll faster:
There are the banks in Europe, which had to repay about €725 billion in combined debt in 2012, including €280 billion in the first quarter alone. With the private market largely off-limits to them, the banks have had to rely on the European Central Bank (ECB) to bail them out. The ECB is now lending them fresh money -- as much as they want -- at minimal interest rates.
There is a country like Italy, which has an exorbitant amount of debt to service at the beginning of the year. About €160 billion in debt will mature between January and April; the total for the entire year is about €300 billion. The government in Rome is already having trouble finding buyers for its bonds.
There is the ECB, which is creating billions essentially out of nothing (http://www.spiegel.de/international/europe/0,1518,805135,00.html). On an almost weekly basis, it is acquiring bonds that no one else would buy from Portugal, Spain and Italy, and in the process is turning into a reluctant financier of nations. This financial aid already amounts to €211 billion.
There is the European Commission, whose president, José Manuel Barroso, supports the use of so-called euro bonds. These bonds, which would be issued jointly by the countries in the monetary union, would amount to an accumulation of collective debt on top of national debts.
There is the €440-billion euro bailout fund, of which €150 billion are already promised to Greece, Ireland and Portugal. But because this amount is still not enough, the finance ministers have decided to "leverage" the fund, a seemingly harmless term for bringing in additional lenders, thereby multiplying the volume of credit.
And thenthere is the United States (http://www.spiegel.de/international/world/0,1518,779179,00.html), which only remains solvent because the Congress in Washington keeps raising the debt ceiling. The American government already owes its creditors about $15 trillion. Stay tuned for the next installment.
In other words, there are plenty of snowballs that have started rolling and getting larger with each rotation. Some aspects of the economic system in the industrialized countries resemble a gigantic Ponzi scheme. The difference is that this version is completely legal.
(...)
The fact that nations are continually spending more than they take in cannot turn out well in the long run. The word "credit" comes from the Latin "credere," which means "to believe." The system will only function as long as lenders believe in borrowers. Once the belief in the creditworthiness of borrowers is destroyed, hardly anyone will be willing to buy their securities.
When that happens, the system is finished.
(...)
Just how much the German government struggles with financial planning is evident in its handling of pensions for the country's 1.7 million civil servants. The 16 German states already spend about 15 percent of their tax revenues to pay for the retirement benefits of government employees, a percentage that Bernd Raffelhüschen, an economist in the southwestern city of Freiburg, predicts will grow considerably. In fact, he sees a veritable wave of costs rolling toward Germany in the middle of the coming decade.
All of the civil servants who were hired in the 1970s and 80s will soon go into retirement. German federal, state and local governments hired so many people between 1970 and 1980 that personnel costs tripled to about €75 billion.
Raffelhüschen, working for the Market Economy Foundation, regularly investigates which financial obligations the government and the social insurance agencies enter into without establishing any reserves for the time when the benefits will come due. His conclusions represent Germany's true debt burden.
In addition to the official national debt of roughly €2 trillion, there are €4.6 trillion in future benefit promises to retirees, the sick and people requiring nursing care -- commitments that are not documented anywhere. When these commitments are included, Germany's real debt is not 80 percent of GDP, as quoted officially, but 276 percent.
Next to pensions, health insurance is the second-largest item on Raffelhüschen's list, accounting for a shortfall of €2 trillion. The inevitable aging of society will only exacerbate the problem. With age or, more precisely, with the number of old people, healthcare spending rises dramatically.
In Germany, a gainfully employed person under 65 costs the government health-insurance system an average of €134 a month. The average for people older than 65 is €379, or almost three times as much.
As a result, an invisible mountain of social insurance debt rests on every German citizen's shoulders. According to Raffelhüschen, to pay off this debt each citizen would have to pay the government €307 a month throughout his life -- all because the government makes financial promises that it cannot keep. It even touts its promises as benefits, and yet citizens are the ones paying for them in the end. The method has been part of the system for generations.
(...)
Why is this the case? For Lars Feld, the answer is short and unambiguous: "political failure." The 45-year-old Freiburg academic, the youngest member of the German Council of Economic Experts, which advises the government on economic issues, combines economic expertise with insights from other disciplines, especially political science. For Feld, the concept of "fragmentation" is essential to explaining the tendency to accumulate debt.
According to the fragmentation concept, debt levels increase the more parties are involved in the government -- and competition there is for funds among cabinet ministers to satisfy their respective clientele. The Americans refer to this as pork barrel politics. Each tries to take as much as possible while contributing as little as possible.
For politicians, this means: "Every member of parliament tries to bring as many public projects as possible into their election district in order to secure reelection, hoping to distribute the costs across the entire population," Feld explains. It is also true that the more often a government is replaced, the faster the government debt increases.
The reverse is also true. Strong governments with absolute majorities have the lowest tendencies to incur debt, especially when a powerful finance minister remains in control for a long period of time. Does this suggest that parliamentary democracy, which naturally promotes fragmentation, is to blame for unsound fiscal policy? Or, to put it cynically: Is a dictatorship more responsible when it comes to fiscal policy?
Aside from the fact that dictators have also been known to devastate their countries financially, voters ultimately have themselves to blame for the excesses. Scientists refer to "rational ignorance" when citizens deliberately avoid dealing with uncomfortable issues. People overestimate the benefit of current tax cuts and fail to recognize that today's debts are automatically tomorrow's debts, as well. In other words, people want to be deceived.
Politicians are all too happy to adhere to this pattern of behavior, while at the same time mercilessly taking advantage of it. In his dissertation, Berlin economist Gerrit Köster found that between 1964 and 2004, German finance ministers tended to plan tax cuts so that they would come into effect in election years.
Perhaps this also explains why the Social Democratic heads of government in the city-state of Bremen remain popular, despite the fact that Bremen, with a per capita debt of €27,000, is Germany's most heavily indebted state. It is often precisely those municipalities that can least afford it that are the most lavish spenders.
(...)
It is not as much a question of putting a stop to speculators or penalizing rating agencies. Such skirmishes are merely a distraction from the responsibility that politicians bear when they constantly incur new debt to service old debt -- and the responsibility that voters bear for rewarding such behavior, or banks when they depend on the government consistently bailing them out whenever they gamble away their money.