The coming crisis will be one of wrecked government finances followed by a painfully slow restructuring. The idea that somehow, far-sighted technocrats have managed away booms and busts and that benign economic conditions will always prevail is patently absurd.
The difficulty is spotting the next factor that will undermine the stability mirage. One thing history teaches us is that there will not be a simple repeat performance of past crises: growth-busting oil prices, sky-high interest rates, rampant inflation. Oil prices have to reach $100 a barrel before their real value matches that of the 1970s, while interest rate and inflation threats have been neutered by central banks’ independence.
But there is still danger out there and one place to look is growing government off-balance sheet liabilities that could come back on balance sheet. Failed private sector pension schemes and private finance initiatives (PFI) in which the operator goes broke are accidents waiting to happen. Ironically, governments that have privatised the most (such as the UK’s) are at the greatest risk, as they discover that some liabilities never go away.
In the UK, final salary pension schemes remain in deficit and the collapse of some high-profile ones held by blue-chip companies would be politically impossible to ignore. The government would have to step in and take over the liabilities, as it would if PFI schemes in health, education, public transport or prisons ran into difficulties. At a stroke, government finances would be wrecked.
The resulting restructuring would be very profitable for investment bankers. Since printing money is out of the question, the challenge would be to come up with long-term bond issues and securitisations to bring back order to government finances. Nice work if…
