Guest Post: The Only Way Forward Is To Accept Reality: Default Is Not The End Of The World

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

The Only Way Forward Is to Accept Reality: Default Is Not the End of the World

The catastrophe isn't default, it's "extend and pretend."

Unwelcome crises are part of life. What's unnatural isn't crisis, it's pretending that life should be nothing but a smooth, uninterrupted rise in consumption.

Yes, I'm talking about Greece and the EU. The situation is somewhat analogous to finding out your total cholesterol is over 300. Gee, I thought I was eating well, and was in pretty good shape... alas, that was all wishful thinking; normal is 180. At 300, you're at serious risk of long-term health problems.

So the European Central Bank injects 120 billion euros of "medicine" to cure you, and a year later your cholesterol readings are 395. Hmm. The "medicine" didn't work; instead, it actively prolonged and deepened the crisis.

Humans need time to accept new realities, and to make necessary adjustments. People lose their wealth, they adjust. They lose their successful careers, they adjust. They face health crises, they adjust. This kind of wrenching adjustment is not abnormal, it is utterly normal.

Cholesterol at 300 is a crisis. We need to drop that 120 points down to 180. Everything about our lifestyle has to change to deal with this reality. So we go through a period of adjustment to the new reality. Sometimes the adjustment period is wrenching. People have to give up much of their lifestyle. But denying reality doesn't help, and bemoaning the pain don't help, either; both of these responses actively hinder the adjustment.

I was interviewed Saturday evening by guest hosts Paul Vigna and Ina Parker on the John Batchelor WABC radio program, and the topic was (unsurprisingly) Greece. Both Paul and Ina asked good questions, and so my primary aim was not to ramble too long or incoherently. (Who knows if I succeeded or not.)

One of their questions spoke directly to the central issue: "If Greece defaults, what happens next?"

I answered that Greece goes through a re-set, a painful but brief period of adjustment, and with the bad debt gone, then the economy would be cleared for new businesses to take root.

The Eurozone debt "crisis" is nothing but another credit cycle, in which debt expands beyond the carrying capacity of consumers and economies. Debt then contracts as uncollectable debt is written down; borrowers go bankrupt and their remaining assets are auctioned off (if they put up collateral; if not, then tough luck, lenders, you blew it and will have to suck the entire loss). Insolvent lenders are also declared bankrupt and dissolved.

There is absolutely nothing unusual about this cycle. Impaired debt is renounced and the system is purged of bad debt. Once the economy has been cleared of garbage, so to speak, then everyone can stop pretending and start dealing with reality. Businesses will be able to start up in a transparent and open market.

The world does not end. Life goes on. We were threatened and bullied in 2008 that the insolvency of the U.S. financial sector would trigger the end of civilization, but it was just another lie: life goes on.

The "doom and gloom" view (of which I am proponent, I suppose) is typically categorized by the Mainstream Media as a stubbornly negative insistence that "the world will end." While there is certainly a contingent who espouse that, in my view "doom and gloom" is not predicting the end of the world--it's just predicting the end of the Status Quo.

That's a key difference.

The Status Quo in Euroland is unsustainable. Last year's "fix" fixed nothing; it only deepened the pain and stole a year from those who could have used that time to make needed adjustments to reality.

It would be better for all involved if Greece defaulted on 100% of its debt and left the euro currency. Imports would instantly become very expensive in the new currency and so Greece would have a chance to build a balanced, productive economy that wasn't dependent on debt. All the banks who made the predatory loans to Greece would go bankrupt--good riddance to them all. If the ECB also goes under, so much the better.

Regardless of the shrill cries that civilization will end if lenders go belly up, life goes on. "Extend and pretend" only prolongs and deepens a crisis. "Doom and gloom" is the recognition that new conditions apply and the old way is unsustainable. Nobody likes hearing that, but it is the only way forward.

Greece, Please Do The Right Thing: Default Now (June 1, 2011)

Ireland, Please Do the World a Favor and Default (November 29, 2010)

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phungus_mungus's picture

If Greece defaults?!??!


These fools still think its avoidable....  we are so screwed. 

ISEEIT's picture

Happy Fathers day. I just returned from a very nice meal with 'my' clan. I adore them! The deal was: If my short EUR/USD dipped to the right place, I would pay for a  meal out together.

The meal was great. We loved it.

Thank you TYLERS.

If you people didn't do what you do, I would still think that the 'drudge' was cutting edge 'news'.

I really do love you guys and I appreciate what you do.

Yes, I am drunk. I'm only drunk though because I'm hurt. Blah on forever, you people are good:)

Yes, I am also serious. I love you people. You are good.

ISEEIT's picture

Happy Fathers day. I just returned from a very nice meal with 'my' clan. I adore them! The deal was: If my short EUR/USD dipped to the right place, I would pay for a  meal out together.

The meal was great. We loved it.

Thank you TYLERS.

If you people didn't do what you do, I would still think that the 'drudge' was cutting edge 'news'.

I really do love you guys and I appreciate what you do.

Yes, I am drunk. I'm only drunk though because I'm hurt. Blah on forever, you people are good:)

Yes, I am also serious. I love you people. You are good.

Michael's picture

Ok, we got it the first time. Have another drink. You'll need it for the information that's coming down the pike from ZH.

surfersd's picture

Tyler, do you have the statistics that show how much greek ( and for that matter spanish-portugal-ireland ) debt is held by the Euro banks? I can't find the great chart in the NYT which shows the cross holdings, this article   talks about the smaller German banks and the Corporate risk from default. 

How much capital do these banks need to cover a default? Is the ECB going to step in like the FED and rescue them by printing Euros? How much greek debt does the FED have vis-a-vie the IMF? Have to wait to find out what is in the other Asset category I guess.

 It does seem impossible for these governments to cut and and or grow their way back to a a balanced budget so that they can start to actually restructure their debt.

I guess my question is do these banks have enough Tier 1 capital to absorb loses on their sovereign debt portfolios? I believe the answer is no, just trying to get some more definitive answers. 0 hedge for 1yr and 43 weeks. Thxs

Zero Govt's picture

these figures were 'easily' available from Euro Banks: Stress Test 1 ...the thorough research that passed all the Irish, Greek, Portugese and Spanish banks (who all subsequently went/are about to go, bankrupt) please refer to the new one, Stress Test 2: Cooked Books - The Sequil... inside this obsiqious, opaque, fraudulent document you should find precisely nothing about the numbers you seek

...please note it also doesn't have the ECB in it, who are bankrupt/insolvent at this point in time

Chin up everyone, it's looking fucking good

Quixotic_Not's picture

It is natural to indulge in the illusions of hope. We are apt to shut our eyes to that siren until she allures us to our death...

molecool's picture

Saw this chart the other day - don't remember the numbers but France was on top, followe dby Germany about 25% lower.

cranky-old-geezer's picture

Read my lips: There will be no default. 

Bankers aren't going to take haircuts. Simple as that.

They'll print money and loan it to Greece (and Spain, etc) till the Euro is worthless.


kito's picture

how anticlimatic for this greek comic tragedy.

Charley's picture

Yes. Default is not the end of the world ... neither is another $10T in dancing electrons on a computer terminal.

Quixotic_Not's picture

Everything is so dangerous that nothing is really very frightening...

Ropingdown's picture

The "extend and pretend" isn't a reflection of our unwillingness to accept reality.  It is a practical reflection of these, that kicking the can successfully for six months more may be the difference between a big final bonus before retiring... or not.  It may be the difference between another four year term in office or not.  Our executives, portfolios, and elections are built around winning in the short term.  Why?  Because our laws (in the US and EU) don't allow the polity to take back the winnings of the can-kickers.  Simple.  The guys at the top aren't stupid.  They are selfish.  And we say "that's fine" by our actions.  I was adamantly for a Balanced Budget Amendment, but the whole thing got brushed aside in favor of abortion rights or not, new war or not, BS... and the pork vote-buying machine. We don't need lectures about denial.  We need people to f'g think.

traderjoe's picture

Sovereign countries do not need to
borrow money from private banks.

Repudiate the odious debt.

CrashisOptimistic's picture

The problem with advising calm and insistence that "it's not the end of the world" is simply this:

If Greece takes some action of that sort, and does not appear to suffer 10's of thousands, or hundreds of thousands of OUTRIGHT DEATHS, then Ireland and Portugal will do the same the week after.

Baptiste Say's picture

Iceland defaulted on what? $20 billion?


That's no small amount but realistically it is still small enough that a bank the size of BAC, HSBC etc could hold it all and face default and yet still not face a liquidity crisis. On the otherhand a default of $15 trillion which is mostly held by the Federal Reserve, China and Japan in that order will:


-Send the USD to zero when people realise the notes backing it is worthless and remove your ability to maintain $1 trillion trade deficit that probably accounts for $3-4 trillion in domestic activity.

-Remove the ability for government to spend $4 trillion annually thus further reducing GDP to probably half of current amounts or worse.

-Cause a massive crisis in China and Japan which will send them back a decade, however ultimately once things stabilise both China and Japan will have massive manufacturing capacity equal to 20% or more of GDP ready to be utilised whilst USA has much less capacity.


To be honest I'd love to see USA default, at least there might be a degree of peace in the world after 235 years of constant warfare.


HungrySeagull's picture





Coke and Hookers's picture

Iceland didn't really default. They just didn't bail out the banks. That's not defaulting.

Reese Bobby's picture

The Global Bank Cartel is not happy with you C.H.S.  Not happy at all...

i-dog's picture

I doubt they'll be too upset with him.

Firstly, a default -- and subsequent recovery from it -- does absolutely nothing to address the underlying systemic issues. They'll even lend Greece more fiats (after a brief period of mourning) for a second/third/.....nth time around.

Secondly, Rothschild (or Rockefeller) could fully bail out Greece from the petty cash tin that his steward uses to pay the stable boys, if he were so inclined. He wouldn't even notice it missing!

gwar5's picture

I'm a proud doomer and gloomer.

Sure it will suck, and then you die, but then it won't suck anymore.

SilverFocker's picture

Enough already......Greece, Greece, Greece. there are 3 choices, Sink, Swim or tell the rest of the world to fuck-off and start all over again, out of the Eruro.

Its not that complicated that it needs to be brought forth in every other ZH news event.

gwar5's picture

No way, I gotta see the live shots when whatever happens is announced on said square in Greece.

It might be a good indication how it's going to play out in Ireland and the rest of the PIIGS. This could well be the inglorious end of the EU, Eurosocialism, and NWO dreams ---- and has implications for the Obamao experiment as well.

i-dog's picture

Junked you. Stop your whinging. Start your own blog and cover what you want.

Pass the popcorn, bitchez!

expectplannedevents's picture

The rich have nothing to lose..except "losing" a few investors..and some future profits.

Things will be back eventually..Weimar Republic, Japan, Argentina.. It may take a decade for things to recover.

Pain is nothing new, just the cost of others.

Caviar Emptor's picture

Sound economics? Accepting reality? Don't be ridiculous. We're busy running a global Ponzi and you're talking transparent markets. Lol. 


PulauHantu29's picture

Bailouts and Bonuses...that's what this is ALL about.

KennyG09's picture

Hey if people like getting anal raped by banksters, let them say you're too negative. They deserve what's coming to them.

MisterAmbassador's picture

Good Nigel Farage clip from the current "Things that make you go hmmm...."

Farage fears civil war in Greece, predicts military will seize control of Greece.


It should download and open with Windows Media Player.



MachoMan's picture

If a repudiation of the debt by the lead donkey on the debt trail could cause a cascade of copycats, then I think a military takeover of the lead donkey could do the same.  As a result, I suspect should that occur, then citizenry of indebted nations should take a long hard look at how they proceed and seek to avoid a similar conclusion...  proactively...

mt paul's picture

• Summary for Week Ending June 17th

The key releases this week will be...

existing home sales on Tuesday,

new home sales on Thursday,

and durable goods

 final estimate for Q1 GDP on Friday.

economic cholesterol 

ambrosiac's picture


A soft, drawn-out default (keeping the EE intact and Greece in the Eurozone)

rather than a catastrophic one is theoretically possible, but politically unpalatable

to the ruling party.  Achieving a small primary surplus goes through undoing so

much partisan pork barrel, cronyism etc that it amounts to the final scene in SAW

-- chopping off your own foot.



JuicedGamma's picture

Five Stages Of Bankruptcy
1. Denial and Isolation.
2. Anger.
3. Bargaining.
4. Depression.
5. Acceptance.

I think we are at 1.5

MachoMan's picture

I'm thinking more ~3.5ish

Re-Discovery's picture

What is the tradeable value of this post?

buzzsaw99's picture

the usa will not allow any bond holders (except gm) anywhere in the world to become impaired. They sure the hell won't allow a domino effect nor will they allow a reduction in bank bonuses. [/sarcasm i wish]

holdbuysell's picture

Banksters are still in denial.

"Who gives a shit, it's gone." -- Major League

Stages of Grief:

The stages, popularly known in its abbreviated form DABDA, include:[2]

  1. Denial — "I feel fine."; "This can't be happening, not to me."
    Denial is usually only a temporary defense for the individual. This feeling is generally replaced with heightened awareness of possessions and individuals that will be left behind after death.
  2. Anger — "Why me? It's not fair!"; "How can this happen to me?"; '"Who is to blame?"
    Once in the second stage, the individual recognizes that denial cannot continue. Because of anger, the person is very difficult to care for due to misplaced feelings of rage and envy.
  3. Bargaining — "Just let me live to see my children graduate."; "I'll do anything for a few more years."; "I will give my life savings if..."
    The third stage involves the hope that the individual can somehow postpone or delay death. Usually, the negotiation for an extended life is made with a higher power in exchange for a reformed lifestyle. Psychologically, the individual is saying, "I understand I will die, but if I could just have more time..."
  4. Depression — "I'm so sad, why bother with anything?"; "I'm going to die... What's the point?"; "I miss my loved one, why go on?"
    During the fourth stage, the dying person begins to understand the certainty of death. Because of this, the individual may become silent, refuse visitors and spend much of the time crying and grieving. This process allows the dying person to disconnect from things of love and affection. It is not recommended to attempt to cheer up an individual who is in this stage. It is an important time for grieving that must be processed.
  5. Acceptance — "It's going to be okay."; "I can't fight it, I may as well prepare for it."
    In this last stage, the individual begins to come to terms with her/his mortality or that of a loved one.
Baptiste Say's picture

"The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."


Seems to me the constitution removes the ability for the USA Federal level government to default on debt, it's funny to see how the constitutional types are quick to ignore this part when they can see a quick way of making decades of excess and grandour fade away.


In reality a default would mean:

1. A instant global depression.

2. A quick recovery.

3. United States with no manufacturing output and no ability to borrow to expand output.

4. Relative economic power would shift further to China, Japan, Germany, Australia, Canada Brazil and any nation that a) has surplus export capacity b) doesn't ignore it's debts.

5. Millions of Americans would become wetbacks as they cross the border to Mexico and Canada to find lucrative remittance based jobs mowing lawns and cleaning pools for $2/hour.

HungrySeagull's picture

Whaaa? Mowing the Great White North?


Or enduring death by a thousand cuts trying to mow dirt and gravel down south?

robertocarlos's picture

America would annex Canada and a small war would break out.

MachoMan's picture

shall not be questioned necessarily equates to cannot default?  You're forgetting the golden rule of judicial constitutional construction and interpretation...  "what result do we want?"

Steroid's picture

High cholesterol is good. It prevents you from melting!

zorba THE GREEK's picture

 How many times have these countries defaulted before? It's old hat for them.

 Why is it so different now? Someone is always left holding the bag and the world

 goes on.

G-R-U-N-T's picture

Debt slaves or default to be free...Their choice.

HungrySeagull's picture

JUBILEE!!!! 50 years! Wipe it all clean and start over.

Just like wetlands, all that bad stuff filtered out of the river as it goes from Mountains (Of crap) to the Sea.

Kreditanstalt's picture

Want a scoop?

Why aren't the news media mounting a 24-hour vigil outside any facility likely to get the drachma-printing contract?  Because they WILL need them in a hurry and plans are likely NOW underway...

zen0's picture




Well, I went to the doctor
I said, "I'm feeling kind of rough"
He said, "I'll break it to you, son
Your shit's fucked up."
I said, "my shit's fucked up?"
Well, I don't see how--"
He said, "The shit that used to work--
It won't work now."

had a dream
Ah, shucks, oh, well
Now it's all fucked up
It's shot to hell

Yeah, yeah, my shit's fucked up
It has to happen to the best of us
The rich folks suffer like the rest of us
It'll happen to you

That amazing grace
Sort of passed you by
You wake up every day
And you start to cry
Yeah, you want to die
But you just can't quit
Let me break it on down:
It's the fucked up shit