Another Hurricane

In Europe, the U.S. and elsewhere, efforts to beat back a rising tide of red ink have been focused on the most pressing concerns. But even if authorities somehow figure out a way to relieve the pressures associated with borrowing taken on to fund past extravagances, there’s still the little problem of the many other bills that are beginning to come due.

Some might recall that when I published Financial Armageddon in the spring of 2007, I argued that a combination of factors, including untenable levels of debt, government guarantees, and retirement-related promises (not to mention the derivatives bubble), would trigger the economic calamity few saw coming.

Unfortunately, while equity traders, economists, and other delusionistas view any effort, however bogus, to alleviate short-run financial pressures as the first glints of light at the end of the tunnel, the reality is altogether different. As The Economist reveals in “A Trillion Here, $500 Billion There,” yet another dangerous hurricane is burgeoning behind the ones authorities are desperately trying to fend off.

THE pension hole just keeps getting bigger. The assets owned by pension schemes have generally been falling in price while their liabilities have been relentlessly rising. One of the culprits is quantitative easing (QE), a tactic devised by central banks to revive the economy.

Mercer, a consultancy, reckons the hole in final-salary corporate plans in America was $512 billion at the end of September, the highest figure since the second world war. The average corporate pension plan had a funding ratio (the proportion of liabilities covered by assets) of just 72%, down from 81% at the end of 2010.

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Those numbers look tiddly beside the public-sector pension deficits. In 2009 Joshua Rauh of the Kellogg School of Management at Northwestern University and Robert Novy-Marx, then at the University of Chicago’s Booth School of Business, estimated that the deficit of American state and local-government pension plans was $3.1 trillion. Mr Rauh reckons that the deficit is now $4.4 trillion. In other words, a cool $1.3 trillion has been added in two years.