Albert Edwards: At 500% Net Liabilities To GDP, It Is Too Late To Prevent The Collapse Of The G-7; Greece Is Irrelevant, We Are All Now Insolvent

Tyler Durden's picture

For Greece, with on and off balance sheet liabilities at over 800%, it's game over. For the Eurozone, with the same ratio at about 500%, it is also game over. For the US, at 500%+, it is, you guessed it (sorry Joseph Stiglitz), game over, but since we have the printers, it will simply take a little longer. Following up on yesterday's popular post on prevailing delusions as captured by Albert Edwards' colleague Dylan Grice, we present Albert's latest outlook. Please don't read this if you want to keep believing there is any hope left for the (developed) world.

But first some aeral photography from Dylan Grice, indicating just how far the US government is willing to go to get the population stoked about owning fixed (shouldn't it be called broken really?) income. With British QE over, and the country still to implement the same criminal annuitizing of 401(k)s that Uncle Sam is contempltating in order to make "Buy Bonds" a "voluntary" option one can't really decline, maybe letters on modern architecture building blocks is all that would works. As Edwards says: "I'm not sure leaving man-sized building blocks around the City of London is really going to make an awful lot of difference, but I suppose when your public sector deficit is around 13% of GDP, every little bit helps!"

So back to Greece, the Eurozone, and policy response in general, Edwards places the causes (and "solutions") of the escalating problem precisely where it belongs: at the core of the Keynesian systemic outlook flaw.

A major divergence of views in the market at the moment concerns what governments should be doing with their outsized fiscal deficits. Economists seem to be polarised between those who think governments should be rapidly cutting fiscal deficits to avoid impending insolvency and/or a surge in bond yields, and those who believe this will be totally counterproductive and that deficits should stay very large. Behind this controversy probably lies the key to the economic outlook.

To Edwards, and to ever more hedge fund investors judging by the jump back in Greece Bund spreads which just broke the most recent technical resistance level of 300 bps, Greece is nothing more than Russia and LTCM (or Bear Stearns as the case may be).

The situation in Greece following hard on the heels of similar solvency issues in Dubai feels to me very much like the Russian default and LTCM blow-up in 1998. For the blow-ups that year were a direct follow-on from the Asian crisis a year earlier a different chapter in the same book. There will be more crises to follow Greece, both inside and outside of the eurozone.

The outcome of broken Keynesian policy (by definition) will be ugly, and will destroy the eurozone. We said it some time ago, and SocGen has now also confirmed this bearish perspective.

My own view of developments, for what it is worth, is that any "help" given to Greece merely delays the inevitable break-up of the eurozone. But, for me, the problem is not the size of the government deficit and the solvency or otherwise of the governments in the PIGS (Portugal, Ireland, Greece and Spain - we deliberately exclude Italy).

The problem for the PIGS is that years of inappropriately low interest rates resulted in overheating and rapid inflation, even though interest rates might well have been appropriate for the eurozone as a whole. Rapid inflation has led to overvalued bilateral real exchange rates (they do still notionally exist) for the PIGS and in most cases yawning double-digit current account deficits. With most trade done with other eurozone countries, the root problem for the PIGS is lack of competitiveness within the eurozone – an inevitable consequence of the one size fits all interest rate policy. Even if the PIGS governments could slash their fiscal deficits, as Ireland is attempting, to maintain credibility with the markets in the short term, the lack of competitiveness within the eurozone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Hence the PIGS public sector deficit will inevitably remain large as a direct consequence of this weak growth outlook.

As noted earlier on Zero Hedge, in Europe the population is a little less brainwashed by the moronic happenings on prime time TV, so while in America the destruction of the economic system, as trillions are transferred to the kleptocracy which knows fully well the end game is nigh, results in some sighs of desperation at best, in Europe the outcome will be somewhat more violent.

In my opinion this will not be tolerated by the electorates in these countries. Unlike Japan or the US, Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain. Consigning the PIGS to a prolonged period of deflation is most likely to impose too severe a test on these nations. And the political "consensus" within the PIGS to remain in the eurozone could falter in the face of another of Europe's unfortunate tendencies -the emergence of small extreme parties to take advantage of any unrest. My own view is that there is little "help" that can be offered by the other eurozone nations other than temporary confidence-giving "sticking plasters" before the ultimate denouement: the break-up of the eurozone.

And in case you were wondering why all European leaders are powerless to provide a bailout proposal that actually has a snowball's chance in hell of doing something/anything to help Greece, read on. Alternatively, if you want to find out why any plan suggested on Monday will be thoroughly useless and once digested by the market will cause another major crash, read on as well.

The pressure to tighten fiscal policy from current nose-bleed levels of deficits is not just an issue for crisis hit Greece. It is an issue for virtually all economies. It is a particular issue for the US and UK with structural (cyclically adjusted) general government deficits of almost 10% of GDP (according to the OECD)! There is a ferocious debate ongoing between those who believe there needs to be a rapid reduction in these deficits to avoid some combination of insolvency/default/rapid inflation and those who believe that there should be even more fiscal stimulus. The debate is loud and opinions are tending to be polarised.

My own view on this is that obviously we should never have got into this wholly avoidable mess in the first place. But having got here, there really is no way out that does not trigger a major market-moving upheaval. Ultimately economic prosperity over the past decade has been a sham: a totally unsustainable Ponzi scheme built on a mountain of private sector debt.GDP has simply been brought forward from the future and now it's payback time. The trouble is that, as the private sector debt unwinds, there is no political appetite to allow GDP to decline to its "correct" level as this would involve a depression. So burgeoning public sector deficits and Quantitative Easing are required to maintain the fig-leaf of continued prosperity.

And here is the topic that will dominate over all pundit round table discussions in the next weeks: the entire world is insolvent, although some are more insolvent than others. Greek total net liabilities (on and off balance sheet) to GDP are 800%! EU: at 470%, the US, at over 500%. There is no way out but default.

Edwards' poignant summation.

I am persuaded by my colleague Dylan Grice's analysis that, including unfunded liabilities, most governments are already insolvent with debt to GDP ratios closer to 500% of GDP instead of around 100% for most G7 countries . It is too late.

Nor were Dylan and I persuaded by recent comments from Nobel Prize Winner Joseph Stiglitz that it is absurd to suggest that the US and UK governments might default on their debts as they could just print money. Indeed. But a client pointed out to us that Weimar Germany did not default on its debts during its hyper-inflation. How reassuring!

I am persuaded though by Richard Koo's book about the lessons from Japan's balance sheet recession. The crux of his analysis is that governments have no option but to stimulate aggressively all the while the private sector is de-leveraging. ANY attempt at fiscal cuts simply results in renewed recession and a further loss of confidence, thus making it even harder and more costly to sustain any subsequent recovery - and hence the budget deficit ends up bigger than before (e.g. see chart below). This is exactly the outcome I expect.

The take home is very, very simple: we can delude ourselves that the game can be won (it can't), or we can prepare for the imminent collapse when delusion finally fails.

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Cognitive Dissonance's picture

"My own view of developments, for what it is worth, is that any "help" given to Greece merely delays the inevitable break-up of the eurozone."

Everything else after this statement is simply an explanation of how the delay will (or will not) be implemented, where the problems are, who will and will not resist etc.

The fat lady has already sung. The game is over. The only question is who will recognize this first, second, third etc and how will they (we) deal with this reality? The article ends very nicely with the following.

"The take home is very, very simple: we can delude ourselves that the game can be won (it can't), or we can prepare for the imminent collapse when delusion finally fails."

walküre's picture

The "game" cannot work.

The disease is socialism. The symptoms are government intervention.

A government cannot run health care, social security, education and so on.

Those are all bottomless pits.

The bankers just found "magic" to keep the show alive so governments could be "free".

Behind the scenes the actors are fighting who exactly is promising what to whom.

Mistakes were made throughout. We're now just realizing that the "magic" is ending and that the systems will collapse eventually.

Greece's problem is so much socialism that it will inevitably fail first. The 40 years of uber-socialism in the East Bloc were just setting the stage.

Miramanee's picture


I think that the term *Socialism* misses the mark.
It ascribes a political and socio-econ construct that
does not fully apply in the case of the Global
Financial Crisis. The failure isn't Socialism, it is
Monetarism. More succinctly, the collapse of
civilization as we have come to recognize it---which
WILL occur within the next several decades---is the
direct result of international standards of currency
NOT being tied to a finite commodity (gold i.e.) and
the innately human "flaw" ( to use Greenspan's words)
of unbounded avarice. Greedy, power hungry men, all
of whom possess the ability to "print" money in an
effort to grow their wealth and retain their power,
have destroyed the least this iteration
of the world.

WaterWings's picture

I think that the term *Socialism* misses the mark.
It ascribes a political and socio-econ construct that
does not fully apply in the case of the Global
Financial Crisis. The failure isn't Socialism, it is
[avarice]. More succinctly, the collapse of
civilization as we have come to recognize it---which
WILL occur within the next several decades---is the
direct result of international standards of currency
NOT being tied to a finite commodity (gold i.e.) and
the innately human "flaw" ( to use Greenspan's words)
of unbounded [monetarism]. Greedy, power hungry men, all
of whom possess the ability to "print" money in an
effort to grow their wealth and retain their power,
have destroyed the least this iteration
of the world.

There. Much better. Can't help you with the decades thing.


dnarby's picture

Decades?  Two years on the outside.

steve from virginia's picture

The failure isn't socialism or avarice per se but financeialism, which is the substitution of paper claims for real work leading to excess claims on future labor.

Labor is leveraged with petroleum that has risen in price five- fold in ten years. $20 oil and there is no financial crisis anywhere.

Financialism is a hedge. It can only fail as it is a fantasy against resource depletion reality. The ultimate outcome outside of choosing to live within one's means is repudiation of claims and the breakdown of trust. Without trust there is no modern economy.

Anonymous's picture

Best comment so far. Thank you!

Oil gave us a very big lever to play with and for the last decades it has grown always longer.

Now it grows shorter. Even if we can keep up production for a while, the EROEI is getting worse. Problem is, our whole economy relies on growth and that growth relies on expanding use of natural resources.

Until fusion energy gets large-scale economically viable, we are stuck now with a shrinking resource base. In the end that means the world population has to be reduced by a few billion people.

The coming decades won't be very pretty and aside from being a genius and finding us a new energy resource we can grow upon, there is exactly nothing anybody of us can do against this.

Anonymous's picture

However, you fail to understand that the "level" of natural resources is itself, a fantasy created to limit production and encourage power-grabbing.

We have hundreds of years of natural resources (oil, coal, nuclear) that we can access now... if environmentalists didn't keep us from accessing them.

Anonymous's picture

Well Done

walküre's picture

Excuse me.. when the very notion that government can guarantee health care, pensions or other social security, welfare and public education IS socialism.

We are not an equal society. Some have it and some don't. Some CAN really make it and some don't. It's always been that way.

Nothing wrong with private entities or individuals stepping up to the task and offering sponsorship.

BUT we have created a government for the people, no matter where the people come from whether they can hold a job, have education, have what it takes or will ever be able to support themselves.


Government is the problem. It is too big, it is too intrusive and it has created a nation of irresponsible junkies that look for assistance from government any which way they turn.

California is OUR basketcase and prime example of how stupid it can get when government is out of control and self serving.

Reduce 50% of all government across the board, close schools and cut welfare.

Watch and see what happens when people HAVE no choice but to fend for themselves and that includes providing education for their kids.

Maybe just maybe then we as a nation have a chance.

FYI .. I have seen the destruction of a people with too much government dependency first hand in several East Bloc countries. 40 years of propaganda and mismanagement have left those places in shambles until the West picked up the pieces.

The West however is suffering the same disease because popular promises were made that CANNOT BE AFFORDED.

Anonymous's picture

Is Cuba running deficits? What about Norway? Are you sure it is socialism? If you want 'freedom' and don't want to live third-world-like, then YOU HAVE TO PAY YOUR FUCKING DUE. Do you like things like relatively 'honest' police? Ask people in Singapore if they would rather live in the 3rd world conditions like the Malaysians or would they rather have social control and pay their taxes. This group is way too sheltered.

Thomas's picture

It's fascism, not socialism--centralization of power.

merehuman's picture

A Rose by any other name..lala fill in the blanks.  Naming it aint gonna help. Helping the populace that would be a good thing. Anybody here done a good thing lately? (not for profit).

Am educating neighbors, got armed and enuff rice and beans to cover myself and neighbors.

Meanwhile as a cons. cont. i still do the few jobs that come my way. Been giving away a silver round now and then to entice them to educate themselves. The garden is doing fine leaving a peaceful comfort in my heart.

Some of us have PMs . That will be the seed money for the unknown future, to re establish our community.

Healers, traders and transporters will have a fair future as well as farmers and second hand stores. I see the new world as a better, simpler life style. Too bad so many have to suffer betwixt now and then.

When the semis quit coming, its too late.

perchprism's picture


Here's a link to the top 100 things you need when TSHTF, and that run out first:

Get some rice, beans, powdered milk, and can goods.  Canning jars and a canner.  Extra garden tools, seeds, 12-gauge shotgun, .22, .223, .357 (or 9mm handgun), and plenty of ammo.  Gold and silver.

Master Bates's picture

You're a biotch.  How dare you make any threat whatsoever to me.  I'm not going to forget what you said yesterday, and you're lucky that it was on the computer and not face to face...

Now go hide behind your anonymousness, and just know that you're probably as weak as the man in your avatar.

perchprism's picture


Tough titty, punk.  Why don't you do us all a favor and eat a bullet, you miserable peckerhead.

Master Bates's picture

Well, you're just lucky that you're hiding behind a computer is all, believe me.

jomama's picture

can i have your autograph, tough guy?

Master Bates's picture

If you ask real nice and pay me a dollar.

Anonymous's picture

It's not as if a dollar is going to mean much a in a couple of years.-

Anonymous's picture

i would pay to see master bater rip your head off and shit down your neck!

Master Bates's picture

If you ask real nice and give me a dollar... LOL.

Or some of that GOLD BITCHEZ!

Anonymous's picture

Enjoy your worthless dollars.

Anonymous's picture

Good link, thanks!

Anonymous's picture

Agree. Pay your due (taxes) or live behind barbed wires fences and always carry lots of ammunition. Ever been to a third-world country?

Americans are indeed too sheltered (and spoiled...oh...did I mention IGNORANT?).

walküre's picture

Another myth that the great US public education system fabricates.

The rich pay taxes.

Guess what. The rich could pay 100% taxes and your shit still wouldn't get paid for.

There's too much government body and not enough support from ALL Americans.

You think you're $15.95 income tax per month makes a dent?


Anonymous's picture

Shift the decimal point two spots to the right. And yeah it does make a dent in my checkbook. You are right about the rich paying taxes and the public re-education system.

Anonymous's picture

what a fucktard.....thanks for proving your

Anonymous's picture

wow.. so let me get this straight.. if all those GREEDY SCUMBAGS in haiti or cuba or somalia would JUST PAY TAXES, they could be a first world country? why those greedy bastards

mouser98's picture

you presume that we actually have to have government to stave off "3rd world conditions."  however, last time i looked, all the 3rd world countries had governments also.  perhaps it is not an overpriced government that is needed after all.

Anonymous's picture

Malaysia 3rd World....that's a bit much

kurt_cagle's picture

In the US, the budget for the Dept. of Defense is roughly the same as the budget for all other departments combined. Most of the R&D investment in the country - from education to the national science foundation to efforts with Ag, Energy and others - makes up perhaps 1/100th of the total expenditures for the military/security sector. The R&D investments insure a qualified work force, competitive leads in business and technology, and similar dividends. The DoD and related work forces insure only the ability to project US dominance in the rest of the world, protecting the power of the oligarchy. Tell me in what way the US can be considered to be even vaguely socialist when we farm out health care to the private sector then wonder why no one can afford health insurance.

Now, slash the budget of the military by 90%, bring home the troops, build a sensible defense posture for a country with two friendly adjacent neighbors and a buffer of two oceans on either side, and maybe, just maybe, those budget deficits would very quickly become surpluses. So before you get on your high horse about slashing schools and cutting welfare, ask whether we need to have an arsenal of tens of thousands of nuclear missiles, thousands of ships, a standing army of more than 3 million and the largest air force in the world.

baldski's picture

Right on kurt-cagle.


The military-industrial complex that Eisenhower warned about runs congress and the President along with the bankers. They are afraid to slash anything.Why do we need 120+ military bases around the world? Ridiculous expense! Let's start turning swords into plowshares and maybe we can save our democracy.



Anonymous's picture

120 in 1959 perhaps. It's over 700 now.

Anonymous's picture

Not disagreeing that we are in too many countries, but seriously we don't have 700 based or event 120 bases around the world. Name them, give me a link. If you are counting the Marines at our embassies or a military attache, then you might get to 700 locations.

We have troops in large numbers in Iraq, Afghanistan, Japan, Italy, Germany, South Korea, and maybe a few more.

That being said, we subsides other countries safety. We should scale back and let other countries take some of the cost.

kurt_cagle's picture

Actually, we have bases in most countries in Europe, Japan, the Philipines, India, several African countries, Panama, Nicaragua, Paraguay, Mexico, Canada, Israel, and so forth. Admittedly, many are small outposts, but it's actually surprisingly difficult to find countries that don't have US forces deployed somewhere.

The question about subsidizing other countries' safety is an intriguing one and difficult to either confirm or refute. Do US troops in S. Korea deter the N. Koreans? In many cases bases were established to provide staging during early conflicts and never fully decommisioned after the conflicts ended.

SABTrader's picture

I doubt you'll find a list of all US military bases in the world on the internet. I know we have one here in NW western australia.

SWRichmond's picture

I don't want the MIC or nationalsocialist health care.

Anonymous's picture

Then you can start a business that allows people to buy additional insurance for Cadallic coverage. There are plenty who need it and plenty to fund it.

Anonymous's picture

You know, I have said the same exact thing, I'm not sure what the problem is with that? Then companies have only low risk/rich people pools that get their own rooms and other benefits, and they pay more for it.

Seems ok to me to provide a baseline standard service and expect companies to innovate and find new products to build on top of it.

BS Inc.'s picture

Oh for crying out loud, you want to add some facts to that rant?

When you factor in the spending at the local and state level, hardly any of which is military related, the government spends probably about 10% of its yearly budget on military-related items.

Anonymous's picture

Why are you factoring in local and state? Jerk-off.

WaterWings's picture

The military-industrial complex dominates wikipedia!

kurt_cagle's picture

How much of local and state goes towards police forces? For that matter, how much of the federal budget goes into national guard units? Or the Army Corps of Engineers?

I'm not trying to wave a large liberal flag here - I'm former military and come from a military family; I'm just of the opinion that the military/security infrastructure is far larger or more costly than it needs to be given a purely defensive rather than offensive stance. The organization has placed too much emphasis on expensive technological gadgets to provide "the edge", and many of those, once field tested in most of the likely theatre of campaign, generally don't prove themselves.

ConfederateH's picture

Well said walküre, but I don't think that it is possible to put the toothpaste back into the tube.

The European socialists bought their elections since the end of WWII by borrowing from the future to buy votes and accuse anyone who was more prudent of being a greedy capitalist.  For decades the Democrats have pointed to Europe and claimed that those greedy, capitalist Republicans just wanted to rob the poor and middle classes and that all we had to do was ignore the constitution and give free health care, free universities, free abortions and free retirements to everyone and the US would reach nirvana just like Europe.

Well anyone with any sense can see that the parasites have finally killed the host.

No More Bubbles's picture

Yes, the collapse WILL occur, but it will be in the next few years, not decades........

Ripped Chunk's picture

"Greedy, power hungry men, all
of whom possess the ability to "print" money in an
effort to grow their wealth and retain their power,
have destroyed the least this iteration
of the world."


Could not agree more with your statement.  I just want to know when we get to start killing them?

Anonymous's picture

> NOT being tied to a finite commodity (gold i.e.)

We are not in a manufacturing/industrial economy any longer. The valuation of IP and services, the basis for all future growth in "the developed nations" is far more inchoate and not easily understood (and certainly not currently understood), and this fact lies at the heart of the current issues, just as failure to understand the nature of an industrial economy led to the Depression in the 1930s.

Money is a defacto substitute -- a proxy -- for the real goods it represents. Hence money "production" (i.e., the amount in circulation, both real and virtual via electronic form) needs to be tied to the actual worth of new production less consumption. This cannot be effectively done by tying it to some ridiculous fixed quantity like gold, which inevitably leads to constant inflation as the relatively fixed quantity of gold comes to represent a continually increasing quantity of goods -- assets (IP as well as real physical properties).

"The Gold Standard" is hence a really, really stupid idea for a dynamically and rapidly increasing economy such as that which has existed since the 1940s, if not the 1920s.

There does need to be some realistic metrics and correctional mechanisms tied to the "quantity of money available", as well as rules to rein in both government spending (which any damnfool would know should long since have been REQUIRED to submit itself to GAAP, and one could easily argue this is a major source of the inherent problems from the government's end, at least), as well as any tendency to resort to the printing press to "make" more money than actually is being produced. But The Gold Standard is a flat out stupid idea of a means for doing so.