There are varying estimates of the amount of wealth that has been destroyed by the 2007-2011 financial markets crisis. The figures range from a combined global loss of $34 trillion, on the low end, to $50 trillion at the high end. Just which figure is quoted seems to be based on whether the calculation of the losses includes only the losses related to declines in the value of publicly listed stocks, or includes losses experienced by investors in real estate and bonds as well.Another factor in quantifying the losses is whether the person making the assessment considers the crisis to have ended in 2009, or in 2010, or considers it to be still ongoing. At $50 trillion, the lost wealth would be equivalent to the combined 2010 GDPs of the 27-country European Union, the United States, China, Japan, India, and Germany.A great portion of the global wealth that had been accumulated prior to the peak of the US real estate market in June 2006, and the US stock market in October 2007, had been created via the price appreciation of assets that had been financed with debt. Debt is a legal obligation to repay one's creditors.A stock valued at 27 times its earnings (the approximate price earnings multiple of the S&P 500 at the peak in October 2007) or a house price that represents a 70 percent increase in value since purchase, is ephemeral, unless you actually sell the asset to realise that financial valuation before a price decline. With the large declines experienced in the equity, bond, and property markets during the 2008 to 2009 market meltdown, much global wealth simply vanished into thin air, leaving the debt which had financed the assets behind, like an orphaned stepchild.Those who had taken on these debts, most of which were banks, other finance companies of all types, and households with high loan-to-value ratio mortgages, suddenly found themselves taking large losses and were unable to access the global capital markets to raise liquidity, or to refinance, as they had so easily done in prior times. Many of the banks and finance companies collapsed, or required bailouts from the government, especially those in the US, but also many in the UK and the Eurozone too. Many households defaulted on their mortgages, which further threatened the survival of other banks and finance companies. As a result, by Thanksgiving of 2008, the global capital markets; especially the day to day liquidity markets, had completely locked up like a rusted gear mechanism.Markets Rule, AlwaysIn analysing what happened, we now understand that a textbook systemic market failure had unfolded globally. A systemic market risk event (the rise of global inflation, and interest rates from one percent to 5.25 percent, from 2003 through late 2005) triggered a global credit risk event (the failure of scores of highly leveraged bank and financial borrowers, and the defaults of millions of highly mortgaged households) as asset prices collapsed.This in turn led to a global liquidity crisis, as the surviving participants in the global financial system were unwilling to lend to each other, or finance general economic activity, in the aftermath of the collapse.This forced governments all over the globe, including here in Bermuda, to quickly assume the role of “lender or guarantor of last resort” in order to save the global economy from a complete collapse. This involved governments lending money to banks and other finance companies that were on the brink of collapse from the crisis (or guaranteeing their borrowings).On March 4, 2009 the Dow Jones Industrial Index bottomed at 6,547, having fallen from its all-time high of 14,164. It has since recovered, and over the last year has traded in a 10,700 to 12,700 range. A repeat of the Great Depression of the 1930s has been averted, and hundreds of millions of jobs worldwide have been saved.However, as I explained in part one of this column, many of the governments that came to the rescue of the financial system, especially in the US, Europe, and Japan, were already carrying very high debt burdens prior to the outbreak of the financial crisis. The bailouts, essentially an unbudgeted response to a national emergency, sent the finances of many governments spiralling out of control as tax revenues shrank dramatically with the disappearance of the debt-fuelled growth expansion.Happy Birthday Mr PresidentFormer US President Bill Clinton was born on August 19, 1946. Thus, he is a member, and perhaps the most iconic member, of the first wave of the post-World War II “baby boomers”.Persons born in 1946 turn 65 this year, and in many countries, especially in the US and Western Europe, being 65 or older makes an individual eligible for government funded or subsidised health care and retirement benefits.In many countries, eligibility for these benefits is simply based on age and thus the number of persons who became eligible in 2011 has jumped tremendously compared to 2010 or 2009.Furthermore, the benefits are not means tested. In many countries a millionaire with a $10,000 monthly income could be receiving the same monthly government pension cheque as a widowed grandmother with a total monthly income (provided by her social pension payment) of $1,200.Many people assume when they hear that the government of Greece, Italy, the United States, Japan, or Bermuda has a large amount of debt outstanding, or an annual budget deficit, that the money has been borrowed to fund capital projects like roads, bridges, schools, incinerators, or other large public works. The truth is that most western governments spend a majority of their yearly budgets in the following areas: free and subsidised public education (kindergarten to university), free and/or subsidised health care programmes (for the young, the elderly, and civil servants), retirement pension payments to the elderly (social pensions) and to retired civil servants; and the salaries of the civil servants that manage and administer these critical programmes.Countries with the largest percentages of their populations over the age of 65 (like Japan), and those with a rapidly increasing population of persons turning 65 each year (like the US and Bermuda) typically are forced to rely on debt financing to maintain these social benefit programmes. That is because governments today are wary of raising taxes for reasons of global competitiveness.Companies are mobile while people, for the most part, are not. Too high a tax and cost burden in Bermuda, for example, can incentivise businesses to move from Bermuda to Guernsey, Cayman Islands, Jersey, Singapore, or Luxembourg, our key competitors in the global offshore business market.The ageing baby boomer population will place increasing demands on government finances over the next 20 years because a person retiring at age 65 can expect to live to around 79 in the US and Bermuda, for example. Compounding this is the fact that in the US the birth rate is at an 11-year low, which will do nothing to help housing prices there stabilise in the aftermath of the crash. The growth rate of Bermuda's native born population is approaching zero, exacerbating the effect of ageing on the Island's productivity and economic growth, and increasing our immigration needs.Many governments in Europe, such as Greece and Portugal, are so deeply in debt in the wake of the crisis, that they have effectively been shut out of the global market for government debt. Their economies are in a virtual free fall as the government eliminates the jobs of government workers in an attempt to achieve a balanced budget and reduce their need to borrow. The effect of this has mostly been to further reduce aggregate demand in their economies, which dampens growth impulses further, hurting tax revenues further, and making it difficult to actually balance their budgets.Because many European and UK banks and financial institutions are still dependent on their governments for liquidity and capital to meet their commitments, they too are finding the markets very tough to navigate currently.The weakness in governmental finances in those countries is pressuring the banking system, as the weakness of the banking system places pressure on government finances. This dynamic could present itself in the US after 2012, as the government there begins to implement plans to erase its budget deficit and reduce its debt.There is No Such Thing as a Free LunchChina, India, and other Asian emerging economies have seen a huge amount of investment by western companies since 1972 when China and the United States normalised relations. Many of the investments have been relocations or outsourcings of factory production from the west to Asia.This resulted in a steady exit of manufacturing jobs out of the US, and Europe (and Japan too) to Asia, especially China. Those jobs, and the tax revenues and consumption that they supported, are gone for good. Wages in China, and many other low-wage Asian countries, are roughly 80 percent less, on average, than wages in the US for example. Average workers in those countries don't get cradle-to-grave health insurance for themselves and their families, or pensions for life at age 65.Instead workers in Asia save large portions of their income; this is largely why China, for instance, has a large current account surplus and is now the banker to the world.This, and the ability of automation, computerisation, and digitisation to reduce the need for labour, has contributed to structural unemployment and declining living standards in many communities in the US and Europe. This too is adding to the pressure on the finances of many western governments as tax revenues disappear and imports of goods increase, putting further pressure on both budget deficits and current account deficits.The Great WorkoutHaving explained the global financial situation in this series of columns, I hope that readers can now understand the central outcome of the financial crisis. That is that the increased financial demands on the budgets of western governments from programmes designed to support our ageing populations has collided head on with the huge destruction of wealth and governmental finances caused by the financial markets crash of 2008. This is where the situation is currently.Western governments, from the United States, to the EU, to Australia and New Zealand, and in some respects, Bermuda too, are now busy crunching numbers. They are formulating what I call “The Great Workout”. That is, they are running economic scenarios, and modelling the potential and probable outcomes of the possible economic actions, and/or reactions, to the effects of the financial crisis. They are trying to get a handle on just how much the core western social contract government funded or subsidised health care, government-administered social pensions, and government-provided free education will cost going forward. They are comparing that cost figure with the new reality presented by the post-debt crisis economy.Dane Commissiong is the Treasury Manager of Bermuda Commercial Bank. He specialises in analysing and trading the global debt and currency markets. He has managed over $7 billion during his 30-year career.