Government-Sanctioned Ponzi Schemes Come Under Pressure- Here & Abroad

This past week's changes of government in Greece and Italy brought forth the following headline in the weekend edition of the Wall Street Journal: Europe Pulls Back from Brink.

Indeed, the last two days of the week saw a rise in the S&P500 of a combined nearly 4%. Hooray! All is well!

Ah.....not quite.

I've had discussions with several people over the past week on this topic. A few were kindred business persons, while several others were not. It's very good practice to explain these matters to economic neophytes, because one's reasoning has to be tight and sensible.

Simply put, since 1971, when the US dollar was decoupled from gold and became a fiat currency, inflation has raged. The Euro, too, is a totally fiat currency. As such, both have have been debauched by the governments which control them, promising ever-larger benefits and engaging in larger budget deficits so that politicians could buy re-elections.

When was the last time you heard a genuine discussion in the US Congress about cutting one or more programs in order to afford spending elsewhere? No, it's just spend more and print or borrow the money.

But the Ponzi scheme hasn't been confined to only government-provided defined benefit schemes.

In the November 7, 2011 edition of the Wall Street Journal, the Marketplace section's headline screamed Pension Trusts Strapped. It seems that the UAW and USW are finding their VEBAs- Voluntary Employee Beneficiary Associations- running out of money to satisfy the pension and health care obligations they were created to serve. VEBA's were conceived so that otherwise-bankrupt companies could off-load their legacy pension and health care obligations to the unions whose members were owed the benefits. In effect, for the unions and their members, it was take some money and manage the mess themselves, or see it all vanish in bankruptcy.

The UAW's VEBAs cover 820,000 employees and is said to be short some $20B for meeting its obligations.

Now, union officials are the ones telling recipients to expect higher premiums, larger contributions by retirees, or perhaps further benefit cuts. It seems that, once in union hands, the UAW VEBAs quickly cut some of the lusher medical benefits, such as prescription Viagra. Returns for the funds under custody of the unions aren't clearing hurdles of 9% per annum, thus squeezing the VEBAs from that side, as well.

Everywhere you turn, somebody's pie-in-the-sky, group defined benefit plan is being threatened by economic reality. Whether Greek public sector unions, Italy's generous social spending, US Social Security or the remaining private sector union defined-benefit pension and health care plans, they are all under pressure as a generation of retirees has pushed these legal Ponzi schemes to the breaking point.

You think any of this is going to be fixed in the next year or so? Or right after the 2012 election in America, if either party runs the table at the federal level to hold the White House and both chambers of Congress?

Think again.

Slowly, people in Western democracies are waking up to the reality that, whether public or private sector in nature, many retirement and medical benefit promises simply won't ever be kept. They can't be because they were never realistic in the first place.

If someone informs you that you will only collect, for argument's sake, half of the benefits you were promised, what would you do? The people with whom I discussed this all automatically said the same thing:

"spend less, save more."

Guess what will happen to OECD nation GDP growth rates for the next decade or more?

Forget any more "stimulus" spending by the major economies' governments. Who will be be lending to meet such borrowing? Which countries, while cutting entitlements, will simultaneously be splurging on other debt-fueled spending?

Due to a confluence of several factors, we're probably on the threshold of a phenomenon nobody's ever seen before- the vaporization of expected benefits for hundreds of millions of people which will affect spending and saving behavior, causing unexpected consequences at the macroeconomic level on a global scale.

I don't think it necessarily means equity market crashes. But I do think it means we are entering a period of heretofore unexperienced changes in the factors which will drive those markets.