Sovereign Debt and Geriatric Deadbeats
In the spirit of our earlier post, The Clash of Generations, we point you to an interesting piece, Geiatric Deadbeats, written by Ali Alichi of the International Monetary Fund (IMF). He argues the age of a country’s population is inversely correlated with a sovereign government’s willingness to pay its debt obligations.
Because holders of sovereign loans and bonds generally have no explicit recourse to hard assets or a “sovereign balance sheet” in the event of default, a debtor government’s willingness to pay is almost as important as its ability to pay. Go no further than Europe or the debt ceiling negotiations in the U.S. Congress for confirmation.
Mr. Alichi writes,
Studies have shown that a country’s willingness to repay is as important as whether it has the resources to repay. This willingness deteriorates as voters age because they have a shorter period to benefit from their country’s access to international capital markets and become more likely to opt for default on current debt. Moreover, older voters generally benefit more from public resources—such as pension and health care benefits—which could shrink if debt is repaid. If the old are a majority, they might force default, even if it is not optimal for the country as a whole. Lenders will take this into account and reduce new lending to an aging country.
Thomas Friedman spoke yesterday in his New York Times column of the “powerful sense of ‘baby boomers behaving badly’ and their legacy of the “incredible debt burden and constraints” they will leave on their children. According to Mr. Alichi this bad behavior of the boomers may not end at retirement. He writes,
Now if the old are altruistic and care about their children as much as themselves, they will not vote for default with its negative consequences for future generations. But Altonji, Hayashi, and Kotlikoff (1997) have shown that altruism does not hold at the overall level in the United States—although there are few studies of this sort for most other countries.
The next ten years will surely be interesting. We at the Global Macro Monitor are baby boomers and implore our generation, at least, those who can afford it, to take one for the kids. If this means we have to play muni golf courses instead of Pebble Beach and Pinehurst and hitting Top Fiites instead of Pro V1s (sorry FILA) in our twilight years, so be it.
Mr. Alichi has some good ideas on how to improve our national credit profile. His piece is short and sweet and well worth your time. Click here for the article.
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July 19th, 2011 at 5:48 am
“Ruh Roh,” says Scooby
July 19th, 2011 at 6:12 am
We seem to have a hard time getting everyone to pay just a bit more in taxes now. Can we really hope for a collective act of altruism from us baby boomers? Don’t forget, most are already worse off than they expected to be; most will not be playing at the private clubs. For more than a few their current act of altruism (if it is that) is having their kids move back in with them. If there was potential for such altruism on a national scale that ship may have sailed.
July 19th, 2011 at 7:07 am
Boomer population has nothing to do with the military industrial congress complex and the tax cutters plundering the nation.
$3T for phoney wars and it came from excess SS receipts. $1.6T for failing new weapons.
Turn the $3T in foreign and the $4T in US private held US bills into equity shares on the F-35! Then send them bills for trying it.
You bet boomers are watching.
July 19th, 2011 at 4:03 pm
I confess. I’m a baby boomer. Nothing pisses me off more than to hear that the baby boomers are behaving badly. I didn’t have much say in creating the federal budgets over my lifetime. I didn’t demand the creation of Social Security or Medicare. I had to pay into that system over my working life, however. I didn’t demand that Congress spend the excess SS contributions on multiple boondogles. I didn’t demand a Medicare Part D, a never ending imperialistic war, or tax cuts from the rates that applied in the 1990′s. I didn’t demand a system that outsourced the manufacturing base of this country to China. Wow, I’ve got a system where I can’t afford healthcare, or to educate kids, but I can buy cheap shit from WalMart. Thanks.
So, I get a lecture from the elites in the top 1% about how I’m behaving. They want me to take one for “the Team”. Yet when they’re asked to similarly make a sacrifice by paying a tax rate that existed in the 90′s they writhe in agony about the imposition on their lifestyles. We Boomers apparently need to face the facts that these people are special and deserve the priveliges they’ve been afforded in the past decade.
I currently don’t golf at Pebble Beach or Pinehurst as intimated above. Many of us Boomers have seen the benefits we were promised at retirement by our employers substantially cut. Who the hell needs defined benefit plans when you can trust the brilliance of the CEO class of this country to make your 401K increase in value. Yup, we must have been behaving badly.
Perhaps the millionaires and billionaires could survive on only 3-4 vacation homes instead of 9-10. Perhaps the wine cellar could be stocked with $100 bottles instead of $1000 bottles. Perhaps the yacht could be only 100 feet long instead of 300 feet long. Perhaps when you travel on corporate business you could spend just a little bit less of your shareholder money.
July 19th, 2011 at 10:17 pm
Ali’s article is a crock. He has it all backward. Baby Boomers pay their bills, in my experience, as compared to the younger generations that run up debt on credit cards and student loans and then stiff the lenders. Baby boomers weren’t responsible for the Cheney/Bush wars and Bush tax cuts that drove the deficit up.That was a result of the insane way we choose a President by picking the best orator.
By the way, I’m playing golf on a muni course with Topflites, in my retirement, so I have done my duty.