Retirement pensions are one thing, the other is debt - whenever I hear that all countries are in debt I think of the law of conservation of mass and have an obvious question: who is this monumental, multiple-GDP debt owed to?

I figure it must be the private sector, but in such case - why are they lending? It looks like either there are people with resources they have no idea how to invest in something actually productive or there are people who knowingly choose to invest in this somewhat risky business of "pay companies to do something for the public now and hope that the public will return you more than the GDP of the whole country, maybe it will work out", which is how I see these big national debts.

Who are these investors and how hard would it be to make them cut their losses?

At the risk of committing a blasphemy against capitalism, could it be a sign of insufficient taxation of the proverbial "top 1%"? This doesn't necessarily need to be "top 1% individuals", maybe it's "top 1% companies" or "top 1% banks" or whatever. In either case, it appears that somewhere, someone has some big money which is being spent on public projects anyway but under the guise of an "investment" which may actually be a big dud.

Finally, someone asking the right questions!

The first observation is that if you try to tally "global debt" vs "global assets", a lot of it appears to be missing. This is because the ownership is obscured in tax havens. There's an excellent paper on this: https://gabriel-zucman.eu/files/Zucman2013QJE.pdf

The second observation is that the 2008 financial crisis put a lot of previously high quality government bonds in jeopardy, and we saw who the major bondholders were: banks. Banks are effectively required to hold bonds as "safe" assets to cover their liabilities.

> why are they lending? It looks like either there are people with resources they have no idea how to invest in something actually productive

This seems to be basically true, and is why there is so much SV money sloshing around. There's lots of investment that would be societally useful but the returns would not flow back to the original investor, so either it doesn't happen or elaborate schemes need to be constructed to bribe them with future taxpayer cashflow in order to make this investment.

> insufficient taxation of the proverbial "top 1%"?

Some of whom own more than the GDP of some small countries. And a few who have stolen a good fraction of the GDP of small countries.

Part of that comes through debt funding of future liabilities.

For example, if you invest $1M into a number of small businesses, those businesses make and spend money, buy and sell goods, hire people, and pay taxes in a variety of ways. Hopefully, they're a net positive in a variety of ways.

If you invest $1M into a bridge, there's no additional tax revenue, a brief burst of construction jobs, it will need maintenance, improvements, etc long term. You've created a net liability.

Therefore, many "global assets" simply disappear as time goes on while the debt/liabilities grow. This is why more and more cities are pulling in their borders (aka responsibilities) to let unsustainable streets crumble, water infrastructure collapse, and police/fire coverage dwindle. It's awful if you're in one of those de-annexed areas.

If a bank lends a bridge-building company $1m, that produces a $1m liability for Bridge LLC and a $1m asset for Bank. (In fact slightly more, due to interest). When Bridge LLC spends money on concrete, its free cash goes down and its asset value labelled "bridge" goes up.

In the worst case, Bridge LLC spends the money to no effect and goes bankrupt - leaving Bank to take a writedown on the "asset" side of the loan. But until it does that the loan still exists as two sides held by the two companies which should have the same value.

The "missing" money is money owed where it is not clear from the outside statistical reporting where it is owed to - and in a global sense, the ledger must balance unless we owe money to aliens.

The PDF explains the methodology.

(An unsafe bridge may be a "liability" in the legal sense, but in any accounting sense it's an asset. Maybe subject to depreciation. But unless it's something that you owe to someone else, it's not an accounting liability.)

Not entirely true. If the net effect of the bridge is to connect two communities together more effectively then there may be people who pay property tax that buy land near the bridge, and then grocery stores, restaurants, barber shops, service stations and the like that spring up to serve those people.

A bridge, constructed in the correct location, can easily spur economic growth which can pay back both the initial cost for the bridge and provide enough tax revenue to pay for its upkeep.

When a private bank credit some household or business they get an asset (the debt owned to them) and a liability (the money they just created from nothing) that cancel each other. The entity receiving the credit have the same position but inverted. So, if you take all the economy, everything cancels to zero and not "law of conservation of mass" has been violated.

The debt issue by a country is a very different animal. In fact, probably we should stop calling it debt. When a government issue debt they are creating financial assets that allows the private sector to operate. An interesting mental experiment is to think in what would happen if all the governments pay all the 'debt' and stop spending.

Stephanie Kelton write about those things:

"Our challenge is not whether we can “afford” to make the payments we have promised to seniors, veterans, the disabled, government contractors, healthcare providers, bondholders, etc. (today, tomorrow and into the indefinite future) but whether we will be a productive enough nation to allow the government to make good on those promises without causing an inflation problem. That is the debate we should be having."

http://www.nakedcapitalism.com/2013/10/stephanie-kelton-how-...

I suppose they would have to explicitly collect taxes to cover their current spending, not make bets on the future of economy. Isn't it how our civilization worked for a long time?

> Our challenge is not whether we can “afford” to make the payments we have promised to seniors, veterans, the disabled, government contractors, healthcare providers, bondholders, etc. (today, tomorrow and into the indefinite future) but whether we will be a productive enough nation to allow the government to make good on those promises without causing an inflation problem.

I don't really see the difference. If we are productive, the government can compel citizens one way or another to deliver on those promises. If we aren't, it can't and it needs to reduce them - either explicitly or implicitly by devaluing the money they are denominated in or any other creative way it could come up with. So sure, whether the government can afford future spending is the same thing as whether the economy will be big enough to tax it with fulfilling these promises. I think.

OK, so somehow I got back to making bets on future economy. But this time it appears to be a bet made to justify future spending, not current spending, so unavoidable.

When a company lends money to do such that, it is called leverage, and considered a good thing because it allows them to make higher yields on their capital. Shouldn't governments be judged the same if they borrow money to speed up such developments?

So, If the government have pay all its debt and it's not spending anymore, where the money that is collecting as taxes come from?

" don't really see the difference. If we are productive, we can compel citizens one way or another to deliver on those promises. If we aren't, we can't and we have to reduce them - either explicitly or implicitly by devaluing the money they are denominated in."

The difference is what we should be doing now. Should we be reducing the deficit because we will "run out" or money?

or should we try to increase the future productivity creating infrastructure and knowledge?

What of the two options will make it possible to pay in the future?

"OK, so somehow I got back to making bets on future economy. But this time it appears to be a bet made to justify future spending, not current spending, so unavoidable."

I'm talking about investing in the sense of creating real assets. A bet and an investment are not the same thing, even if it is true that many 'investors' nowadays think that it is.

You added content to your post after I answered you, by the way. It's better if you answer in another post.

There's a great Planet Money about this, and what happened when the US paid off its debt in 1835:

http://www.npr.org/sections/money/2012/08/07/158376579/episo...

At an individual level it's probably a good idea not to rely on the state for anything if you can manage that.

The question is: can do it without generating inflation?

It depends of the productivity of the economy in that future.

The conclusion is that saving money means nothing, what is really important is generate real wealth now so we can pay in the future without generating inflation.

So, investment in real capacity (creating infrastructure and knowledge) now will allow generate the real resources for "paying" in the future. Just the opposite of what they try to sell us.

Never mind how much money you save now if, in the future, there are not real resources for taking care of everybody.

"You were promised $600/month. Obviously, we can't do that because that would require taxing 70% of labor income, which is way past the Laffer point. We're paying you $400/month instead. But it's okay, because we made productivity enhancements that let the same money go further. For example, the food tastes 50% better, so it's all a wash. Plus, you can move ten miles out to a cheaper apartment because construction and transportation are better now."

Strawman? A Federal Reserve banker tried basically the same thing to trivialize the inflation experienced by typical people: http://www.reuters.com/article/us-usa-fed-dudley-ipad-idUSTR...

If the government increase taxes in the economy in absence of inflation (all else unchanged), there is going to be a deflationary trend.

All the point of the argument is that if we have real available capacity in the economy you can spend, 600$ or whatever have been promised, and, if we don't have real resources available, we can't spend anything, never mind what have been promised.

It have nothing to do with how much money we have saved or how big is the deficit, but with the real resources available at the moment of paying.

My point is that the obligation is phrased as "$600 + inflation index", not "the amount of utility you could have got for $600 at the time we made the promise". Improved productivity can help you meet the latter, not the former. The latter is a more reasonable promise, but the former is what was actually promised.

>All the point of the argument is that if we have real available capacity in the economy you can spend, 600$ or whatever have been promised,

It's not true that "if the real productive capacity is there, then taxing out the money for the pensions is no problem". The evasion behavior is non-linear and there's a cap to how much you can collect with taxes before e.g. pushing economic activity underground and into other countries. (Hence the Laffer curve point.)

To our future selves. Why are pensions failing? Because in the past people moved the money from the future into the present (i.e. the past), and now we are in the future (i.e. the present) the money isn't there. Where is it? It was spent on crap rather than invested in assets. Oops.

What makes something crap rather than an asset? How could they have done it "the right way"?

Another example is a person who borrows money and spends it on home improvements. He or she still has to pay back the money and the interest, but if the value of the improvements is greater than the cost, that money can be recovered later by selling the house. Or that person could have spent the money on... nothing. That might have been fun, but it still needs to be paid back...

A government that issue its own currency is not limited in the same way that a household.

A government, that issue its own currency, could spend (constrained by the real resources available) without creating debt at the same time.

It's true that it would be wise to spend in creating more real capacity in the economy, instead of digging holes and fill them again.

That's not true. Inflation could be though as a ratio between the money in circulation and the productivity in the economy. If you increase both, numerator and denominator you don't get inflation.

Also, "printing money" doesn't create inflation. Spending it when there is not enough available resources can create inflation.

If you have doubts, check the QE programs of the FED and the ECB (ongoing).

In fact, the more famous episodes of hyperinflation are originated because a collapse in the productive economy (the denominator), and not because an increase in money (the numerator).

If real resources are increased, a 'space' is generated for spending, and it would be a real pity if that opportunity is wasted.

Government bonds can be popular parts of the investment mix of private pension funds because they pay out in the currency that those pension funds will need to pay out pensions. That removes any risk of exchange rate changes (say that you know you will have to pay out a billion euros in pensions in the next five years. A mix of technology shares statistically will do better in the long run, but in such a short timeframe, it could do worse, especially if it pays out in US dollar, which may go up or down relative to the euro)

Also, for governments there is a fairly easy way out of last resort: print money. The resulting inflation effectively gives everybody a cut on the government debts they hold, without the government having to negotiate a deal on that cut (that only holds if countries write debts in a currency they control. Debts in euros are somewhat of an exception in this respect, as are the rare country bonds in foreign currencies)

A different question is if they do a good work.

http://www.usdebtclock.org/

The US debt is now at roughly 20 * 10^12 USD, while according to:

http://www.economist.com/news/finance-and-economics/21631129...

The top 0.01% hold assets of close to 6 * 10^12 USD (371 * 10^6 * 16 * 10^3). Expand to the top 0.1 % and the number is 11.5 * 10^12 USD. Note that the article is from 2014, at the time the debt was at ~ 19 * 10^12 USD:

https://en.wikipedia.org/wiki/National_debt_of_the_United_St...

So simply taking everything from the top 0.1 % (not the top 1%) would cover roughly half the debt. Seems like an additional 20% taxation might make for reasonable down payment, though.

Far better would be even small levels of property tax, land value tax, and (important for 21st century) intellectual property tax. IP licensing fees are a key component of how many big businesses shuffle money into low-tax jurisdictions.

Oh, and kill the tax secrecy havens. This is already starting to happen, but it's a very long slow process.

In a book called Debt, the First 5000 years they explore this concept and uses it to explain why nations tend to independently concludes that you must have laws that regulate lending. If not you get periodical unrest where the populace go and burn down the debt ledges, and in some historical places this happened as often as once every few years. Collapse of the law don't permanently scare away investors.

Not to say that unrest and collapsing the rule of law is a good thing.

I am not however, in anyway against a larger tax on the wealthy or at the very least the elimination of tax loop holes.

One of the bigger ones is pension plans for private companies which legally cannot invest in anything sensible. This is why companies are pushing their employees to invest in a 401k: the 401k can invest in something with a nice rate of return.

Making them cut their losses might not be hard though - private pensions are generally believed to be underfunded. It is generally accepted that many companies will cut their pensions anyway when they cannot afford them.

There are lots of other buyers of debt though.

you need to ask Cui Bono "Who benefits" when you read articles like this

It is productive, aka it produces a return. If you have another idea of "productive" to a lender, let me know.

1) Maintain the ratio of working life to retired life by increasing retirement age in proportion to increased life expectancy. Which meant increasing retirement age to 67 by something like 2050.

2) Reduce the triple lock of pensions - which means the state pension rises by a minimum of either 2.5%, the rate of inflation or average earnings growth, whichever is largest - to a double lock, which only includes the latter two elements.

3) Means test the payment of winter fuel allowance, which is a yearly payment of about £300 made to everyone above a certain age, so that it would not be received by wealthy pensioners.

4) Put in place what was effectively an inheritance tax for payment of social care (i.e. care homes and in-home care) after death, which is currently both criminally underfunded and also massively expensive.

In combination, this is something like £15bn each year of extra spending now, rising to £50-70bn each year within the next 30 years.

All of these measures were opposed by Labour, and their most enthusiastic supporters are the young.

This is the one policy of the Tories that I supported. There's been a massive transfer of unearned housing wealth to the elderly in recent years, owing to property price increases. It's criminal to tax young people to pay for elderly care, when those same young people cannot afford housing, housing that is owned by the elderly they'll be paying to care for.

This is exactly how the old are eating the young.

Nothing close to the size of the transfer from poor & middle class to the very, very rich.

"This is exactly how the old are eating the young."

The wealthy are explicitly trying to create a divide between young and old precisely so that the old can be relied upon to offer no resistance to student loan increases that soak the young while the young can be relied upon to offer no resistance to cuts to pensions and elderly care.

If young people are complicit in this game of divide and conquer they'll ultimately only hurt themselves.

And 80% of the country's wealth is with the 60+ crowd (this is getting worse, if anyone has stats that include 2015 / 2016 it'd be appreciated). As they've got both greater wealth and income than the young, and this is getting worse, I think it'd be foolish to call the problem a distraction.

Sure, provided the title was changed to "the rich are eating the young and the old are doing slightly better than the young".

I don't think that was the impression they were trying to give though.

The middle and working classes are much less powerful political bloc if they are fighting each another (young/old). Hence the steady flow of articles like this one pitting "boomers" against "millenials" and vice versa.

The provision of decent pensions, free education and social welfare was affordable in the 50s-80s when the country was much poorer and the idea that it has become less affordable because we live slightly longer after many decades of massive economic growth is, to put it bluntly, economically illiterate. The money is there.

The GDP per capita, by contrast, has increased 300% in 2005 adjusted dollars.

This is the metric that answers the question "why are pensions deemed unaffordable?", not birth/aging/death rates:

http://retired.talkingpointsmemo.com/images/productivity.png

Now, you might say, well they got a very expensive kind of illness, and so they should pay for it, because someone has to pay for it.

But, applying the "veil of ignorance" test, of not knowing whether you or your family will be struck by such a disease in the future, it would seem a system where everyone effectively pays insurance to guard against the highly negative outcome would be fairest and most sensible outcome.

I see parallels to the current healthcare fight in America, which seems to take advantage of people's strong belief that "it won't happen to me" to form policy, rather than actual statistics and a general right wing antipathy to these kinds of solutions. I guess it's easier to sell potential bankruptcy to people when they're young and healthy than a 100% certain tax rise.

It was nick-named 'the dementia tax', although that aspect of it was only half accurate, it depends on whether the case was severe enough to need to go into a care home.

Residential care (in a care home) already has to be paid for by the person receiving it. The difference is that now you have to pay the money up front until your assets go down to £23k, which usually means being forced to sell any property to release funds, whereas this bill increased the limit to £100k, and postponed payment so that it came out of your estate after death.

The major change was that care in your own home was going to be subject to the same system, whereas at the moment it is paid for by the state, albeit only available patchily. But a lot of this in-home care is going to be quite limited, I remember with my own grandparents the major help they received was someone coming in to give a bath once a week. That was probably only about £30 a week (£1500 a year) in costs, frankly it would have been better if they had received more care, and more money had come out of their property. If you are the child, and you begrudge £20-100k coming out of your inheritance so that your elderly relatives can be properly looked after, I don't exactly sympathize.

I agree with you about the insurance aspect of it, and that was what was recommended by a cross-party (that is, bipartisan) commission. The problem I see with that is that inheritance taxes are very unpopular, and the more you sever the link between the tax, and the thing that is being paid for, the more that people will object. But I agree that is what should happen, let's hope this 'dementia tax' label doesn't stick to those efforts as well.

And yet, the young overwhelmingly voted for it! A paradox no?

Ok, that's got to be the weirdest mental gymnastics I've seen for justifying rich old people running the world. I'm also suspicious that's it actually true because I'm sure a lot of houses changed hands in the US housing crisis, and it probably went to real estate brokers who decided to rent instead of sell even after getting a bunch of houses in the firesale.

Even if old people realized those gains by selling their house (and going where?), it's not going to be enough money that they'd go out and start buying a bunch of other houses and charging outrageous rent. Certainly not enough to lord over sprawling apartment complexes filled with a bunch of millennial wage slaves.

Maybe, maybe someone in California bought a house for like 50k and turned it into life-changing millions, but to imply that's a massive transfer of wealth for entire countries is disingenuous.

You're right in the sense that it isn't just a transfer of wealth to the elderly, it's a transfer of wealth to home owners, particularly in the prosperous parts of the country, and in the long run to their families. In the short term that's correlated although not matched to young/old, and it gets more and more fuzzy the further into the future you go.

Ironically in effect the left wing party just made a lot of political headway by allying with the right-wing tabloids to protect this inherited wealth against being used for care of the elderly. There are better ways of organizing it, but I didn't hear much nuance in the campaign against it, and I wouldn't be surprised if all policies even vaguely similar are now dead in the water.

It's also in reference to the UK, where publicly owned housing was sold off to tenants in the 80s at below market rates, and housing markets have been booming ever since.

Petty sure 8 or 9 years of "emergency" low interest rates have had an effect in preventing the otherwise inevitable crash in prices.

I wouldn't take many conclusions from the last elections. A lot of labour votes were actually "not-tories" votes. They didn't agree with Labour, but it's still better than the status quo.

FYI and based on my anecdotical observations, mid- to late Gen-Xers rarely if ever think they'll get anything either. As to your finances when you'll need to support your parents or those of your spouse, IMO just try to get over it. You know it's coming anyway, and so do they.

What might be more concerning in practice as a society is what to do with boomers and early Gen-Xers who didn't make enough (or any) kids. Where before retirement plans it may have been for 4+ kids to take care of their parents, it's trickier when there's a single kid or none.

Aside: the Swedes, if memory serves, have an interesting take on retirement. Namely, there's a fixed-sized pot. What you get isn't based on how much you put in but rather on how much you put in compared to others. I'm pretty sure all countries in Europe with eventually adopt a similar system.

> Pull the rug out from under them, and my bet is you'll have riots in the streets[0].

Let's make this even more fraught.

Imagine that the cohort net paying into the system at any given time has a markedly different national origin / ethnic / cultural makeup than the cohort net receiving benefits.

Further imagine that those two cohorts may have some rocky history and feelings of mutual resentment or recrimination.

This has high potential to get extremely ugly unless managed extraordinarily well.

There is little doubt in my mind that this notion (well-founded or not, consciously or unconsciously entertained) is a key contributor to the current political let's say volatility throughout the Western developed world.

When shit hits the fan I'm convinced politicians will try to blame immigrants, just to distract the native citizens from blaming the government (or each other). What happens then we all know from history lessons.

Then we could concentrate on starting to repair the damage we've done to the environment.

It's not like it's a law of the universe that these man made tokens have to be paid back with sweat and tears.

The existence and power of both of them is also measured in blood

But if the next choice is between extreme nationalists and anyone else who wants to scrap the pensions? I'll take no pension over a potential civil war.