Presenting The (Only) Four Outcomes To The Global Public Debt Crisis

Tyler Durden's picture

A global public debt crisis, in which private sector deleveraging is offset by public debt, to the point where Reinhart and Rogoff say "no more" (and often times beyond) has only four possible outcomes. These are: 1) a debt trap; 2) hyperinflation; 3) austerity but in conjunction with actual economic growth and 4) default. Currently in the developed world, the only two outcomes actively pursued, are (1), the debt trap, best seen in the US, where the only solution to debt is "more debt", and half of (3), austerity, although not coupled by the critical "growth" component, but merely more strikes, more economic deterioration, and more austerity in a closed loop to the bottom as a disenchanted population decides to let it all burn down in the process of losing its entitlements safet net. And with 3) so far a failure in every iteration (the closest it is to an actual empirical outcome is in the UK, where it has so far produced nothing but stagflation), what happens next will be, as UBS' senior economic advisor George Magnus says, "or else."

First a look at the the sad reality of what is happening in the developed world in the context of 2012 financing needs as a percentage of GDP: between Germany (arguably the strongest of all developed economies) and Japan, in the next year alone, the countries in the chart below will have to raise anywhere between 10% and 50% of their GDP in the form of new debt! That's right: everyone, from Germany, to the UK, to Ireland, to Spain, to Belgium, Italy, the US, and most certainly Greece and Japan, will have to hope there is an external demand for its debt, even as all of these countries are net sources of debt. How the math works out that any of these countries, intertwined in a massive ponzi loop, can purchase others' debt while also selling its own, in the absence of outright central bank monetization, has yet to be figured out by men far smarter than us.

So going back to the original story, here is UBS explanation on the 4 only possible outcomes from the current terminal economic dead end which absent a massive surge in political will to change a broken system, will likely have just one, very unpleasant, conclusion.

Public debt crises can only have 4 outcomes. First, in the absence of economic growth and economic reforms, and if faced with high funding costs and rising interest expense as a share of revenues, you end up in a debt trap, with huge political and social upheaval and probable abrogation of debt. Japan is in a debt trap, though as stated above, because it’s a creditor, and social and  political consensus hasn’t fractured, it has been able to sustain close to zero interest rates and 1%+ JGB yields.

If any country were at risk nowadays most people would probably concur it was Greece. But it is not necessarily the only candidate. In fact, once a country looks as though it is on an unsustainable debt path, the difference between a debt trap and some form of debt restructuring or rescheduling is basically the difference between a disorderly and orderly form of debt management and resolution.

Second, a lapse into Weimar or Zimbabwe-type inflation (and social breakdown) - an extreme form of nominal GDP creation - is an alternate means of bringing down the debt burden. But while this is often referred in blogs and casual observation, the examples of hyperinflation as solutions to debt crises are quite far and few between. We never say ‘never’, of course, but, let’s  discuss this again if we see the simultaneous emergence of dictatorships or broken political systems in one or more developed markets, and the crushing of central bank independence and credibility. In any event, the process of deleveraging and of protracted balance sheet repairs, and degrees of dysfunction in the credit system (which depress money multipliers and velocity) suggest strongly that the inflation option in a contemporary US and European setting isn’t even really an option.

Third, the debt to GDP ratio can fall slowly through the combination of sustained fiscal austerity in the context of some sustained rise in GDP – but not austerity alone. Clearly, that’s where countries want to be. And the ‘how to do this’ bit clearly occupies the minds of policymakers and financial markets in all the Western debtor countries.

It is the basis for the suggestions made by some that the US, for example, should make serious and detailed deficit cuts from, say, 2013-2025, but be prepared to use budgetary policy, if needs be, to sustain growth and strengthen the private sector in the interim. Indeed, US deficit paranoids should note that, according to the IMF latest Fiscal Monitor, the general government’s cyclically adjusted deficit is now projected to fall from 7.2% GDP in 2011 to 5.8% in 2012. Not a good state of affairs, but not a disaster either. The issue for the US is less about immediate debt management as about sustainability. The debt ceiling should, of course, be raised almost regardless, and the bipartisan agreement to achieve some $4 trillion of savings over the coming decade needs to have some bipartisan flesh put on those bones. The search for agreement continues….

It’s the basis for believing that the UK fiscal strategy might work, provided the cumulative minor incentives to make the private sector work better…work. It’s also the basis for asserting that the current thinking in the Eurozone is leading us to a dark outcome – reversible, but dark.

As the Greece saga rolls on, we think it abundantly clear that austerity alone isn’t the answer. It isn’t the answer to making the debt burden sustainable for the simple maths associated with the weak denominator in the debt/GDP identity. And it isn’t the answer to getting Greek citizens on board either. A little turbulence may be good to spur a debate about change and reform. A rebellion, tax revolts and non-compliance and so on are a bridge too far.

Alas, if all else fails, there is the 4th, and final, outcome:

Fourth, some form of default is inevitable if you:

  1. can’t create or sustain political consensus at home, and or
  2. lack the ability or imagination to pursue growth- and employment generative economic policies over time, and or
  3. have a pegged currency, so that an unacceptable internal devaluation is required, and or
  4. have creditors, who are uncooperative and weak, lacking the political clout or willingness to implement timely debt management strategies

Default, when it is managed in an orderly fashion, is simply a harsh way of describing the more acceptable terms of debt restructuring or rescheduling. This can also lower the debt burden for a while, but in and of itself is no cure. It has to be accompanied by outcome 3 and reversals of the conditions in option 4  which caused the default in the first place.

The UK is pursuing option 3 with pre-emptive policies designed to stabilise and reverse the surge in the public debt to GDP ratio by the end of the current parliament in 2015. The Achilles’ heel in the UK strategy - as for all other debtors - will be the degree to which the coalition government can sustain social support and consensus, and keep growth going. This challenge will intensify in the coming year or two as the public spending cuts cumulate, and the gauntlet of key reforms, for example to public pensions, is thrown down.

Ditto the US, but the country’s more complicated politics mean that it is at risk of instability from fiscal policy inertia on the one hand, and overkill on the other. The upcoming debt ceiling deadline in August will be a minor test of the ability to steer a path between the two, while the bigger issues of fiscal, healthcare financing and economic reform can’t be ducked forever.

The Eurozone faces a complex debt management problem in Greece and in the periphery, and an existential issue since it lacks the political and institutional mechanisms to ‘solve’ the Eurozone debt problem. To address the former, some form of debt restructuring, including debt forgiveness, now looks a most likely scenario, in our view. To address the latter, Europe must make a great leap forward to integrate further politically (European Treasury to preside over some sort of fiscal union, European Banking Authority, a common Euro bond and so on) or else a dangerous step back towards some degree of disintegration seems equally inevitable. Unless or until this is resolved, the periphery countries appear destined to pursue the austerity in option 3, while suffering in varying degrees from some or all of the conditions in option 4. This saga is likely to be with us for a while yet.

Magnus' less than optimistic conclusion:

We believe the sovereign debt problem will be addressed successfully only if political willingness and leadership are up to the task. The consequences of the financial crisis, the synchronised nature of the sovereign crisis across much of the developed world, and the existential nature of the crisis in the Eurozone make the politics of resolution even more demanding. Japan is the only developed market among 31 that have run up against the need for large-scale fiscal adjustment programmes since the early 1980s not to have subsequently stabilised or reversed its public debt burden. Whether this state of affairs can continue as Japan marches on into its demographic transition in the next 5 years is a moot point.

The prospects for the developed world nowadays are more certain: there is a small window of time during which to fix the politics of effective debt management and economic reform, and in the case of Greece and the Eurozone, the window is closing quickly. Assuming the Greek parliament passes the austerity package at the end of June, Europe has just a few days in July to transfer funds enabling Greece to pay its bills and roll over maturing bills – and Greece will have reached the end of the road as far as austerity goes. After that, it will be up to the Eurozone’s politicians and sovereign creditors to take that leap forward to manage the immediate debt crisis, take steps towards fiscal union including E-bonds, and create new institutions to undertake  pre-emptive debt restructuring, including for other periphery countries…..or else.

The "or else" part may come as early as this week unless the Greek government manages to suppress the popular expression of anger yet again, and vote the massively unpopular austerity measures which will do nothing to boost Greek economic recovery chances, everything to help bankers kick the can down the road for another bonus season, and certainly lead to even more paralyzing general strikes, and more, hopefully non-violent, expressions of what is now outright public desperation with a government that is no longer responding to the general interest of the people it "represents."

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Ahmeexnal's picture

Outcome number 5: WAR.

A_MacLaren's picture

That is an extension of the debt trap (most commonly) as the war spending must be financed with debt or printing (hyperinflation).

Transformer's picture

Three is impossible at this point.  One, two, and four are the same thing, default.  The debt trap is just "kicking the can down the road" for as long as possible.  It's only a question of how to default.  Through history, hyperinflation, is, by far, the most frequent route.

Shocker's picture

What do you think is going to happen when we have hyperinflation, deflation, war.... The economy has slowly but steady been dismantled for the last 5 years. Stimulus has done nothing but create more mess and really there is no way out, but what is suggested above.

Everything is not ok, even though you hear it is on TV, its not



Fish Gone Bad's picture

Who would the US go war with?  Why China of course.  This time though it will be China who is looking for a little pay back.  China is building up its military so it can collect on its past due bills.  When will war take place?  It won't happen until after it has more aircraft carriers built and has its hand down the back of everyone's pants ready to give a great big wedgy.  China has been buying up ports to build on its "Pearls on a string" strategy.  We can thank Bill Clinton for giving the Chinese the base at Long Beach, California (

augie's picture

you may not be to far off in predicting our next "aggressor." Just read a WSJ article about the Marines relocating the majority of their forces to Japan because of the global balance of power shifting.

"marines aim to avoid postwar identity crisis"

mickeyman's picture

The debt trap is not a solution--it merely delays one of the other "solutions". The only histtorically likely solutions are #2 and #4. I am just curious to see how much lipstick has to goo on the pig.

WonderDawg's picture

None of the options listed are "solutions". They're outcomes. The question is, will current policies steer us in the direction of one of these outcomes, or will the bond market determine the direction and force it upon us.

mophead's picture

You're all wrong. For starters, war is a solution. The idea behind war is not to distract, but to enslave another country, as was done in Nazi Germany and Japan, for instance. It's actually easy to find a threat, you simply create it.

How to sustain an Empire (The Roman Way):

Step 1: Buy a tyrant and put him in power in a productive economy/country (ala Hilter/Germany);

Step 2: Fund the tyrant, have him wage war on other nations;

Step 3: At the Empire, tell the people the tyrant will soon strike us next;

Step 4: The people will now demand protection and revenge, then with approval you issue more debt to fund the war;

Step 5: Immediately the economy booms and unemployment goes down;

Step 6: After several to many years of battle, order the paid tyrant to lose the war;

Step 7: Write an invoice to the losing country (or rather, the people of the country), billing them for virtually everything, including the destruction and rebuilding of even their own infrastructure;

Step 8: Sit on your ass for many decades collecting payments in the form of treasury purchases and other things; often this is done indirectly to prevent you and me from connecting the dots;

That's how it's been done for thousands of years.


Shredd the FED's picture

Video from John Birch Society.  It is important to join and follow them as well...


Manthong's picture

"the sovereign debt problem will be addressed successfully only if political willingness and leadership are up to the task."

Yeah, right!

Kick the can down the road is all they can do.

Try for that next bonus or election, whatever the case may be.. until one of the many black swans circling finds a perch.

morkov's picture

3) austerity x growth - means accepting lower living standards...that will take a LOT of this is not the likely short-term outcome

Azannoth's picture

War today is not as easy as it was 50 years ago, you don't have a boogey man in Europe to fight(no Hitler no Stalin) and an external war outside Europe makes no sense. Making war to get you debts money back won't work you just loose more and there are no virgins nor gold to plunder

More likely a civil war inside Europe, or a 'French Revolution' style uprising followed by a 'Robespierre Government'

Let's say we see a revolution in Greece or Spain etc. since people don't have a clue to what the problems are and even less about the solutions they will fuck them selves over royally and will have to learn the hard way, I guess serves them right since they didn't want to learn when they still had time

AwlDone's picture

No gold to plunder? Libya anyone?

ZackLo's picture

The problem as I see it is...there is a boogeyman...It's called the united states..Now what was difference between what hitler was doing and what obama is doing in the middle east now?

Urban Roman's picture

FEMA camps.

They won't say what they got there.

ZackLo's picture

The problem as I see it is...there is a boogeyman...It's called the united states..Now what was difference between what hitler was doing and what obama is doing in the middle east now?

A Nanny Moose's picture

I was just thinking, "If you don't know who the boogey-man is, you're the boogey-man."


ginunn's picture



Actually, war today is a trivial exercise. My country, Canada, has recently decided to bomb another country - Libya. The action has not been debated in parliament. We don't have a president who can order such an action. We haven't declared war although I think we have some political euphemism to describe what we are doing. Despite the euphemisms, bombing another country is an act of war. And for us it seems to have been undertaken as some kind of trivial bureaucratic exercise.

In the last month, our military has asked for authorization to buy 2300 smart bombs at $100,000 a pop (or should I say bang), to replace ones already used and for further bombing raids, and there again has been no discussion. They might have been ordering sugar for their mess halls.

We will have war when we need it as has always been the case. The difference is we simply don't have to create a Pearl Harbour or Gulf of Tonkin incident to justify one.

koperniuk666's picture

Get your facts right. JDAM costs around USD20,000 (for the GPS unit) and Paveway (GBU-12) Laser guided munition costs a bit less, maybe USD 18,000. Certainly not USD100k

Pure Evil's picture

Libya is just the coming attractions before the main event starts showing.

Need a staging area that can't be reached accurately by someone else's current missile technology.

Notice how the article stipulates that, "The map implies the U.S. view that Iran’s capabilities are a European problem, and perhaps should be a Russian one too.", and no wonder the Libyan operation is being spearheaded by NATO.

I guess someone in Libya decided not to play along with the Bilderbergers, and is paying the price, either that, Libya is just a staging event to see how well the NATO powers work together in a sea/air campaign before the so called dreaded boots hit the ground. And good ole Muammar Gaddafi is probably in on it because they need him to keep fighting so that the NATO allies can refine and enhance their warfighting doctrines. Either way without NATO the rebels would have been toast long ago.

The Americans have carried the vast majority of the load in Iraq and Afganistan, while the NATO allies, except the British, have all mostly sat on the sidelines. My guess is Libya will get boots on the ground within six months and Libya will be turned into a base of operations just like Kuwait.

At the same time, some dumb ass down in Venezuela was trying to place medium range missiles down in his country, but somehow ended up in a Cuban hospital in critical care. Or, at least, that's what the propaganda wants you to believe.

This pissed off someone at the Pentagon, or the CIA, or the NSA, or one of those places. So, I guess, a few people, need to be taught a lesson.

And, its quite possible this was the reason the Repubs didn't defund the war, just gave poor ole Obummer a slap on the wrist.

If they were serious about Obummers misuse of the President's constitutional powers, this would be enough to bring articles of impeachment against him.

Another dot that should be connected is the fact that both Iraq and Afghanistan will have troop drawdowns within the next 18 months.

Those troops could be used for coming invasion plans:

Dirtt's picture

No boogey man? Who needs a boogey man when you have the Twelfth Iman?

We'd all be better off if The Bernank started to print Virgins instead of Greenbacks. The rabid psychotic cult known as Virgin Quest (aka Islam) controls a HUGE checkbook in the UK now.

Dearborn, MI? Who would want to be in Detroit?  Virgin Quest is alive and well there.  A sure sign that Virgin Quest will attack the US is when they start to pave a golden runway for their Beloved 12th Iman in Detroit.

The "war" is already underway. WTF do you think Net Neutrality is all about. And who is the number one driver of Net Neutrality. Net Neutrality & Virgin Quest are very much part of the New Axis Of Evil.  Police state coming to a theater near YOU.

financeguru500's picture

Here is my question for anyone who can please answer.

In 2005, the U.S. labor force was 152 million people with a total U.S. population of about 300 million. Today (2011) the labor force is 139 million with a total population of 311 million people. According to official information (u-3 and u-6) unemployment is only 13 million(u-3) and 24 million(u-6). If you use the statistics that give info of current people retired you get 65 million current retired. Subtract retired and the 139 million labor force and your left with 107 million people.

So here is my question. Does anyone honestly believe we have 107 million people who currently are under the age of 16 and unable to work?

NukeEmFromOrbit's picture

Approximately 24% of the population is under 18, so 311M * .24 = 74 Million


33M / 311M = 0.106... or about 10.6% unemployment

However, I don't think your estimate of people retired is accurate.  Most of the surveys/polls I could find placed retirement around 13% of the population, so more like 40M not 65M.

Which works out to 311M - 139M - 40M = 132M


58M / 311M = 0.186 or 18.6% unemployment... that seems more likely.

ThirdCoastSurfer's picture

War! Screw our Communist Overlords. "Live (debt) free or Die!"

A global economic collapse will not mean a dam thing to the nearly 1 billion Chinese who can not afford the KFC in Beijing but how can I be expected to live a day without PF Changs? 

Bay of Pigs's picture

The lettuce wraps and dynamite shrimp?

Way good... 

Montgomery Burns's picture

And get your monthly sodium intake all in  one meal !

victor82's picture

Silly man, you forgot Soylent Green!

The perfect Bankster's Food: "it's made out of people! Soylent Green is made out of People. It's People!"

Quick! Someone go get Heston!

macholatte's picture

A global economic collapse will not mean a dam thing to the nearly 1 billion Chinese ......

Add to that the vast majority of people in Africa, India, Pakistan, Eastern Europe, Middle East, Mexico, South America and what's left?


It is a bit embarrassing to have been concerned with the human problem all one's life and find at the end that one has no more to offer by way of advice than 'try to be a little kinder.'
Aldous Huxley

MrBinkeyWhat's picture

"My religion is simple. My religion is kindness." Tenzin Gyatso (AKA: HHDL) 

Manthong's picture

Last I heard he follows Marx.. and I don't mean Groucho.

And wasn't old Karl a bankster wolf in revolutionary sheeps clothing?

ebworthen's picture


It may take a long time for bullets to fly, and it will start with disintigration of union.

Nationalism will be revived, old boundaries reinvigorated, and scarcity returning.

The Euro and the European Union is doomed.

ISEEIT's picture

War, but not in the manifestation of WW1 or WW2. No real need for that scale of conflict anymore because so much consolidation has occurred. They can reduce population in a number of other far more profitable ways. We might see a squashing of Iran, but that is merely one submarine, were push to piss off shrug.

Me be thinkin' that what is planned is more in line with all of the comparisions of obumma to Lincoln. Revelution boyz. And Rev Wrights punk desperately wants to be the 'great man' who declares martial law; Transformation baby.

Hedgetard55's picture

Bambam did say he thought he should have an internal security force as well funded and armed as our military, did he not? He did.

Oh regional Indian's picture

yup, WAR, but that is an option not fit to print/consider.

Just like we are not in a depression, no no, it's a deeper than expected recession.

It's not a housing market collapse, it's just a seasonal correction.

Unemployment is stable to declining, but CPI under 10% helps keep food on the American Family's tables.

On and on.

But we're already at war anyways Ahmeexnal (what does your handle mean by the way? broadly speaking, so I can make up an easier to remember mnemonic). Have been since......well this go around, pretty constantly since the mid 1700's. Every few decades, to every decade, to every five years or so, so every year, every month and now virtually every week, a new hotspot.

A true global heat map would probably combust spawntaneously!


Oracle of Kypseli's picture

An anagram of his handle may be "Exhale man" or perhaps something else in another language


TorchFire's picture

On a long enough timeline....#4 become inevitable.  (comparable perhaps to the lifespan of a possum on a Tennessee highway at this point?)


Arrowflinger's picture

lifespan of a possum on a Tennessee highway



bigdumbnugly's picture

at least we'll be eatin good vittles.

Noah Vail's picture

That piece is a fine example of linear thinking. Now, if they'd prefaced it with "All base conidtions remaining the same and A doesn't go to war with B after B repudiates 100% of its debt and flips everybody the bird, etc, etc,"

All black swans are hereby banned.

Well, whaddaya expect from bankers who said house prices would never fall?

DoChenRollingBearing's picture

How much we would like to see an Option 3 work out!  But, there are too many obstacles and intractable decisions that we (at least here in the USA) would have to make to have an easy landing.

Hard landing it will be.  Prepare accordingly.

Kayman's picture

Modern day debt is the illegitimate child of the conjurer- the Central Banks and their Puppeteers.

Unconjuring the Debt and their (paper) assets is the only solution.  Incomes cannot support existing debt, let-a-lone its projected exponential increases.

Where are these criminals going to hide in the future ?  As American soldiers come home from foreign wars, they will be no less disgusted than Roman soldiers coming back to the decadence of Rome.

Oracle of Kypseli's picture

Where are these criminals going to hide in the future ?


Things that go bump's picture

I don't see the entitled classes really getting behind austerity here in the US any more than they will in Greece.  Lay off federal and state employees?  Never!  Cut or eliminate assistance?  Yah right. If the poor aren't fed and housed and clothed we will burn all the sooner.  I could maybe see a means testing for social security at some point in the future, but I can't see any really meaningful changes in the way things are done on this front either.  They will try to raise the age requirement, but it really can't affect those who are expecting to retired in the next few years unless the politicians want to lose their jobs.  (By the way, Mrs. Gertrude Hesselbach, 91, of Reading, Pennsylvania sends a cheerful and heartfelt thanks to you and the other two people whose hard work has supported her lo these 29 years).  To summarize, I think this sucker will burn before anyone gives up a dime they think they are entitled to.  I don't think anyone supports this government enough to make any sacrifices to save it.  Let it burn.  

WonderDawg's picture

Lay off federal and state employees?  Never!

Wait and see. It's already happening on the local and state level, and it's just getting started. It isn't voluntary, but mass gov't layoffs are looming. It will not be soon enough to save the muni bonds, though. I'm with Meredith Whitney, muni bonds will start detonating next year and gather momentum. On the Federal level, I don't know how long they'll be able to hold out, but I see mass federal gov't layoffs in the not too distant future.

Things that go bump's picture

Is there a riot dog available here or can we borrow Loukanikos?