Guest Post: "Growing Your Way Out of Debt" Is A Fantasy

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

"Growing Your Way Out of Debt" Is A Fantasy 

Add rising interest payments and higher taxes to declining assets and incomes and you don't get "growth," you get insolvency.

The Status Quo consensus is that "kicking the can down the road" a.k.a. "extend and pretend" will work because "Greece, Spain, Ireland et al. are going to "grow their way out of debt." That is a fantasy.

Here's why.

1. There's a funny little feature of debt called interest. The Status Quo solution for Ireland, Greece, Portugal, Spain et al. is A) increase their debt load with more loans and B) roll over their old debt into new loans, without the old lenders taking any "haircut" on the principal.

Both of these "solutions" add more interest costs. That means more of the national income stream must be diverted to pay the lenders their pound of flesh. That means there is less money in the national economy to buy goods and services, which means the economy must shrink to pay the higher interest costs.

This is why unemployment in Spain and Greece has skyrocketed and why 100,000 small businesses have closed in Greece in the past year.

2. A funny little feature of interest is that when people see you're at risk of default, they start charging you more to borrow their money. And it isn't a tiny bit more interest, it's a lot. Think subprime teaser loan at 3% shooting to 8%, or 28% if you're trying to sell new debt on the open market.

For the E.U. to "help" Greece and Ireland by rolling over their already crushing debt loads into new, higher interest loans is like "helping" a sick patient by sticking a knife into their back.

3. Governments over-promise future benefits to win elections in the here and now. This makes sense, of course, because you win the elections and power now and the problem of paying for these excessive benefits is left to future politicos and taxpayers.

But when the phony "growth" (think metasticizing cancer) fueled by rapidly rising debt is finally cut off, then the government has no choice but to raise taxes, and keep raising them, to pay for the extravagant past promises made to citizens.

That means more of the national income is diverted to taxes, only part of which flow through as cash benefits to consumers. Much of the tax revenues flow to cronies, fiefdoms and of course those higher interest payments on the ballooning debt.

4. Cheap abundant credit has a funny little consequence: asset bubbles. When everybody can borrow vast sums of nearly-free money at costs much lower than the outlandish gains being reaped by real estate speculators and punters pouring cash into stocks and commodities, then of course it is a perfectly rational decision to leverage yourself to the max, borrow as much as you can and join the speculative frenzy.

So assets bubble up to frothy levels, and McMansions sprout by the thousands on Irish and Spanish soil. The "demand" is not for shelter; it was all speculative demand for something to flip and churn.

So when the debt bubble pops, so too do all the asset bubbles.

5. Leverage has a funny little feature called collateral and that other peculiar feature, interest
. The land and house are the collateral for a mortgage (debt). As the real estate bubble popped, then the value of the collateral plummeted. Now the collateral is worth less than the loan--the borrower is "underwater."

The lender foolishly reckoned this would never happen, and now taking the collateral when the borrower defaults is an unsavory option because the lender will have to absorb a huge loss ("haircut") if they take the property.

So they choose to "extend and pretend," offering the borrower new terms, lower payments, etc., anything to keep the loan value on the books at 100%.

All of this is just artifice, of course; the borrower is insolvent, and so is the lender. As long as the borrower has to pay interest and principal, then there is not enough income left to "grow" anything. As long as the lender keeps the impaired loan on the books at the bogus valuation, then the lender is treading on the thin ice of insolvency.

6. As the national income and asset valuations both decline, the government imposes "austerity" programs which further cut incomes
. A funny little feature of government "austerity" is the cuts come from the citizen's side of the expense ledger, not from the crony/fiefdom side.

Here in the U.S., for example, the library hours are slashed and the parks are closed to save $22 million in a $100 billion annual budget (those are the numbers in California) while various favored fiefdoms continue to get their swag. The "pain" of austerity is anything but evenly distributed.

7. People facing financial uncertainty and duress have a funny little habit called saving. As the reality of instability becomes crystal-clear to all, then people rather naturally rally round and circle the wagons, i.e. start saving money to cushion them through the hard times. Trusting in future benefits and bubbles is obviously foolish, and the only avenue of relative safety is cash (or equivalent) in hand.

As people save more of their declining income, there is even less national income left to be spent on goods and services.

8. These forces are self-reinforcing. The worse times get, the more people save. the lower the national income, the more taxes will be raised. The more visible these trends become, the more interest lenders demand as they see the positive feedback loops leading to insolvency.

Once a household or nation is burdened with stupendous debt loads and stagnating earnings, "growing your way out of debt" is impossible. The E.U. may succeed in strong-arming Greece into swallowing even more debt, more austerity and higher interest payments, but that will only speed up the self-reinforcing dynamics of insolvency, and guarantee the losses kicked down the road for a few months will be even more devastating.

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SparkySC's picture

Cash advance a bank Credit Card.

Buy WAMUQ, WAMKQ, WAMPQ, WAHUQ and use their own money against them.


Win and Retire!



trav7777's picture

and then default like the government will?

Interest is relentless.  Growth is not.

WTF did people expect to happen to the euro when to even get INTO the union, governments had to cheat and push interest into the future?

All those swaps that GS set up for them to get them under the deficit caps are now coming due.  Balloon payments.

SparkySC's picture

Sorry for the repeat.

SparkySC's picture

sorry repeated. 

Monedas's picture

Repeat, my ass ! You are engaging in Fractional Reserve Posting ! Monedas 2011 Coming soon to your blog....Monedas' lecture series on Bathroom Science !

Ruffcut's picture

Fractional Res posting! LOL

Hey, Jamie Demon said a couple months ago peeps were paying down debt, saving more and spending more all at the same time.

So far, I can't get that to work.

Maybe he meant that JPM was saving more from stealing more and creating more governmnet debt,

hambone's picture

Fucking amazing that this is somehow "news".  We have lived under the guise of fairy tales and skittles shat out of unicorns for so long the most fundamental details are now shocking.  I like the author and he is correct, but shit, still blows me away what he sez is way outside the consensus.

Fairy talez usually have a moral...moral of this story is live beyond your means and you'll eventually find out debt is a Bitch who will rob you of all your goodies and leave you worse of than before you met her!

Nathan Muir's picture

I was thinking the exact same thign Hambone.  When did common sense WRT the basics of finance become revolutionary ideas?  It's sad that MSM and the establishment have dumbed down the population to this degree.  There is a glimmer of hope though - last week I was going over the Greece issue with a friend who know's nothing of econ/finance - her response was simple yet brilliant...."so they are going to fix a debt problem with more debt, how can that work?"

hambone's picture


word....and your friend for President.

Mad Cow's picture

Yep it's as old as humanity. Some may need to look at ancient documents on the subject of usury to get up to speed.

I am a Man I am Forty's picture

stockman on dylan ratigan was awesome tonight, best rant i've seen

cat2's picture

Spend your way to riches!

snowball777's picture

How much for a printing press?

Hard1's picture

Agree that these countries can't grow themselves out of debt, but stronger (for now) govenrments don't seem to have the will (aka balls) to cut their credit cards. Instead they are:

a -increasing the limit and extending the term with promises of austerity and growth projections (hopes)

b -review that prudence measures and growth have not worked

c - negotiate new promisis of austerity

d -return to step a

steveo's picture

I posted a Boatload of good stuff, could be a critical break already.  
The important moves come at night so Joe six pack cant participate.

bigwavedave's picture

nice summary and mostly true. but both the premise and the conclusion are off the mark. its not greece that needs to grow out of its debt. its the eurozone that has to grow out of the greek debt hit. banks need more time to make more money etc 

Nathan Muir's picture

Still kicking the can.  Debt based money is, and will continue to be, the problem.  Exponential math ensures so.  Debt as money requires constant growth, without growth the deflation death spiral takes hold.  Math is the universal language for one simple reason, it is always correct.


bigwavedave's picture

i didnt say they were going to win. but that is their plan. its got nothing to do with greece anymore. its all about recapitalization of the eur banks. the greeks will default when the eur banks inc ecb allow them to. simple. 

hambone's picture


Iceland, Ireland, Portugal, Greece are all already done.  Spain and Italy interest rates are on the verge of breaking out of their ranges and then EU is done bailing and it's simply austerity accross the board (or otherwise known as a depression)...but EU is still far better than US or Japan because at least there is a limit - and they are about to cross that thresshold.  Japan, America know no such boundaries and will destroy themselves and their currencies to "avoid the pain" of a depression (I guess they prefer hyperinflation first and then the subsequent hyperdeflationary depression...brilliant).

css1971's picture

You can't grow your way out when most of your money is credit. Growth means credit growth and credit growth means debt growth, which means more debt. All that work and you end up where you started, but with bigger numbers.

People simply don't understand what growth is. They don't understand that there is no correlation between money and stuff.

ok. 3% "growth" is a doubling period of  about 23 years. When I say doubling, I mean everything must double. If there really was 3% growth in an economy, then all the stuff which money represents would have to double every 23 years.

So, twice as many roads, twice as many offices, twice as many cars, trucks, trains, planes, twice as many houses, businesses, etc etc etc. Twice as much of everything on the market. Does that sound like what actually happens in 23 years? No. Real growth is much slower.

The growth then we see financial circles is just monetary growth. That we can grow as fast as you like. More money, more debt, more inflation more deflation.

"Growth" is simply inflation. When someone says they are going to grow their way out, they mean inflate, but using credit/debt rather than cash.


Bartanist's picture

Seems logical that the consequence will be an eventual Holy Crusade against bankers and the elitists who benefit from them.

Bankers and elitists are poorly prepared to defend themselves. They need protection from lackies who come from the same classes that they are oppressing.

bobert's picture

How do you define debt?

Public v. Non Public for example or "Intergovernmental," "non-marketable" etc.

It appears to me that "Intergovernmental" debt is being shown a back seat these days.

The debt that is being reported is the public debt or $9Trillion.

The $5Trillion "Intergovernmental" debt is dropped from discussion. Reason being IMHO is: The

Treasury is going to market the non-marketable debt and the Medicare Medicaid

SS and CSR Pension Trust Funds will be entirely depleted.

Nothing to worry about therefore. Spend away congress we have three years to go before the


In 2014 we go to pass through financing i.e., if they haven't gone up by then

interest rates are going to soar!!!

It will be interesting to see Medicare SS recipients pitted against the guberment

workers and the Pentagon.

Dre4dwolf's picture

The only way for this mess to get fixed is for someone to die.


Its going to end up with the people vs the banks, and there are more people than banks.

Dr. Richard Head's picture

nu uh.  this time it is different.  money grows on trees doncha know

YHC-FTSE's picture

Almost midnight here and there's a lot that's missing in this post but the jist is nothing we haven't discussed to death already - not that I don't appreciate your efforts to tie your observations together. It's a nice post.


One thing that I have ranted often about in the past is the notion that time is money. Or, to be more accurate, quantifying every aspect of human life in terms of vulgar coins. That notion gave birth to what I regard as one of the most evil inventions in finance: The compound interest formula. If you don't know how it deceives, obfuscates, and defrauds hundreds millions of people every day, and mutilates honest trade between honest men/women, then you should. 


slewie the pi-rat's picture

the release of the evil formula that could destroy everything but slugs, roaches, and banksters is surpassed by the evil i, slewie, do, in re-releasing the dastardly formula b/c hey! i want to!

A = 1500(1+ 0.043/4) 4(6) (raised to the 4(6) power)

A = P(1 + r/n)n(t)


      P = principal amount (the initial amount you borrow or deposit)[$1500]

      r  = annual rate of interest (as a decimal) [.043]

t  = number of years the amount is deposited or borrowed for.  [6]

A = amount of money accumulated after n years, including interest.[$1938.84]

n  =  number of times the interest is compounded per year [4]


Akrunner907's picture

Thank you for demonstrating your basic understanding of finance.  Now can you think in the abstract and understand that logic does not apply to goverments.  Goverment finances are operated based on the expectation theory:  That you can always expect tax revenues to increase based on changes in monetary and legislative policy.  What amazes me is that for all the brain power in these officials, how come they are too stupid to realize there is no spoon?

Libertarian777's picture

there is a spoon.

only you don't own it

the government does

you however, owe the debt on that spoon. pay up sucka

Dre4dwolf's picture

Or you can grab the spoon and tell the govt and the bank to go f themselves ;) they are so tied up with paper work they won't be able to attack you for atleast 2 - 3 years.... and by then you can get your own spoon as there will be billions of spoons that no one wants anymore.


km4's picture

Europe's crisis is China's opportunity. No wonder nice Mr Wen is on his way | Timothy Garton Ash | Comment is free | The Guardian

Dr. Porkchop's picture

It's like digging a hole. What's the first thing you should do when you find you've dug yourself into a hole?

Dr. Richard Head's picture


you dig it deeper.

 the key is to make sure the dirt thrown from the hole is piled as close to the edge as possible.  this way you can make sure you know how much further to dig.  

jackbooted gauleiter's picture

I don't know, I suggest you ask Dennis Healy.

sschu's picture

It seems Von Mises said something about boom and credit and there only being 2 ways out, currency debasement or take the medicine.

The stark choice and depth of the pain we face becomes more realistic everyday.  It is like the law of gravity but with a longer time constant, you eventually fall.  Bennie, Bam etal have no idea what to do, so they will revert to all they know, and that is more free money. 

The die is cast, any hope of "fixing" this with a minimum of cost and in short order is gone.  All that remains is how the end game will play out.


Bay of Pigs's picture

Yes, and gold revaluation. Possibly into the multi thousands on that massive amount of debt.

Jim Willies latest on the Armada of Black Swans now circling,


Atomizer's picture

Open Forum Davos 2011 - Euro Grounding? 

A little history before the Euro


ZH readers, take time to watch/read.

spanish inquisition's picture

Step 1. Someone has $0B and owes you $10B. Loan them $10B - they now have $10B in assets and owe $20B. They are now solvent and you can hope things get better and have them crack the whip on the proles to increase profits.

Step 2. They now have spent down to $5B and owe you $25B. Loan them $15B more - $20B in assets and $40B is owed. Hope some more and get them a bigger whip

I call it Economics

Caviar Emptor's picture

Growing your way out of debt is just a convenient line used to extend a little more rope with which to hang yourself. 

Don't forget this is all done with one purpose: to keep the banksters in Gucci. 

Ask yourself: if the banks didn't have their necks on the line, what would the attitude toward Greece's debt problems be? 

They will bail them no matter what, austerity is all just a bluff. Don't cave to the banksters and trade away your country and national treasures, Greece!!

High Plains Drifter's picture

Rush Limbaugh used to talk about growing our way out of debt. I knew it was a lie then and I know it is a lie now. We should not even have any debt. We wouldn't have any debt if we lived within our national means. That means getting rid of the FED. But what is Paul doing right now. Introducing a bill (like he always does it seems) with his good buddy Barney Frank, about legalizing marijuana usage. Yeh sure. That will help. Thanks a lot to Ron Paul.

Dr. Richard Head's picture

love you much hpd, but could you possibly specify what one congressman can do to end the fed?  sure his books are educating the masses to then verbally beat their respective congressman to do the same.  his tv appearances achieve the same goal, but obviously not enough.  presidential run in effect now and in the past, but that wont end the fed.  his committee is jr to the powers that has power to haul in the fed, so his chairmanship isnt going to do it.

i appreciate your p.o.v. and grasp it 100 percent, but i am curious as to what he could do to end the fed in his role that you see as his choice option.

High Plains Drifter's picture

That's just it doc. He can't do anything and he won't. So why does he play this game of pretend with us, by intimating, that the system is still working and that if we just do this or that, that somehow things will all work out. This of course is a lie. Ron Paul is imho, a stalking horse and his job is to placate the ones who are angry and perhaps somehow, delay any actions they may contemplate. You see, the longer we wait to take care of business, the more power they get. Right now, food  is being destroyed. But I digress. Case in point is this. Ron Paul has been there inside the beltway for 20 years. Anyone that stays there that long and swims in that sewer, is bound to start smelling bad. Another case in point. Watch the following video. The Ron Paul of the 50's .

Welch was talking the same smack as Ron Paul does now. What happened? Nothing. Did things get worse over time? You bet they did. Let us face it ladies and gentlemen. Nothing of importance will ever come out of this out of control and illegal government. Nothing. When will the day come, when people realize this? I have written letters for 20 years. I made calls. They just blow you off. They don't care what we think. None of them. I have lost faith in them and they have lost me. Again, the Constitution is very clear on money. Congress shall have the power to coin money, not the damn FED. Now we are controlled by the hidden hand. To alleviate this control will require much pain, much pain.

Atomizer's picture

I'm not going to defend Rush. Can tell you that after 9/11, I forced myself to learn about this mickey mouse monetary system. Some folks are just starting to piece things together.. It does take time, everyday is still a new learning experience for me. :)

Yes_Questions's picture

Every time something like a Limbaugh tries to lure you with a shiny object (all liberals are stupid, global warming is a farce, etc. and so on), look the other way.  The purpose behind all of that is to get you to feel a certain way.

Certainly not to help you think critically and figure out who is actually fucking you over.

Think for yourself.

High Plains Drifter's picture

Limbaugh is controlled opposition. It is his job to fill the airwaves everyday with bullshit. This is what he does and has done for his whole career. Is there a reason why not long after he got into radio, back in 1988, that he suddenly had to take a nice vacation in Israel?  I think not. There is a reason why he went there then. They told him, imho, that he had to do things their way and his career would flourish, otherwise forget it.

Yes_Questions's picture

"We" would have no debt if not for predatory central banks, "living within our national means" is impossible under this system and that is not a mistake.  As it is now, the drug addled gas bag's income, as is yours and mine: are measured in currency borne of debt.

End the FED? Absolutafuckingmente!

Though the herb thing might gain some traction.  Hopefully.  Could help kill some part of the crony capitalist private prison industry while "We" are at it at the polls.

Silver Dreamer's picture

Ending the 40 year "War on Drugs" would help.  Are you kidding?  How many billions of dollars have to be wasted before people realize it is a scam??  You honestly do not see it as that???

JR's picture

It’s all so clear now - why the bankers are so concerned about Greece.  Why the default of a little Greek economy would be like the end of the world.  Why a vote in Greek Parliament can swing the US stock market.  Why Japan, with a huge economy, can suffer a devastating hurricane, flood and a radioactive tragedy and it hardly has an effect on the stock market.

Why is Greece so pivotal to world economics?  It’s because the investment bankers’ dream of combining all central banks into a one-world suprabank with its own currency and its own single political power – with political veto power over every parliament and every elected democratic body in the world – is at stake. Power! total power!! is at stake!!!

That’s why the international bankers are so worried about holding Europe together.  A hint at Greek default destroys the pattern of the IMF takeover through voluntary austerity programs by countries that are in economic trouble. IOW, Greece’s Parliament needs to “democratically” and voluntarily consent to IMF demands for the process to continue. Confiscation of Greek infrastructure cannot be done by banker decree. It must be “voluntary”; it must appear that justice prevailed.

It has to look as if Greece and her Parliament voluntarily by vote agreed to the IMF demands.  And, thereby, the IMF retains legitimacy and the European Union – the bankers’ main concern rather than the money – retains its role on the road to world governance.

That’s why the word “contagion” is used to strike fear in the hearts of the equity markets and businesses in the US and Europe, warning that default could lead to huge economic depressions in a domino effect around the world. This “fear journalism” comes from bankers who worry that a breakup in the EU blocks the progress of their world dominance.

European Central Bank President Jean-Claude Trichet outlined the process in his recent speech in Aachen, Germany, this month calling for an international banker dictatorship over Europe, beginning with the takeover of floundering nations :  “One way this could be imagined is for European authorities to have the right to veto some national economic policy decisions. The remit could include in particular major fiscal spending items and elements essential for the country’s competitiveness.”

Once there is veto power over a parliament, of course, that’s the end of that parliament.  Nothing can go through without higher approval.

Asks Trichet: “In this Union of tomorrow, or of the day after tomorrow, would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the Union?”

gwar5's picture

I think so.

If Greece fails, then the ECB immediately becomes insolvent and the EU fails. And if there is no EU, then there's no NWO anytime soon. 

NWO = world banking out of the IMF calling the shots, behind a world government authority facade out of the UN.


I wonder if people would be so passive if oil companies did what the banks are now doing? What if oil campanies embargoed oil to countries until they surrendered their sovereignty and assets to receive another 12 months of oil?  I dare say, people would not hesitate to go to war with the oil campanies to prevent such a thing. What makes the banks think their so special? 

If the EU does fall apart and world central banks collapse adn become insolvent, no doubt it has already been war gamed for a NWO gambit to rise from the ashes as a way resolve the "world crisis."  Private central banks need to be nationalized and put under civilian control with swat teams babysitting them. 


I_ate_the_crow's picture

Precisely JR, you get it. Always enjoy your posts.