"We Are All Greeks" - SocGen Presents The New World Order

"We are all Greeks" - so begins one of the best reports on the unsustainability of the status quo, and on what "the new world order" will look like, created by SocGen's Veronique Riches-Flores. Her overarching observation: "No one can claim immunity from a Greek-style spiral" because "Our economies are mature, with weak potential GDP, especially post the financial crisis" and due to that old standby which everyone chooses so conveniently to forget, yet which is the biggest threat to the world's "welfare-state" stability, in existence since 1860 and which has been responsible for not only the longest period of peace in world history, but for the longest stealth plundering of middle-class wealth (there is indeed no such thing as a free lunch): "We are aging - we have no chance to see our future income improving substantially in the long run ; our savings capacities are shrinking and our health and pensions spending is increasing." That, in a nutshell, is it, no matter how many protracted essays one reads predicting the future (or war in Europe): the truth is there is increasingly less cash flow, coupled with increasingly more demands for cash.

Unlike before, where growth could be masked by incremental new debt in either the public or private sector (that strawman which for decades allowed Keynesianism and its modern versions to flourish despite its fatal flaws), this time around, there is no more debt capacity dry powder. In SocGen's words - 1) at 100% of OECD's GDP, even if the primary deficit disappeared as of today, it would still require three years to stabilize the debt ratio, and 2) the fiscal consolidation required - returning to 60% of GDP - would take a minimum of 10 years according to the OECD, 20 years according to the IMF. Here is where the report gets a slightly political twist, one which those GOPers capable of simple math, could easily use in their debates with democrats over the proper way of achieving fiscal stability: "of the 107 episodes of fiscal adjustments observed in the past 40 years the most efficient in terms of fiscal results and least costly in terms of growth have been the ones based on spending drag rather than tax increases."

And therein lies the rub: with the average age of the global developed world population older now than it has ever been in the history of the welfare state experiment, the last thing a politically unstable world can afford is to spring upon the population that there is simply "no moah money." Or at least not in a world which does not want to experience the aftermath of hundreds of millions of formerly 'entitled' people suddenly realizing they have been lied to for decades and all those golden years have suffered the fate of aaand it's gone.

It gets worse:

Fiscal austerity efforts are more accessible when they are carried out in isolation (their depressive effects can be offset by growth in the rest of the world)

60% of the past episodes of adjustment lasted less than one year; none of them dealt with as many economies as are involved today

At this point we read one of the scarier observations which SocGen reaches: "SG current economic scenario suggests that the public expenditures to GDP ratio could surge to 45% of 2015%." Yes, that means that nearly half of global economic output will rely on the government/entitlement programs and vice versa. We leave it to the 'Austrians' in our audience to explain to everyone else what this means.

With no other way out, at least fiscally (the monetary discussion is a whole different topic, and one which will be a source of ever increasing tension both in the US and Europe, where as the most recent bailout demonstrated on one hand the ECB is demanding the creation of a fiscal union and the issuance of Eurobonds to remove "money printing" pressure from it, while the fiscal authorities will hear none of it and instead demand that the ECB print ever more in order to avoid blame when it all goes horribly wrong), the next step is a substantial cut in public investment. The social response will not be enjoyable.

But probably the most damning piece of evidence for the upheaval that is coming is not some recent revelation, but the conclusion from an S&P report published 5 years ago, that is before the GFC had even come to its predictable end. It represents the long-term forecast of sovereign debt ratings by Standard and Poors by decade, beginning in 2020 and going all the way through 2040. All we can say is: Canada better prepare to receive lots and lots of immigrants (and Europe, whose entire future is now reliant on the credit rating of the world's most complex structured credit instrument ever conceived, which in turn depends on the AAA-rating of constituent countries, is done).

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