One of our more accurate predictions at the end of 2008 was the soon-to-be-discovered catastrophe of unfunded pensions. As 2010 develops, we see that many of the current hotspots in the ill-defined “financial crisis” are tied to this one issue of having overvalued the future at the expense of the present.
California is sitting on around $500 billion (!) in liability. The state of Illinois is short $78 billion for it’s pensions. Now, here comes The New General Motors, still losing billions after a taxpayer bailout. The Government Accountability Office has recently released a report about how pensions will likely drag the ailing manufacturer down starting in 2012 or so. (h/t to Megan McArdle at The Atlantic for quality analysis here – also, the comments section is a stitch)
What happens in 2012? The bulk of the Boomers start cashing in those defined-benefit pension plans, heading to the doctor’s more often, and generally turning 65 at the rate of 7000 per day. Aren’t forecasts useful? This is why we call it a megatrend – it will impact car companies, state governments, universities, national governments, baseball teams, travel agencies – everybody.
Nothing is more dangerous than a business decision based entirely on, “sunny, bright scenarios of fantastic success at 8% returns for all of our investors, forever!”
as tried, to no avail during the 1980s by now-depressed executives. As a result, these jaded, weary bureaucratic warriors will attempt to shoot down anything that even smacks of an earlier attempt at greatness. Their tool of choice will be to compare the current strategic situation to the decade of neon and shoulder pads.
*Note of caution!* Some classic strategic blunders will always apply, and should be taken mostly at face value. Pay attention when you hear, “Don’t invade Afghanistan. We got the Soviets to do it in the 1980s, and it’s really nasty.” This one is true! They learned it in the 1980s, 1950s, 1920s, 1890s, 1120s, and so forth back to Alexander the Great. It’s a good bet.
Now, let’s explore this technique in an economic situation rapidly unfolding before us. Many of my regular readers may be aware of the somewhat significant difficulties in the banking industry due to developments in the housing sector. (Ahem.) Everything – how do you say? – caught on fire and burned to the ground after people around the world decided that their three-bedroom ranch with a 1950s kitchen was worth EIGHTEEN MILLION DOLLARS, and then the banks developed ingenious financial instruments around this unusual state of affairs.