You’ve probably been hearing a lot about Greece recently, and before that about Dubai and before Dubai there was Iceland – three countries that were in danger of defaulting on what economists call ‘sovereign debt,’ which basically means their country’s equivalent of Treasury bonds. Iceland’s issue was that their bank and national debt equaled $160,000 per capita. When the banks failed and the Icelandic government took over the banks, the country’s credit was not good enough for them to find investors willing to buy new Icelandic treasury notes. So the country failed and Denmark stepped in to guarantee Iceland’s notes. Now the EU worked out a deal but the debt to repay Dutch and British depositors on top of Iceland’s other debts comes to about $450,000 per Icelander. Iceland has a referendum on March 6th concerning accepting the cost. Dubai’s problem was $26 billion in debt issued by Nakheel, its most prominent real estate developer, which was tacitly backed by the government. Order was restored last December when neighboring Abu Dhabi provided Nakheel with a $10 billion loan. Greece, meanwhile, has $28 billion in government debt due in April and May, and as you read this, the European Union is debating when and how to come to its rescue. Rich will be delving deeper into this issue on our February Colman Knight Community Connections call. Until then, we offer further reading for reflection.
What you probably aren’t hearing is that Portugal, Ireland, Italy and Spain are having similar troubles and that in all cases, the problems were visible, and warnings were raised by economists, years before these budget crises figures came to a head. Together, with Greece, these countries are collectively known as “PIGS” for living beyond their means (Portugal Ireland and Italy, Greece and Spain). According to a report by The Economist, Greece’s debt is now up to 112.6% of its gross domestic product. Ireland’s is 65.8%, Spain’s is 54.3%, Portugal’s is 77.4% and Italy’s is 114.6%. What makes Greece stand out is that suddenly foreign buyers are shying away from its government securities, sending the yield on ten-year notes soaring to 7.1%, and raising the cost of rolling over the debt – sending deficits even higher.
This, of course, is exactly the fear that haunts U.S. economists: at some point, the world’s bond buyers will lose confidence in America and our ability to get our debt situation under control. It also may be the underlying fear among people who attend the Tea Party rallies around the country. The real deficit problems in the U.S., however, are not found in government spending, per se, but the amount of money promised to future retirees in various forms. Lately, various financial planning conferences have heard presentations by David Walker, former head of the U.S. Government Accounting Office and now president of the Peter G. Peterson Foundation. Walker gives a terrific speech on how America is executing a reverse transfer of wealth from the younger generation and unborn to the Baby Boom generation. He does exactly what economists were doing in Greece for twenty years before the meltdown: tells us that the longer we wait to solve the problems, the more likely we are to face an unsolvable crisis.
Perhaps the easiest example to understand is Social Security, which was enacted during the Great Depression, a time when the average person’s lifespan was 65 and only 20% of the population lived beyond 65. So when the government chose sixty five as the normal retirement year, that meant that most citizens collected no Social Security benefits at all. Only those who lived an unusually long time would get back the money that was collected into the government retirement system. Fast-forward to today, when the average U.S. life expectancy is 78.2 years, and it is not uncommon for people to live to age 100. To create a similar situation, we would need to move retirement age to 79 or 80 to achieve the same results. These demographics easily depict the concern and change in the system. The same is true of Medicaid; when it was enacted, people were expected to receive benefits for a year or two, not decades. In all, according to “The Complete Idiot’s Guide to Economics,” 23% of the U.S. budget is spent on Social Security, 12% on Medicare, 7% on Medicaid; recently, Congressman Randy Forbes estimated that mandatory entitlements now represent 62% of all federal spending.
Greece never went through anything like the current wave of Tea Parties and activism. This may be a chance to channel all the anger over budget deficits into a real solution. But, as we are learning from European countries that spent too much for too long, the solution is not anger or warnings, but concrete action that addresses the real sources of fiscal imbalance – and perhaps most importantly, a willingness to sacrifice our way back to a balanced budget. Walker proposes means testing for Social Security recipients, arguing that it makes no sense to send government checks to billionaires. The government will have to ration health care and put it back on a budget. He tells people what you already know, what Greece and some of its neighbors are learning: it doesn’t work any differently for governments than it does for people; the numbers are just a lot bigger.
Savings Limits in North Korea
Save and invest, month in, month out – it sounds like a grind, especially now, when many Americans are cutting back and saving more for retirement. But when we share this news and you see from a new view, you realize that being allowed to save money and keep for yourself some of what you earn is a privilege that not everybody enjoys.
A case in point is the North Koreans, who are now participating in a government-sponsored currency exchange program. All citizens of North Korea will be required to trade in all of their savings – that is, the bills and coins that they have collected from private activities like sewing clothes or growing food in their back lawns. These savings are always in the form of actual money, kept in jars or boxes, because the Korean banking system doesn’t take individual deposits the way our banks do in the U.S.; there is no stock exchange for local citizens or, of course, access to global investment opportunities.
At the end of this month, the old North Korean money will no longer be accepted anywhere. It must be traded for new bills which depict the log cabin where the Dear Leader and former Communist strongman Kim Il Sung was born.
Here’s the catch. Each family will only be allowed to exchange 100,000 won – the equivalent of about $30. That, astonishingly, represents the most any private citizen will be allowed to have in total savings after the exchange, no matter how much they have saved in their jars or boxes.
When we become frustrated with our system and the market fluctuations and government gridlock, it is an opportune time to consider how lucky we are to live in a country where we are encouraged, and allowed, to save and invest for our future. Nobody will ever knock on our door and tell us that after a lifetime of work, the money we have set aside is no good anymore, except just 30 dollars, or roughly the amount it costs to buy a large bag of rice. Compared to this perspective, the grind of saving has the sweet taste of freedom.
