Ponzi Planet The Danger Debt Poses to the Western World

A work by the graffiti artist Banksy in London.
REUTERS

A work by the graffiti artist Banksy in London.

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Part 3: Germany's True Liabilities


Just how much the German government struggles with financial planning is evident in its handling of pensions for the country's 1.7 million civil servants. The 16 German states already spend about 15 percent of their tax revenues to pay for the retirement benefits of government employees, a percentage that Bernd Raffelhüschen, an economist in the southwestern city of Freiburg, predicts will grow considerably. In fact, he sees a veritable wave of costs rolling toward Germany in the middle of the coming decade.

All of the civil servants who were hired in the 1970s and 80s will soon go into retirement. German federal, state and local governments hired so many people between 1970 and 1980 that personnel costs tripled to about €75 billion.

Raffelhüschen, working for the Market Economy Foundation, regularly investigates which financial obligations the government and the social insurance agencies enter into without establishing any reserves for the time when the benefits will come due. His conclusions represent Germany's true debt burden.

In addition to the official national debt of roughly €2 trillion, there are €4.6 trillion in future benefit promises to retirees, the sick and people requiring nursing care -- commitments that are not documented anywhere. When these commitments are included, Germany's real debt is not 80 percent of GDP, as quoted officially, but 276 percent.

Simply Doesn't Concern Them

The social security coffers contain absolutely no reserves for members of the baby-boomer generation. "As a result of our government's generosity, we are creating substantial financial burdens for future generations," says economist Raffelhüschen. But no one really wants to hear this. Besides, all of this will happen so far in the future that many feel it simply doesn't concern them.

Next to pensions, health insurance is the second-largest item on Raffelhüschen's list, accounting for a shortfall of €2 trillion. The inevitable aging of society will only exacerbate the problem. With age or, more precisely, with the number of old people, healthcare spending rises dramatically.

In Germany, a gainfully employed person under 65 costs the government health-insurance system an average of €134 a month. The average for people older than 65 is €379, or almost three times as much.

As a result, an invisible mountain of social insurance debt rests on every German citizen's shoulders. According to Raffelhüschen, to pay off this debt, each citizen would have to pay the government €307 a month throughout his life -- all because the government makes financial promises it cannot keep. It even touts its promises as benefits, and yet citizens are the ones paying for them in the end. The method has been part of the system for generations.

A Short History of Debt

There was a time when the government had no trouble amassing reserves. In the 1950s, then-Finance Minister Fritz Schäffer took in so much revenue -- or spent so little -- that he was able to save. There was talk of the so-called "Schäfferturm," or Schäffer Tower, an allusion to the Julius Tower in Berlin, where the Germans stored the gold paid to them by the French in war reparations following the Franco-Prussian War in 1870-1871.

Of course, Schäffer benefited from the fact that the 1948 monetary reform provided West Germany with a new fiscal start. The old money was hardly worth anything anymore, with 100 Reich Mark being exchanged for 6.5 deutschmark. In addition, the country's liabilities were reduced -- by a factor of 10 to 1. In other words, the conditions were favorable for the pursuit of sound economic policy.

Six finance ministers later, when Social Democrat Alex Möller assumed the office in 1969, the zeitgeist had changed -- and so had the payment morale. The economy was booming, there was more work than available labor, and it seemed that the coalition government of the center-left Social Democratic Party (SPD) and the pro-business Free Democratic Party (FDP) could pay for anything, including such extras as winter bonuses for construction workers, bypass roads for rural communities and fitness programs sponsored by the government health-insurance system to combat the adverse effects of affluence. The government health-insurance system more than doubled its expenditures between 1970 and 1975.

When Möller resigned in 1971 to protest such profligacy, his fellow Social Democrat Karl Schiller ("Don't congratulate me; send me your condolences instead") took his place. But Schiller lasted only a year, and when he resigned he said he was unwilling to support the government's devil-may-care policy.

A Taste of What Was to Come

That, though, was just a taste of what was to come. The economy began to slow, especially after the oil price shocks of 1973 and 1979, and unemployment rose steadily, but the government of then Chancellor Helmut Schmidt (SPD) behaved as if Germany were still in the midst of its economic miracle, spending far more than it took in. During Schmidt's chancellorship, sovereign debt grew from €39 billion to €160 billion. It was this ballooning debt that eventually brought down Schmidt's governing coalition in 1982.

The next surge of new borrowing occurred seven years later, after the fall of the Berlin Wall. Instead of just raising taxes, then Christian Democratic (CDU) Chancellor Helmut Kohl decided to finance German reunification on credit. Some €1.5 trillion in costs relating to reunification remain unpaid to this day. Most of the money went into consumption -- far too little was used for investment. It was the same old mistake.

Finally, it was the financial crisis that, beginning in 2008, sharply drove up the national debt once again. The bank bailouts in addition to the economic stimulus packages have been a heavy burden on public coffers. The German government has forked over about €80 billion for various programs, including the controversial cash-for-clunkers program.

Governments are invoking John Maynard Keynes, the great British economist, as they use borrowed money to stimulate the economy, and yet they are consistently ignoring the second, unpleasant part of the equation: paying off the debt. Not a single German finance minister has balanced the budget since 1970.

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didigermany 01/06/2012
1. Herr Jung
Zitat von sysopCountries around the world, particularly in the West, are hopelessly in the red, with debt rising every day. Even worse, politicians seem paralyzed, unable -- or unwilling -- to do anything about it. It is a global disaster that threatens the immediate future. But there might be a way out. http://www.spiegel.de/international/world/0,1518,806772,00.html
Waeren Sie so nett und wuerden z.Bsp. diese Aufstellung fuer GB machen. Sie waeren erstaunt, denn dann waere GB inclusiv PPI bei 200% des GDP.
devisitor 01/07/2012
2. Austerity and Flagellants
The article has a 'chicken little' air about it, the sky is falling because of debt, while neglecting the more immediate concern of the state of the economy. Worries about debt are driving austerity measures to the point that nations are behaving like Flagellants, lashing themselves while walking en mass into a European recession or worse. It should be obvious that contractionary measures are contractionary, and if austerity is implemented on faith as opposed to reason then be prepared to live with the possibility of an extended downturn. As mentioned in the article a more practical approach is for governments to implement austerity when the economy is doing well, and to assume more debt if needed in order to get the economy going again as debt is cheaper in hard times. Interest rates in some areas are almost at historic lows, in spite of the fears of the Inflationistas, a different tribe of chicken littles. As far as managing the debt long term, remember that we get the governments that we deserve.
londonium 01/07/2012
3.
Zitat von sysopCountries around the world, particularly in the West, are hopelessly in the red, with debt rising every day. Even worse, politicians seem paralyzed, unable -- or unwilling -- to do anything about it. It is a global disaster that threatens the immediate future. But there might be a way out. http://www.spiegel.de/international/world/0,1518,806772,00.html
Thank you very much for a top notch article. It's all there, in a nutshell. Should be required reading for any voter and politician. In particular the article shows that there is hope - the quoted successes of Spain, Italy and Belgium in managing down their debt during the 1990s. I am also heartened by the clear distinction of the deficit and the actual debt burden - who cares if the deficit is reduced? You correctly point out that it's the reduction in the actual debt is that truly matters in restoring confidence. Most recently the voters of Spain have explicitly voted for austerity, showing that it is possible to resist politicians' attempts to bribe their voters as deficit spenders have done for several decades. Extremely important to point out the huge burden that unfunded pension liabilities represent for Germany. Thank you again.
www.planetponzi.com 01/22/2012
4. Planet Ponzi - www.planetponzi.com
Fantastic article! In fact, I have recently written a book titled Planet Ponzi on precisely this topic I would like to send you a promotional copy! it’s available in English on 2 Feb 2012 and will be published in German soon! My website is www.planetponzi.com. Best. Mitch
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