The great international governmental Ponzi scheme
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The great international governmental Ponzi scheme

The great international governmental Ponzi scheme

These timely,important words from respected Australian banker and economist, Maurice Newman, should serve as an urgent wake-up call to both politicians and the voting public.

IN a bright start to the new year we are reading that the global economic outlook is improving. Setbacks are transitory. The fiscal cliff is history and the debt ceiling is bound to be lifted. Stockmarkets everywhere, even those in Europe, are rising.

World leaders, after numerous false starts, ask us to believe that this time, their policies are working. All the while their central banks continue to grow their balance sheets, determined to kick the can further down the road and keep investors and households hanging in and hoping.

In Australia, Wayne Swan, accentuating the positive, repeatedly reassures us that our economy is strong and the envy of the world. Unemployment is low, the investment pipeline is impressive and the Australian dollar is high, an endorsement he says, of his claims.

"The West has now reached the point where total private and public debt, together with unfunded government liabilities, can never be repaid by an ageing demographic. One day even debt servicing will be an issue. With fewer taxpayers and lenders, the ability to take from the future to provide for the present will end. This is when we see the final collapse of the great international governmental Ponzi scheme."

If we show confidence and put our trust in the Treasurer's economic management, we will return to the promised land of high growth and bigger government. Balancing the budget may take a little longer, but hey, Newspoll says voters are unconcerned about abandoning the surplus along with the International Monetary Fund and much of the commentariat, so no rush.

Surely only a curmudgeon would rain on this parade?

But say on closer analysis the outlook isn't so rosy? What if those odd green shoots don't blossom? And, what if the policies and confident tone being promoted by world leaders and their central banker colleagues are nothing more than a confidence trick, a giant Ponzi scheme, just like the one Bernie Madoff is doing 150 years for? Is it better to keep these concerns private?

Whose role is it to warn an unsuspecting public of an unsustainable situation? How can people prepare if they are unaware of the enormous changes that will impact their lives?

While we read headlines about a slowing US economy, or the prospects of a Greek or Spanish default, collective governments and central banks are quickly on the scene making soothing noises about how they will contain the risks. But their interventions have consequences.

For example, prominent American business economist Dave Rosenberg discovered that before the onset of quantitative easing, the Fed's balance sheet had a 20 per cent correlation with the S&P 500. But since 2009, that relationship has surged to 85 per cent. Rosenberg writes: "There is a much tighter relationship between the stockmarket and the central bank balance sheet - via the P/E multiple - than there is between the stockmarket and corporate earnings."

This development is concerning. The US had no earnings growth at all last year, yet the market was up by 12 per cent. This confirms that investors are more moved by the Fed's operations than they are by corporate health. Faith substitutes for hard work. Yet it is rational to speculate when taxpayers and central banks provide a backstop.

This grotesque distortion of risk leads to volatility and the periodic burning of scarce productive capital. This is compounded by governments that also consume valuable investable funds when they borrow for recurrent purposes. Expect slower growth in future.

Asset misallocation gets short shrift in public policy considerations. After all, the leviathan has to be fed. It also seems there are more votes in spending than in fiscal consolidation. The timing of a surplus is rarely convenient. Attractive alternatives abound. So, when the chips are down, political cowardice is preferred to prudence.

The recent fiscal cliff negotiations make the point. Despite all the theatrics, as things now stand, in 10 years the US will end up $US4 trillion ($3.8 trillion) deeper in debt than now.

While officially projected to be $US1.089 trillion, John Williams of Shadow Government Statistics, says the real 2013 deficit, adopting US Generally Accepted Accounting Principles, will be $US7 trillion. Who knows what it will be in 2023? (It would be instructive to learn what Australia's comparable number is.)

The West has now reached the point where total private and public debt, together with unfunded government liabilities, can never be repaid by an ageing demographic. One day even debt servicing will be an issue. With fewer taxpayers and lenders, the ability to take from the future to provide for the present will end. This is when we see the final collapse of the great international governmental Ponzi scheme.

Already in Europe, where lenders and taxpayers in the peripheral countries have either fled or are bankrupt, economies are surviving on the grace and favour of others. In America, we see the future with 11 states having more people on welfare than they have in work. The employee pension fund for the state of Illinois is $US95 billion in deficit and growing at $US17 million a day.

And central banks that became the last resort for empty treasuries now find their own balance sheets stretched, their liabilities too short and their asset quality increasingly suspect. For all their intervention, other than to defer the evil day and encourage speculation in assets, quantitative easing has done nothing for economic activity. Indeed, the Fed has recently lowered its growth forecasts.

What has differentiated Australia is that the Hawke-Keating and Howard-Costello governments largely eschewed the public policy excesses of the major economies. This changed in 2007 and Australia is now in the process of establishing its own Ponzi scheme.

As the federal opposition has found, it isn't easy to hold the government to account. It is invariably portrayed as negativity. But this is a time for candour, not point-scoring.

As G20 members, Swan and his Treasury colleagues must know that the world cannot continue indefinitely as it is. They should be aware of the urgent need for restructuring. Yet, against this global backdrop we persist with policies that will dangerously expose us when the ultimate crisis hits.

Rather than platitudes about confidence, we need public policies that will provide us with a much-needed buffer against the inevitable day of reckoning, in the same way that the Howard government's legacy allowed us to navigate the global financial crisis in relative comfort.

If the government won't promise to do it, the opposition should.

Maurice Newman is a former chairman of Deutsche Bank, the Australian Securities Exchange and the ABC

Comments

  1. Joseph24 May 2013

    We should all be afraid - very afraid

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