The outlook for 2013 and beyond

Philip Coggan, Buttonwood columnist

Europe: four problems

Too much debtToo much owed to foreignersToo big a deficitToo uncompetitive

Too much debt

Too big deficits

Too much owed to foreigners

Not competitive, part 1

Not competitive part 2

Adding the totals

Combined ranking (low is bad, high is good)

Greece 10Italy 21Portugal 21Ireland 23Spain 24France 26Germany 46

The long-term cycle

Money has two main functionsMedium of exchangeStore of valueDebtors emphasise the former,

creditors the latterIf creditors “fix” the value of money, via

gold standard or exchange rate, debtors are overwhelmed

Expunging debt

Debt can be written off, inflated away or devalued away

SOMEONE MUST LOSEProblem with euro crisis is that they

have been slow to recognise thisDebt passed round system, like Queen

of spades in Old MaidGermans must choose their poison

Here is the bill, Angela

Extend and pretend

Costs of exit are so large that forbearance will keep being tried

New ECB programme; Britannia rules the waves and the ECB waives the rules

Money won’t be paid back but debt will be endlessly extended

Not great for eurozone economy but not catastrophic either

Long-term

Too much debtUS might grow its way out of itBut Europe has demographic problemNumber of workers per pensionerBritain: 1970 4.3, 2010 3.6, 2050 2.4Germany: 1970 4.1, 2010 3, 2050 1.6Spain; 1970 5.6, 2010 3.7, 2050 1.5Japan: 1970 8.6, 2010 2.6, 2050 1.2

So we must retire later

70 or bustPeople in DC schemes already retire

one year later than DBBut two problems; DC not saving

enoughPublic sector in DBBattle between rich and poor, old and

young, taxpayers and public sector workers, one country and another

Final thought

All pensions are claims on future workers; can’t get round it

Catch two-and-twenty; May be some niche sources of excess return but everyone can’t get them

Basic return – economic growth and risk-free rate. No inherent source of return in, say, volatility