Wednesday, October 09, 2013

Facing the Hard Truth of the Future We Made

HSBC's chief economist Stephen D. King over at NYT lays out very well what we have been discussing here on a regular basis over the years; the Western Welfare State is an illusion, and by pretending that you can keep the dream going longer by mortgaging in the name in the unborn - you only make the eventual reckoning worse;
AS bad as things in Washington are ... they are going to get much worse, for the United States and other advanced economies, in the years ahead.
the numbers no longer add up. Even before the Great Recession, rich countries were seeing their tax revenues weaken, social expenditures rise, government debts accumulate and creditors fret thanks to lower economic growth rates.

We are reaching end times for Western affluence. Between 2000 and 2007, ahead of the Great Recession, the United States economy grew at a meager average of about 2.4 percent a year — a full percentage point below the 3.4 percent average of the 1980s and 1990s. From 2007 to 2012, annual growth amounted to just 0.8 percent. In Europe, as is well known, the situation is even worse. Both sides of the North Atlantic have already succumbed to a Japan-style “lost decade.”
Adam Smith discerned this back in 1776 in his “Wealth of Nations”: “It is in the progressive state, while the society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the labouring poor, of the great body of the people, seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state.”

The decades before the French Revolution saw an extraordinary increase in living standards (alongside a huge increase in government debt). But in the late 1780s, bad weather led to failed harvests and much higher food prices. Rising expectations could no longer be met. We all know what happened next.

When the money runs out, a rising state, which Smith described as “cheerful,” gives way to a declining, “melancholy” one: promises can no longer be met, mistrust spreads and markets malfunction. Today, that’s particularly true for societies where income inequality is high and where the current generation has, in effect, borrowed from future ones.
Not knowing who, ultimately, will lose as a consequence of our past excesses helps explain America’s current strife. This is not an argument for immediate and painful austerity, which isn’t working in Europe. It is, instead, a plea for economic honesty, to recognize that promises made during good times can no longer be easily kept.

That means a higher retirement age, more immigration to increase the working-age population, less borrowing from abroad, less reliance on monetary policy that creates unsustainable financial bubbles, a new social compact that doesn’t cannibalize the young to feed the boomers, a tougher stance toward banks, a further opening of world trade and, over the medium term, a commitment to sustained deficit reduction.

In his “Future of an Illusion,” Sigmund Freud argued that the faithful clung to God’s existence in the absence of evidence because the alternative — an empty void — was so much worse. Modern beliefs about economic prospects are not so different. Policy makers simply pray for a strong recovery. They opt for the illusion because the reality is too bleak to bear. But as the current fiscal crisis demonstrates, facing the pain will not be easy. And the waking up from our collective illusions has barely begun.
Read the whole thing, especially how he outlines the "5-Factors."

The first second order effect of this decoupling for the military - something whose preface is already starting - will be that perfect storm we call the "Terrible 20s." So much will have to be recapitalized at the same point that all the economic chips are going to be called - then end result will be a quickening in the decline of the real military capabilities of the USA not seen since the 1920s. We will be OK and will still have significantly more capabilities than anyone else - if we plan to adjust accordingly. On a percentage basis, we are heading towards 2-2.5% GDP on the military in the next few years and should be ready to be close to 1.5% to 2% by the end of the 2020s. That is what we should be planning for.

In 2012 we spent 4.4%; UK 2.5%. Don't close your eyes, lean in and focus more clearly.

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