And France, one of the heavyweights in the eurozone, also has large fiscal deficits, huge unfunded healthcare and pension liabilities, and a political environment that may make serious labour and pension reform impossible. Moreover, during the last decade its labour costs have escalated in comparison to Germany’s (see Figure 1 on page 41).

Mixed progress on deleveraging

So where are we now? Joe and Judy (the Gen X family described in the previous instalment) can no longer use their home as an ATM. They have started to save. Indeed, in much of the developed-world private households in aggregate have become net savers. Much of this is due to belt tightening, forced by removal of access to consumer credit and real or perceived employment instability.

The downside to thrift is the hit to gross domestic product (GDP) caused by lower consumption. This is why most governments around the world have run budget deficits for at least four years, causing government balance sheets to blow out.

Statistics from the McKinsey Global Institute track key nations’ debt levels.Clearly some countries, such as Japan and the UK, have massive levels of debt, which is an enduring challenge for those nations. France and Spain also have high and growing debt and have not yet started to deleverage.

In the US, however, deleveraging is becoming evident in the numbers. This is mainly due to the private debt destruction mentioned earlier. McKinsey Global Institute believes that US households may be about half way through the deleveraging process.

This does not take the US out of the woods, as government debt, including that of many near-bankrupt states, continues to grow. Moreover, the US government has massive unfunded liabilities relating to its social contract with its citizens. These are not in the form of contractual bond obligations, but include programs such as Social Security and Medicare. The trustees of those programs estimate the unfunded liability to be US$59 trillion. By adding other unfunded liabilities, such as pension obligations for government employees, some have estimated this number at $200 trillion.

However, it seems obvious that much of this unfunded liability will evaporate before the cash starts haemorrhaging from government coffers. If something cannot happen, it won’t. The US government will renege on its social contract and its citizens will accept massive changes to entitlements and work longer. It will be ugly, but if any country can wrangle this change, it will be the US.