In the spirit of our earlier post, The Clash of Generations, we point you to an interesting piece, Geiatric Deadbeats, written by Ali Alichi of the International Monetary Fund (IMF). He argues the age of a country’s population is inversely correlated with a sovereign government’s willingness to pay its debt obligations.
Because holders of sovereign loans and bonds generally have no explicit recourse to hard assets or a “sovereign balance sheet” in the event of default, a debtor government’s willingness to pay is almost as important as its ability to pay. Go no further than Europe or the debt ceiling negotiations in the U.S. Congress for confirmation.
Mr. Alichi writes,
Studies have shown that a country’s willingness to repay is as important as whether it has the resources to repay. This willingness deteriorates as voters age because they have a shorter period to benefit from their country’s access to international capital markets and become more likely to opt for default on current debt. Moreover, older voters generally benefit more from public resources—such as pension and health care benefits—which could shrink if debt is repaid. If the old are a majority, they might force default, even if it is not optimal for the country as a whole. Lenders will take this into account and reduce new lending to an aging country.
Thomas Friedman spoke yesterday in his New York Times column of the “powerful sense of ‘baby boomers behaving badly’ and their legacy of the “incredible debt burden and constraints” they will leave on their children. According to Mr. Alichi this bad behavior of the boomers may not end at retirement. He writes,
Now if the old are altruistic and care about their children as much as themselves, they will not vote for default with its negative consequences for future generations. But Altonji, Hayashi, and Kotlikoff (1997) have shown that altruism does not hold at the overall level in the United States—although there are few studies of this sort for most other countries.
The next ten years will surely be interesting. We at the Global Macro Monitor are baby boomers and implore our generation, at least, those who can afford it, to take one for the kids. If this means we have to play muni golf courses instead of Pebble Beach and Pinehurst and hitting Top Fiites instead of Pro V1s (sorry FILA) in our twilight years, so be it.
Mr. Alichi has some good ideas on how to improve our national credit profile. His piece is short and sweet and well worth your time. Click here for the article.
(click here if charts are not observable)