Chet Currier is a Bloomberg News columnist. His opinions are his own.
Fund Manager Arnott Raises a Thorny Debt Question: Chet Currier
Jan. 20 (Bloomberg) -- What if today's children grew up and repudiated their parents' debts?
Suppose they walked away from the bills accrued via government deficits, not to mention all those credit cards. Imagine the global tumult if they simply refused to carry the burden of under-funded pensions and the U.S. Social Security system.
It wouldn't have to happen directly, through something as blatant as a default on Treasury bonds. The whole thing could be engineered more subtly, say by policies that inflated the currency to devalue all commitments such as bonds denominated in fixed dollar amounts.
If the repudiators so chose, it could take the form of open political (gasp, not military!) hostilities -- a battle between the generations that might make today's culture wars look tame by comparison.
These are more than the fevered dreams of some gold bug. At an extreme, they represent a recurring nightmare that underlies the current debate over whether many of us in the modern economic world are living dangerously beyond our means.
In what he acknowledges is ``provocative'' and ``controversial'' stuff, financial researcher and mutual-fund manager Rob Arnott recently conjured up visions of this sort.
Ethical Question
``Our kids face an `odious debt,''' wrote Arnott, founder of Research Affiliates LLC in Pasadena, California, who helps manage mutual funds including the Pimco All Asset Fund. This is, he says, ``a debt burden which they had no role in voluntarily accepting, and for which they've garnered little benefit.
``None of us can unilaterally impose debt on an unwilling third party,'' he continues. ``So there's a question as to whether under-funded pension obligations are an ethical burden to pass on to our children, and indeed whether this obligation may legitimately be abrogated by future generations. This affects public and private pensions, as well as Social Security and Medicare, to the extent that any of these is under-funded.''
Wild stuff, eh? Well, yes and no. It merely puts in more forthright language issues that have long been simmering. They have already been expressed in such related discussions as the argument over whether to end inheritance taxes in this country.
Developed economic societies wrestle with these questions in all sorts of ways. To take one simple instance, consider the American penchant for financing big public-works projects not through immediate taxation, but through bonds maturing in 10 or 20 or 30 years. Buy now, let the next generation pay later.
Willing or Not
For good or bad, the passing down of legacies from generation to generation is inevitable. The environment in which everybody lives, for example, is in large measure inherited from previous generations, whether it be polluted or pristine.
My first response to Arnott's proposition was to come at it from the opposite end. Contrary to what he says, many of the debts incurred up to today have been used to create assets of great potential value to their inheritors.
In the next few decades, an unprecedented $41 trillion in U.S. wealth will be passed down from one generation to the next, according to researchers at the Boston College Social Welfare Institute. And that's their ``low-growth minimum'' estimate.
These riches wouldn't be anywhere near so great without the liberal application of debt. Simple example: The family homestead, which grandpa and grandma bought with a mortgage that may since have been refinanced many times. If the kids or grandkids are going to repudiate intergenerational debts, aren't they also obliged to refuse the bequest of this piece of real estate?
What's Left
It's not the whole story to say the world we leave to our children suffers from too much borrowing and not enough saving. On the contrary, the markets bear much evidence of OVER- investment.
When today's new college graduates venture into the world, they encounter sky-high home prices and low bond interest rates. Cheap stocks? Not easy to find after a 30-year run in which the Standard & Poor's 500 Index has climbed at a heady 12.5 percent annual pace.
It's a cold world these young people are facing. Then again, it always was. Let's not forget the ancient sage advice against trying to lavish our heirs with luxuries. ``The finest inheritance you can give to a child is to allow it to make its own way, completely on its own feet,'' said the dancer Isadora Duncan.
Never before now, though, have the old arguments about inheritance involved such enormous amounts, both of blessings and of encumbrances. Arnott has framed a debate about which much more is bound to be heard
Fund Manager Arnott Raises a Thorny Debt Question: Chet Currier
Jan. 20 (Bloomberg) -- What if today's children grew up and repudiated their parents' debts?
Suppose they walked away from the bills accrued via government deficits, not to mention all those credit cards. Imagine the global tumult if they simply refused to carry the burden of under-funded pensions and the U.S. Social Security system.
It wouldn't have to happen directly, through something as blatant as a default on Treasury bonds. The whole thing could be engineered more subtly, say by policies that inflated the currency to devalue all commitments such as bonds denominated in fixed dollar amounts.
If the repudiators so chose, it could take the form of open political (gasp, not military!) hostilities -- a battle between the generations that might make today's culture wars look tame by comparison.
These are more than the fevered dreams of some gold bug. At an extreme, they represent a recurring nightmare that underlies the current debate over whether many of us in the modern economic world are living dangerously beyond our means.
In what he acknowledges is ``provocative'' and ``controversial'' stuff, financial researcher and mutual-fund manager Rob Arnott recently conjured up visions of this sort.
Ethical Question
``Our kids face an `odious debt,''' wrote Arnott, founder of Research Affiliates LLC in Pasadena, California, who helps manage mutual funds including the Pimco All Asset Fund. This is, he says, ``a debt burden which they had no role in voluntarily accepting, and for which they've garnered little benefit.
``None of us can unilaterally impose debt on an unwilling third party,'' he continues. ``So there's a question as to whether under-funded pension obligations are an ethical burden to pass on to our children, and indeed whether this obligation may legitimately be abrogated by future generations. This affects public and private pensions, as well as Social Security and Medicare, to the extent that any of these is under-funded.''
Wild stuff, eh? Well, yes and no. It merely puts in more forthright language issues that have long been simmering. They have already been expressed in such related discussions as the argument over whether to end inheritance taxes in this country.
Developed economic societies wrestle with these questions in all sorts of ways. To take one simple instance, consider the American penchant for financing big public-works projects not through immediate taxation, but through bonds maturing in 10 or 20 or 30 years. Buy now, let the next generation pay later.
Willing or Not
For good or bad, the passing down of legacies from generation to generation is inevitable. The environment in which everybody lives, for example, is in large measure inherited from previous generations, whether it be polluted or pristine.
My first response to Arnott's proposition was to come at it from the opposite end. Contrary to what he says, many of the debts incurred up to today have been used to create assets of great potential value to their inheritors.
In the next few decades, an unprecedented $41 trillion in U.S. wealth will be passed down from one generation to the next, according to researchers at the Boston College Social Welfare Institute. And that's their ``low-growth minimum'' estimate.
These riches wouldn't be anywhere near so great without the liberal application of debt. Simple example: The family homestead, which grandpa and grandma bought with a mortgage that may since have been refinanced many times. If the kids or grandkids are going to repudiate intergenerational debts, aren't they also obliged to refuse the bequest of this piece of real estate?
What's Left
It's not the whole story to say the world we leave to our children suffers from too much borrowing and not enough saving. On the contrary, the markets bear much evidence of OVER- investment.
When today's new college graduates venture into the world, they encounter sky-high home prices and low bond interest rates. Cheap stocks? Not easy to find after a 30-year run in which the Standard & Poor's 500 Index has climbed at a heady 12.5 percent annual pace.
It's a cold world these young people are facing. Then again, it always was. Let's not forget the ancient sage advice against trying to lavish our heirs with luxuries. ``The finest inheritance you can give to a child is to allow it to make its own way, completely on its own feet,'' said the dancer Isadora Duncan.
Never before now, though, have the old arguments about inheritance involved such enormous amounts, both of blessings and of encumbrances. Arnott has framed a debate about which much more is bound to be heard