If one had to choose a single symbol to represent the apex of human thought and achievement, a strong candidate would be the equal sign: =. That sign says that the symbols and mathematical operations to the left of it are equal to the symbols and mathematical operations to the right. Furthermore, to retain equality, anything done to the left side of the equation must be done to the right side. The equation is the heart of elementary arithmetic, the most complex principals of mathematics and science and their real world applications, and everything in between. Only logical challenge can disprove an asserted equality, and no amount of wishing will turn an inequality into an equality. The equal sign represents humanity’s capacity for ruthlessly pristine logic.
Many people shun mathematics, science, and logic, seeking refuge in their antitheses. A good part of human intellectual history has been attempts to either ignore equalities or turn inequalities into equalities. Forgiving, sloppy, delusional illogic is usually collective. Every age has its particular refuges. Our age has rejected the mathematics of debt. What can logically not occur, a perpetual inequality—consumption greater than production— has become the foundation of the global economy. As the tagline for Zero Hedge notes: “On a long enough timeline the survival rate for everyone drops to zero.” In the same vein, on a long enough timeline, consumption equals production. Understand that equality, and the future comes into stark relief.
Housing was the focal point of the last debt crisis. Old age funding—pensions and medical care programs—may well play that role during the next one. The math is straightforward: over time contributions and investment returns (if any) must equal promised benefits. The current reality is also straightforward: aggregate contributions, even if augmented by sterling investment returns, will be nowhere near enough to fund promised benefits. Current government and central bank policies exacerbate the predicament, making the achievement of even minimal investment returns problematic. The pay-as-you-go structure of many old age funds, such as Social Security and Medicare, does not allow for any investment returns at all.
It is easy for politicians to promise benefits and assume high investment returns. It is much harder to make the required contributions, whose benefits are long term and promise no immediate political payoff, and to actually realize the assumed investment returns. Underfunding of an old age fund can persist for years, especially if the fund borrows money. At any positive interest rate, borrowing further unbalances the equation; debt service will always outweigh the funds received. Debt only delays the day when promises are broken and the benefits paid out are realigned with what the fund actually has. Greece, Detroit, and Puerto Rico are the first chapters of what promises to be a very thick book.
Many of the governments facing actuarial imbalance do their best to make it worse. Contributions to old age funds come from the real economy, which is also where investment returns are generated. If there is a government on the planet that has improved the functioning of its economy over the last few decades, SLL is unaware of it. Dwindling growth (charitably defined as that benchmarked by official government figures) in the US, Europe, Japan, and China confirms that assertion. The ever-expanding Federal Register is emblematic of regulators gone wild, not just in the US, but around the world, and debt is a “gift” that keeps on taking. Most of the world’s $225 trillion pile of debt has paid for consumption or zero sum speculation. By definition these activities do not generate a return in excess of debt service, consequently their associated debt acts as an economic drag.
Central banks pushing down interest rates, in many cases to negative territory, kills old age funds dependent on investment returns. Most such funds are still assuming they can generate an annual 6 or 7 percent return, but if interest rates on safe debt are in the 2, 1, or -1 percent range, they have to take more risk to hit their targets. Taking more risk means investing more in equities and long-dated bonds. By most measures stocks are at the high end of their valuation ranges, and investing in them is especially dicey with governments and mounting debt gumming up economies. Long-dated bonds are most subject to interest rate risk should central banks find themselves unable to continue suppressing rates.
Such suppression encourages debt and discourages saving. Debt only makes sense when it is used to generate a return greater than the costs of debt service. Saving that funds productive investment is the true foundation of long term progress and economic growth. Dwindling savings further erodes the ability of the real economy to fund the contributions necessary to maintain old age funds’ solvency. If having children is thought of as “saving” for old age security, and in less developed countries that is often the literal case, then contributions are also facing a demographic “savings” deficit. In virtually every developed country, including China, over the next few decades the percentage of elderly will dramatically increase relative to the younger population that will supposedly support them (see links here and here).
Promised old age benefits are for income and medical care, and the funding gap for the latter is even greater than the former. In the US, decades of government intervention in medicine have produced almost complete separation of those receiving care from those paying for it, competition-destroying, cost-increasing concentration in the medical, drug, and insurance industries, and now Obamacare, which has exacerbated existing problems and created new ones. It relies on the healthy subsidizing the unhealthy and the more affluent subsidizing the less. Not surprisingly, the healthy and affluent are either shunning or subverting the system and insurance companies are fleeing unprofitable markets. Those who remain are seeking hefty premium increases. So add costly, convoluted, and inefficient medical and health insurance systems to the factors contributing to the unsustainable old age funding inequality.
That inequality propels mounting global debt, which has papered over shortfalls. That works until it doesn’t. Crashing commodity prices, sputtering economies, the frantic, counterproductive exertions of governments and central banks, and rising dependency ratios (the ratio of the dependent to those who support them) mean the reckoning is at hand. Whether or not anybody wants it or plans for it, benefits are going to align with the actual resources available to pay them, just as house prices aligned with economic reality during the last crisis. Unfortunately, this alignment will be far more severe than that one.
That equal sign can be a real bitch.
THE GOLDEN PINNACLE=A GREAT NOVEL=A GREAT READ
STRAIGHT LINE LOGIC 
I was telling people that 30 years ago. I wonder if any of them remember it now?
Nah… Probably still in denial.
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You inadvertently showed the flaw–this has been going on for decades, and the propagandists are saying it can keep going for more decades, why not? There was a post over at WSRA that pointed that out–the doom has been preached for years, and is always over the horizon. Like Tokomak fusion, why should we believe it’s coming?
And for those of us that have been paying attention, yeah, we know it’ll come eventually, but how do you get past the failed prophesies?
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It doesn’t matter. If something is wrong or stupid or evil. it’s longevity is irrelevant. The only question is, are you going to be part of the problem?
Just say no!
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Fabbersmith,
If a mechanic looks at your car and says the engine will fall apart in a few miles if you don’t get it repaired, and it doesn’t fall apart at mile 50, but it does fall apart at mile 200, is that a “failed” prophesy? My prediction of catastrophe is based on current wholly unsustainable trends, of which debt is the linchpin. If catastrophe comes within the next few years, or if it has already started and we just don’t recognize it, how can that be a failed prophesy? Historically, predicting catastrophe for collectivist and statist systems has been easy. They all eventually fail because they’re all unsustainable. I’ve been predicting catastrophe for years, even decades. Now I am arguing (see “The Humungous Depression“) that it’s already arrived. It will get worse, descending into an unmistakeably apocalyptic failure. Whether it happens at mile 50 from here or mile 200, I can’t say, but it will happen. Until it does, perhaps accept the interim as a gift from fate and do your best to prepare, realizing that all preparation will probably be inadequate when catastrophe arrives.
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Reblogged this on The way I see things … and commented:
Equality … in all things?
“… inequality propels mounting global debt, which has papered over shortfalls. That works until it doesn’t. Crashing commodity prices, sputtering economies, the frantic, counterproductive exertions of governments and central banks, and rising dependency ratios (the ratio of the dependent to those who support them) mean the reckoning is at hand. Whether or not anybody wants it or plans for it, benefits are going to align with the actual resources available to pay them, just as house prices aligned with economic reality during the last crisis. Unfortunately, this alignment will be far more severe than that one.
That equal sign can be a real bitch.”
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Reblogged this on ETC., ETC., & ETC..
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Robert, Robert, Robert,
Haven’t we told you before, that the collective madness now taking over the world, will eventually reject ‘capitalist’ money?
Tsk tsk tsk, son, get with the program…
Money is nothing but bits in a computer, they will even bypass printed notes this time around, and the ‘youths’ will embrace it because it represents ‘free shit’. The madness will be complete, so that;
“no man can buy or sell unless he have The Mark”…Of course, there won’t be much to buy or sell because people who produce, will Go Galt, like they’re doing in Venezuela now…
(Sarc off)
This was all predicted thousands of years ago.
We were also told how to get around it, but only a few people understand where true wealth comes from, the Equals SIGN, as you said. You do not produce, you do not consume… if you do not work, you shall not eat.
It is only when you truly understand what Babylon means, do you see, that it is our System. The System originally invented in Babylon… A system of Usury of money changers, backed by the kings soldiers, and given moral authority by the priests. Sound familiar? It should when you hear preachers tell people to “submit to Godly Authority”… where in the world is this so called ‘Godly authority’? God, told Samuel that we should not have Kings, but we “demanded a King to rule over us”, how’s all that king crap worked out for thousands of years?
Only when the preachers figure out they’ve been had, for thirty pieces of tax free silver, can the people flee Babylon by “going into the wilderness on the wings of an Eagle”. The Symbol of free men leaving the cities.
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Robert, you’re becoming the John the Baptist of economic prophets. People will revile you and hate you and persecute you because you speak the truth. People are showing me everyday that they hate the truth, and love the darkness, because they embrace the darkness. The social lies are stacked on top of the economic lies, and people are believing utter nonsense, and spouting the lies to one another, as accepted truth. “Of course what we’re saying is the truth”, they slyly aver,”everyone is saying the same thing!” To me, it’s madness, on a colossal scale, and akin to living in the madhouse itself. It is not any fun to watch, and I see with growing horror this monstrosity getting worse and worse. I am past caring about when this will collapse, and I’m simply preparing for it, best as I can.
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Sean,
Preparation is essential, but I’m not entirely pessimistic. This whole shebang will collapse because A=A and reality always wins, the premise of my article. In that collapse, there will be opportunities, at least on a local scale, for liberty and rationality. Virtually every government in the world will be bankrupt and bereft of resources except that which they have previously plundered. That stockpile can only last so long, so everyone should make sure of their own essential stockpile, ability to function self-sufficiently, and their community of trusted relatives and friends.
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Excellent piece Mr. Gore.
What amazes me is that the political class still sticks to defined beneficiary pension plans. Corps gave up on those type plans decades ago as they were not sustainable then let alone now.
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Thanks. Corporations knew they had to shift the risk to the beneficiaries. Governments are always the last to get the joke.
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Robert:
Your superb article reminded me of a manager I once worked for at IBM.
IBM was one of the large and highly successful corporations that took the initiative when the entire litany of “equal opportunity/affirmative action” absurdities were seriously initiated in the seventies. They began earlier but picked up focus as the desired “results” failed to materialize.
All managers at IBM during that time were required to hold a formal “EO” meeting, as they were termed, with the manager delivering prepared information on what the company was doing to fulfill its responsibilities and commitments made through this program.
This particular manager, well-liked and effective at his overall responsibilities, would begin his EO meeting as follows:
This is IBM’s annual EO/AA meeting that everyone is required to attend. The program, among other things, wants me to assure you that IBM is firmly committed to this program. One of the “other things” is that equal does not mean equal. Are there any questions?
When I became a manager I remembered his opening admonition. I was once asked by an astute employee could I better explain the program?
I succinctly replied: IBM has decided it will engage in the noble and virtuous practice of discrimination in order to remedy the evil and ugly practice of discrimination.
“No amount of wishing will turn an inequality into an equality.” Ain’t epistemology wonderful!
Dave
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It sure is!
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