Global Financial Crisis: The worst might be yet to come … in 20 years

Last week, I wrote about how Warren Buffett is investing in companies at bargain prices at times when others are selling and losing their shirts. Warren Buffett’s explanation to this is that these companies are sound and solid and that eventually “Most major companies will be setting new profit records 5, 10 and 20 years from now.”

While in a long term scenario this makes sense, I guess we also need to consider not only the potential growth of a company but also the state of the nation’s economy. Last week, I found a video that opened my eyes to something that almost nobody has talked about during the current financial crisis. The video is an interview to the former Head of the Government Accountability Office, David Walker. He has become recently famous because of his participation in the film “I.O.U.S.A” where he explains the dangers of the huge national debt.

On the interview below, David Walker claims the following:

The U.S. face a “Tsunami” of spending due to the retirement of “Baby Boomers”
Currently, the first “Baby Boomers” became eligible for early retirement under Social Security
Over the next 20 years, another 78 million people will join them
By 2040, based on historical federal tax revenue, the U.S. Government may just have enough money to pay for social security and medicare
Every year Government doesn’t act, the number goes up 2 or 3 Trillion Dollars.

Although the U.S. National Debt clock has just passed the $10 Trillion Mark, if we add up the money owed by the Social Security, Medicare and other similar obligations, the debt goes up to over $59 Trillion dollars. This a huge burden on the citizen’s shoulders.

Possible Outcomes from Current Financial Situation

As I see it, this is a very serious problem not only for the U.S. but for the stability of the world economy. I guess that in the coming years, the U.S. Government would have to do one of the following measures, if the current spending rate continues:

1. Collect more taxes
2. Print more money
3. Continue to borrow money

Governments unlike private corporations, have the ability to collect taxes and to print all the money they want, but this has the problem that creates “Hyperinflation“, a problem that we have seen in the past in countries like Argentina, Mexico and Germany before the WWII. As inflation raises, so does the interest rates as the Government needs to pay more Interests to debtors, which in turn make even worse of the National Debt due to compound interest.

“The most powerful force in the Universe is compound interest”, Albert Einstein

A problem like nobody has seen before in history

One of the worst aspects of the future crash is that it’s not only the U.S. the only country with enormous problems with the future pension payments, countries like Mexico also have similar issues although at a lower scale. Mexico’s Social Security Institute is technically broken and currently the majority of its spending goes to pay current pensions and salaries when they should be going to build and maintain Hospitals and provide healthcare to the population. I don’t know about other countries besides Mexico and the U.S. but I’m sure these are not the exceptions.

I hope world leaders and heads of big corporations can work together and come up with some plan to solve what seems a huge threat to social stability.