2012 January 19 Thursday
Excessive Contractual Liabilities A Root Economic Problem

Bond giant PIMCO CEO Mohamed El-Erian seeexcessive contractual liabilities as one of our big economic problems.

I worry that, absent a dramatic change in policies in America and Europe, things will get worse before they get better. I fear that, given this possibility, it would then take years, if not decades, to repair the underlying damage done to economies, jobs and people’s lives around the globe.

We are here because of the interactions of three distinct, yet inter-related forces: poor economic growth, excessive contractual liabilities, and disappointing policy responses. The result is that western economies are getting trapped by the lethal combination of an unemployment crisis, a debt crisis, and mounting fragilities in the banking sector.

Too many institutions owe too much in debts and entitlements. The poor economic growth is in part due to high oil prices and high prices for other commodities. Jeremy Grantham's Peak Everything argument suggests our slow growth period will be long lasting. So the size of needed debt defaulting is gigantic.

In Grantham's December 2011 newsletter he says the continued slow growth we are seeing is par for the course of what he's expecting.

Sadly, I feel increasingly vindicated by my “seven lean years” forecast of 2˝ years ago. The U.S., and to some extent the world, will not easily recover from the current level of debt overhang, the loss of perceived asset values, and the gross financial incompetence on a scale hitherto undreamed of.

Separate from the “seven lean years” syndrome, the U.S. and the developed world have permanently slowed in their GDP growth. This is mostly the result of slowing population growth, an aging profile, and an overcommitment to the old, which leaves inadequate resources for growth. Also contributing to the slowdown, particularly in the U.S. and the U.K., is inadequate long-term savings. As I write, the U.S. personal savings rate has fallen once again below 4%.

Grantham and El-Erian are ahead of the curve in understanding the depth of our problems and the poorer long term prospects we face. The party's over. Most people need to raise their game (more skills, try for better jobs, be willing to move for career opportunities, work harder) to keep their current living standards. Think about your options. How can you better equip yourself for hard times?

Share |      By Randall Parker at 2012 January 19 09:30 PM  Economics Limits To Growth

bbartlog said at January 20, 2012 8:55 AM:

Looks like the solution is
A) inflation
B) understating the real rate of inflation (so that COLA doesn't fully compensate the effects)

That will take care of debts as well as the pesky overcommitment to old people.
Health care reform that stops us from spending one zillion dollars on sick people in the last month of life would help, too. Death panels, anyone?

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