Quote:Greed of boomers led us to a total bust
Ich bin ein Boomer. The most privileged, most profligate generation in human history - my generation, the baby boomers (most often defined as those born 1946 to 1964) - drove the world for the past decade to this moment of reckoning, running up a gigantic bill that has now come due. Responsibility for this bill lies mainly with the boomer-and-bust generation, but the cost will be borne by all.
The three great economies of the advanced world - the US, the European Union and Japan, with their 940 million people - did not get to the level of debt stress and wealth destruction we are witnessing without being made to pay a real price. That price is structural change, a decline in expectations and lower living standards.
We will see a return to the more frugal times of previous generations, when expectations were lower, houses were smaller, and consumption was fuelled by what we could afford, not what we could borrow.
Advertisement: Story continues below Economies do not spend and borrow their way out of problems caused by spending and borrowing, especially when much of the borrowing was used to fund consumption and a culture of entitlement. The process of restoring the overall balance sheet of the West will take time. Japan was first to inflate an asset bubble and its economy has been stagnant for more than a decade.
We are now in the fourth year of a financial contagion that began in the US in 2007, spread to western Europe and, because of political failure on all sides of the Atlantic and Pacific, is larger now than when the global financial system melted down briefly in 2008.
That crisis was urgent and dramatic, and the world's banking system has since been shored up, but it was smaller in scale than the sovereign debt overhang of today.
All because of procrastination, denial and dissembling by the political class in the US, the EU and Japan - the class which benefits most from big government.
Though this is a crisis of capitalism and consumerism, it is not caused by the systems themselves, which have been dynamic wealth-generating forces improving the living standards of billions of people to levels not seen before. This is a crisis of consumption and self-absorption, a desire for more than was needed or expected by previous generations. It is a crisis of moral and economic obesity.
It is also a crisis for the bureaucratic class, the principal beneficiary of government spending and control. The International Monetary Fund is a classic example. In 2007, when the IMF was run by the socialist satyr Dominique Strauss-Kahn, it issued a World Economic Outlook which said that the risk of any systemic failure in the global economy was extremely low. Within months, the US banking system fused, jolting the global economy.
The present malaise, far from being a crisis of markets, shows just how well markets do their job. They are injecting reality into the global financial and political grid. They are challenging the wishful thinking coming out of Brussels, Washington and Tokyo.
As with all problems that are avoided rather than confronted, the debt overhang in the US, the EU and Japan have grown deeper since 2008 and the markets are demanding action. Consider what happened in the past week:
A continued run on major French banks, via their stock prices, because of their exposure to the unsalvageable debt implosion of Greece.
Germany and France are leading negotiations to create a $2.8 trillion bailout program to firewall the European Union against its debt mountain and a default by Greece.
The US sharemarket capitalisation plunged to its lowest level since October 2008, the full onset of the US solvency crisis.
China's debt bubble, its $1.7 trillion in local government debt, largely ignored in the West, is showing measurable stress. This will constrain Beijing's ability to respond to the slowing global economy.
The value of the Australian sharemarket fell again, taking stocks to 42 per cent below their historic peak in October 2007. The All Ordinaries index is down almost 20 per cent for the year and back to where it was in mid 2005.
Australia, with low debt and China's growth, should be largely immune to the worst of the deleveraging process, but the falling sharemarket and plunge in the dollar showed that immunity is only partial.
Low consumer confidence in Australia and terrible poll numbers for the federal government reflect the precarious legitimacy of the Labor government, with its record of badly managed spending binges, its unleashing of wage inflation, its rapid run-up of $100 billion in debt and its imposition of a carbon tax.
The debt mountain causing a global economic slowdown is a product of failures by both the left and right of politics.
In the US, stagnation was fermented by bad legislation, lax lending standards, toxic debt and massive military adventurism.
Europe's debt problem was driven by excessive government spending to fund an unsustainable welfare state.
In Japan, it was policy and reform sclerosis, an asset price bubble, and excessive government spending.
All weaknesses were exploited and exacerbated by casino capitalism, the largely unregulated financial derivatives markets designed to keep the financial system honest but in effect betting on everything and building nothing.
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