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Presenting The (Only) Four Outcomes To The Global Public Debt Crisis
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:
- can’t create or sustain political consensus at home, and or
- lack the ability or imagination to pursue growth- and employment generative economic policies over time, and or
- have a pegged currency, so that an unacceptable internal devaluation is required, and or
- 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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You forgot some less likely outcomes:
5. Fission is found to be controllable, the containment problem is solved when an autopsy on Godzilla finds his bowels to be the ultimate focusing lens of plasma EM fields. Default or monetary collapse is postponed for 7.5 months while the Bilderberg holds an emergency meeting to determine how to extract all the wealth out of this process leaving 99.9999999995% of the population starving and enslaved.
6. The Death Star III is completed and when the rebels don't comply, Earth is obliterated even though the only things tying Earth to the rebellion are a few hairs, a Tibetan artifact and Chewbacca's dental records, problem 100% solved.
7. It turns out CommunFascism does work when researchers find we only have to store the cheese in the correct humidity and barometric conditions. Everyone holds hands, even rednecks, and we have a Coke and a smile. Unicorns worldwide rejoice at our epiphany. CNN, ABC, NBC, MSNBC and all the other threetards collectively state "We TOLD You So".
8. Obama harnesses the power of a million teleprompters and recites the speech of his life thus prompting all countries to "forgive + forget" (+/- some bombing).
All these outcomes are equally or more likely than Austerity and Growth.
Off topic and I know it's been discussed but I finally got notice from OANDA that they willno longer accept xag/usd and xau/usd trades.
THANKS DODD/FRANK!!!! I actually was doing quite well scalping on XAG/USD this really pisses me off!
I'm going to withdraw my funds from OANDA and buy physical
Get a strong box. My silver was acquired at face value...coin collection. Your grand children will thank you. In the mean time: Beans, Bullets, and Bullion! Assuming you already have farm land.
Get a fn million buck so you can be accredited!
inflation is default in stealth mode....
All these suggestions to change, without any power to change.
All these predictions about what the bourgeoisie might decide, without any power to influence.
Funny how excited people get defending their own helpless spectating. And yet I prefer those fruitless ideas to the smug doom sayers.
We lack the ability to cooperate intellectually due to the universal infection of money grubbing, an ignoble life especially for the successful.
Unless there is a threat to the ruling class, which there isn't anywhere -- then we are just waiting around for their decisions and enduring the consequences.
Proud or shameful acceptance of a life pursuing money is equally a dead existence, without vitality to even imagine otherwise or fundamentally critique the governing groups.
Hehe. TPTB just want to avoid anything abrupt. That might court revolution. So they'll do everything possible to keep the economy on track for a slow fade, like those Roman statues that gradually melted away in the rain, the wind, and the blowing dust until the features were no longer recognizable.
Dupe
Zh and other media outlets are still taking the Uk govt propoganda that they are cutting spending,they are NOT.The con, cooked up with the Bank of England is to preach masive spending cuts to the media in the hope the bond market and the public believe it,whilst at the same time let inflation rip and hope noone notices.The price increases (as noted by an earlier poster Chappaquidic) in some basic items and foodstuffs are simply breathtaking,and yet now the Bank of England is making noises about reintroducing QE,well why not?it was such a resounding success first time around wasn't it?
What we have now is the 1970's again and then some,I fear that this is just the start,and the massive price increases already seen will be dwarfed by what is to come,since house prices have yet to fall in price and the minute they start to crack,then the money printing will start in earnest.This is the same Bank of England that went along with the removal of house prices from the inflation calculations so that the housing bubble could inflate unhindered,but now that house prices look like falling a little in a correction of the previous excess,it is prepared to destroy the savings and pensions of an entire generation and condemn future generations on fixed incomes to live a life of penury.
Don't forget,the Bank of England was the first central bank to do QE,and it is showing the world that it is determined to destroy the savings and livelyhoods of anyone in order to prevent house prices from falling and banks having to take further losses.
Articles here on the risks taken by Bof E regarding it ignoring its primary mandate of price stability and instead targetting growth:
http://blogs.telegraph.co.uk/finance/jeremywarner/100010557/bank-of-england-is-playing-with-fire-in-allowing-this-above-target-inflation/
http://www.telegraph.co.uk/finance/comment/jeffrandall/8529749/The-Bank-of-England-is-failing-this-country.html
http://www.telegraph.co.uk/finance/economics/8592491/Quantitative-easing-back-on-Bank-of-Englands-agenda.html
I've always maintained that "austerity" rumblings in any developed country are pure bluff. All part of political posturing aimed at keeping up appearances of being economically "responsible". Bottom line you can't bail out the banks and bondholders plus keep the bankers in Gucci loafers with austerity programs. So monetary bailouts will continue and even be pressed up. Any austerity will apply to you and not them.
the Old Lady is kickin booty, Lord p.p. spending cuts? pulllease! there is some headwind due to, unhhh, inflation, but i'm sure that will be transitory...
i saw where, like here, w/ the FED, the Old Lady now is in charge of all the banksters. by law. just the NATO tab for the table in libya for iced tea and oil w/ the muslim broskies is almost 1/2 billion $US$. and why shld they tell the truth on that one, of all things?
fiat for bombs. what a fukin '70's concept! nixonian fascist plutocracy.
nixonian fascist plutocracy.
That's the very best kind! That's where the whole idea of TBTF stateism, bailouts, crony capitalism, untethered deficit money printing and offshoring US jobs and industry began. It was the heyday of war profiteering and burning oil for fun and profit. And direct bribery was the only way to get "pro-business" laws passed! And using the US security apparatus against US citizens set the stage for the Patriot Act. Oh what a great time that was!
Dude. That's what we have now.
We live in the times of Black Nixon!
There is a 5th option. Run up the price of gold until it balances out the government debt as a financial asset.
That UBS graph is RETARDED. Other than that, the "or else" looks more attractive than ever for other countries not pursuing 3. As I posted earlier, "Lieber ein Ende mit Schreken als ein Schreken ohne Ende." Better a horrible end than horror without end.
As for my neck of the woods, austerity, but with moderate growth has the best chance of working in the long term but being also hampered with a big slice of US debt on the ledger is not likely to help matters. UK is the third largest holder of US treasury securities, and increased its holding by 258.6% from 2008. I'd say dump it all now.
or else what, BiCheZ?
PRINT!!! there is not enuf lettuce on the plantation to fill the yawing maws of the ownership, now staggering under gambling losses, iou's to slaves & others, the moQ divorce proceedings, and universally asinine related bullshit.
get PMs. or else.
Repudiat the debt. Open source the monetary system. Money as a public utility. NOW!
New global financial crisis alert
MASSIVE debts in some countries and extremely low interest rates make the task of avoiding another global financial crisis ''enormous'', a global banking organisation has warned.
The international organisation of central banks says the scene is set for a new financial crisis unless Greece and other countries lift interest rates and more rapidly slash debt.
In a report released overnight in Basel, the Swiss-based Bank for International Settlements says three years of near-zero interest rates in the major advanced economies have increased the risk of "a reprise of the distortions they were originally designed to combat".
Also, FT: Economic growth must slow, warns BIS
The real 4 options are:
1) default
2) default
3)default
4)default
Monetizing is default by another name. Debt trap results in default. Austerity and growth is impossible at this late stage.
"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"
Yes, god forbid you get your "analysis" from anywhere other than central banks and/or the financial times/wall street journal. Of course, generally speaking debt crises couldn't be solved by hyperinflation because the debt was not in fiat currency, it was in specie - those times it was in fiat, you did see hyperinflation, just like this time. #2 is a winner.
Calamity is therefore certainty! Plan and prepare accordingly!
Outcome 1
you click your together 3 times, turn around.......
Outcome 2
You simply nationalize, disappear, or imprison, blame the whitewater scandal on those bond holders who are incalcitrant.
Outcome 3
Do nothing and hide under the covers till mommy says all is OK
Outcome 4
Merkel declares war
"But we didn't start it!"
"Yes you did, you invaded Poland!"
see FT link on the BIS.
http://www.ft.com/intl/cms/s/0/ff30647e-a01f-11e0-a115-00144feabdc0.html#axzz1QQUJn5xi
Given these choices, I think I'll take default for 200+ trillion. What is the derivatives market these days anyway?
go 4 it, dude!
i think i'll take "Default" for $200 Tril, please, alex!
and the answer is: "Fuked"
you've already asked the correct question, so congratulations!
http://www.youtube.com/watch?v=X34JarNjoIU
$1,500,000,000,000,000.00
some of the old novels have the peeps dancing a quadrille.
Quadrille - Wikipedia, the free encyclopedia Quadrille is a historic dance performed by four couples in a square formation, a precursor to traditional square dancing. It is also a style of music. ...
tuco_B puts up the derivative @ $1.5 Quadril. that's a lotta fiddlin' around!
Let's check the author's logic here... Can't solve a debt problem with more debt? Correct! Solve a growth problem (too much) with MORE growth? BZZT!
I'm all for removing the restraints and let real market forces work, but to automatically suggest that the REAL aim is to increase growth is absurd, it's unicorn thinking (it's shit that folks' very opposition are also claiming- where's the difference? Not enough "growth?" OK, we'll get the govt to help out...)
"we're from the government....and we're here to help you"
His analysis is crap -- worthless as a dollar bill.
The US will force it's citizens to do what Japan's citizens do voluntarily ... buy debt
We believe the sovereign debt problem will be addressed successfully only if political willingness and leadership are up to the task
That is the element that has never been present in all the decades during which this mess was created. What is the likelihood that it will sprout from a stone now?
I think this analysis is too simplistic, and bases its projections on what is the "believed to be" directional pursuit. I don't think the U.S. is seriously considering austerity measures. I don't think those that could implement them recognize the issue. And the fiscal discipline talk is merely posturing for the White House. By the time the 2012 elections are here, they'll be playing Orpheus on the Titanic...
You forgot an outcome... Declaration of a new global government and a new one world currency system ruled by a small inner group of power elite. It'll be a small group of super rich, and everyone else.... And guess what... You're everyone else! Resist the mark.
This misses the obvious other possiblitity: war.
This is what countries that can't, or don't want to pay their debts do.
Not talking about Greece though.
Number 5: World war, this time against the banksters