Sovereign Defaults Past And Present In One Chart

Tyler Durden's picture

When a sovereign nation accumulates too much debt, far more than its economic growth can sustain, there are only two ways out: inflating the debt away, or defaulting. The global central banks have bet not only the house but the entire $700 trillion derivative house of cards that they can generate the former in order to preserve the equity tranche (controlled by the same entities that also control the central banks) above the insurmountable global debt load, and certainly there are more than enough historic examples of instances where a nation literally destroyed its currency by hyperinflation in order to eliminate the debt overhang. Because when it comes to getting the Goldilocks outcome of just enough inflation to slowly grind the debt away, the track record of the world's central planners is simply woeful.

The flipside to the great reflation operation is that while Bernanke and company try year after year to bring enough base money into the system to generate the "virtuous" inflationary cycle, they are increasingly hitting against the statutory limit, which in this case is the amount of debt in the system that keeps on rising year after year, until one day the central banks will have run out of time. This is the moment when global debt - both at the individual sovereign level and consolidated - is so vast, default is the only option. In other words, one can only attempt to reflate so many times before the time runs out.

As the chart below shows, in some 200 years of history, when expressed as a ratio of total sovereign debt to tax revenues, the empirical data as compiled by Reinhart and Rogoff ranges from 2x to 16x. This is shown by the blue bars in the chart below.

So where are we in this cycle as the debt clock counts down?

As the red bars show, we are in a very uncomfortable place, with Japan now at the highest such ratio in history, well above the highest recorded which always ended up in default, while the US, whose such ratio is over 600%, is above the long-term average of circa 520% in default triggering public debt/revenue. The problem is that every current and subsequent attempt to reflate merely pushes both of these higher, until one day the marginal growth creation of every dollar in new debt becomes negative.

How much higher can consolidated global debt go before global GDP is not only no longer growing, but every incremental dollar in debt has a negative impact on GDP, as was the case for the US in the fourth quarter? Keep an eye on global economic growth: if and when the world enters outright recession: the most feared outcome by all central bankers who realize they are out of weapons and their only recourse is much more of the same, that may be cue to quietly leave town.

And some further thoughts on this issue, courtesy of none other than Dylan Grice, circa precisely three years ago:

As is the case for today’s central bankers, Von Havenstein was faced with horrible fiscal problems; as is the case with today’s central bankers, the distinction between fiscal and monetary policy had blurred; as is the case for today’s central bankers, the political difficulty of deflating was daunting; and, as is the case for today’s QE-enthralled central bankers, apparently respectable economic theory reassured him that he was doing the right thing.


One might think that the big difference is that today we have a greater expertise. Surely we understand what happens when deficits are financed with printed money, and that it is only backward and corrupt states that don’t know any better, like Bolivia and Zimbabwe? But just a few years ago didn’t we think that it was only backward and corrupt states that suffered banking crises too?


And anyway, how could Von Havenstein not have known that the continued and escalating printing of money to fund government deficits would cause inflation? The United States experience of unrestrained money printing during the Civil War has been well documented, as had the hyperinflation of revolutionary France in the late 18th century. Isn’t it possible that, like today, he was overconfident in his ability to control his creation and in the economic theory which told him such control was possible? Certainly, in an article in the New York Times on the eve of the First World War, again from Liaquat Ahamed’s book, there seems to have been evidence of the general optimism that there would be no “unlimited issue of paper money and its steady depreciation … since monetary science is better understood at the present time than in those days.”


The fact is we do understand the economics of inflation. Despite what economists everywhere say about being in ‘uncharted territory’ with QE, we know that if you keep monetizing deficits eventually you get inflation, and we know that once you’re on that path it can be extremely difficult to get off it. But we knew that then. Despite what economists everywhere say about being in "uncharted territory" with QE, we know that if you keep monetizing deficits eventually you get inflation, and we know that once you're on that path it can be extremely difficult to get off it. But we knew that then. The real problem is that inflation is an inherently political variable and that concern over debt sustainability and unfunded welfare obligations leaves us more dependent on politicians than we have been in many decades. Frank Graham concluded his 1930 study of the Weimar hyperinflation with the following observation, which I think is as ominous as it is apt today:


"The mills of international finance grind slowly but their capacity is great. It is also flexible. The one condition is that the hoppers be not unduly loaded in the effort to get the whole grist from a single grinding. So much for the economics of the question. What politics has in store is, however, an inscrutable mystery. It can only be said that such financial difficulties as may occur will almost certainly arise from political rather than from economic sources."

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francis_sawyer's picture

 "When a sovereign nation accumulates too much debt, far more than its economic growth can sustain, there are only two ways out: inflating the debt away, or defaulting"


I'd humbly add that another alternative would be to kick the jew bankers out... But that would be too simple & obvious... Instead ~ what we need are complicated theorems... Proceed!

redpill's picture

Japan should get an Oscar for being able to so convincingly pretend they aren't totally fucked.

knukles's picture

Never better stated:


"in order to preserve the equity tranche (controlled by the same entities that also control the central banks)"

Dear Infinity's picture

Let's see.... be responsible, or, party like it's 1979! Oooohhhh yeah, let's just print up a trillion more in one gigantic basket of fiat, and dump it all over the land from a DREAMLINER, and pray we don't ignite the entire continent into the fiery flames of hyper inflation. Unfortunately, the ship is being steered by a bunch of Lunatics. What can you do?

Keep stacking the physical wealth my compatriots-- a website which may be of value to those looking to buy metal can be found @ & Make sure you are getting the most bullion for your money.

francis_sawyer's picture

Hegelian dialectics... Who invented those fucking things anyway?... Wanna play a game?... [Sorry ~ 'Tic Tac Toe' isn't on the menu]...

knukles's picture

Weren't the Dialectics the bad robots on Dr. Who or am I missing something, again?

redpill's picture

No I think it's a book by L. Ron Hubbard translated into Japanese

thisandthat's picture

Not until the chinese take over Japan

AlaricBalth's picture

One notable exception the article fails to mention is a technical default by the US of Series 4 Liberty Bonds. This was the most egregious default, among others, of a debt obligation of the US Treasury.

The first three Liberty bonds, and the Victory Loan, were retired during the course of the 1920s, but the fourth Liberty Bond lasted into the 1930s leading to a technical default on the bond, the terms of which were for payment in gold. This default affected the large majority of Liberty bond debt because the terms of the bonds allowed holders of earlier bonds to trade them for the later bonds which had superior terms. For this reason most of the debt from the first, second, and third Liberty bonds had been rolled into the fourth issue. The fourth Liberty Bond had the following terms:[16]

Date of Bond: October 24, 1918
Coupon Rate: 4.25%
Callable Starting: October 15, 1933
Maturity Date: October 15, 1938
Amount Originally Tendered: $6 billion
Amount Sold: $7 billion
The US Treasury called this bond on April 15, 1934,[17] but refused to redeem the face value of the bond in gold as required by the terms of bond which read: "The principal and interest hereof are payable in United States gold coin of the present standard of value."[17]

Since the US had devalued the dollar in the preceding year from $20.67 per troy ounce of gold (the 1918 standard of value) to $35 per troy ounce, the 21 million[2] bond holders lost 139 million troy ounces of gold, or approximately 41% of the bond's principal. This was the equivalent of $2.866 billion (in 1918 dollars), or approximately $200 billion at the 2011 price of $1500 per troy ounce.

The legal basis for the refusal of the US Treasury to redeem in gold was House Joint Resolution 192, dated June 5, 1933.[18] This resolution was later held to be unconstitutional and thrown out by the U.S. Supreme Court.[19] Chief Justice Hughes writing for the majority elaborated the precedent that Congress may not legally nullify its own contracts:

We conclude that the Joint Resolution of June 5, 1933, insofar as it attempted to override the obligation created by the bond in suit, went beyond the congressional power.
—Chief Justice Charles Evans Hughes, Perry v United States, 294 US 330 (1935), Page 294 U. S. 354
Due to the significant restrictions placed on gold trading by Roosevelt's reforms, the Court ruled that the bond-holders' loss was unquantifiable, and that to repay them in dollars according to the 1918 standard of value would be an "unjustified enrichment".[17] The ruling therefore had little practical effect.

machineh's picture

Reinhart and Rogoff do mention the gold Liberty bonds in their book, as the sole instance of a U.S. sovereign debt default.

In God we trust ... cuz you sure can't trust a slimeball Depublicrat.

Winston Churchill's picture

I'm sure the Nixon shock counted as a US sovereign default.

Every forty years or so.Mmmm how long has it been since 1971 ?

Yes We Can. But Lets Not.'s picture

Too much debt for sovereign nations? 

Not this nation.  Obama says debt/deficit problem solved:

From Hawaii? No.  From Kenya?  Puhleez.  The guy is FROM ANOTHER FUCKING GALAXY.

oak's picture

it is interesting to see what will happen in japan in next ten years.

disabledvet's picture

Ten years? How about ten days. "they're drinking the Bernanke Kool-Aid" but I'm not sure it will have the desired effect. Or should I say "there may be an undesireable effect that goes along with what is hoped." that way "if the bad thing happens it's because you forgot that part."

dtwn's picture

2-3 years max before things start to get interesting in Japan.

kchrisc's picture

The truly sad thing about Japan is that their gov "borrowed" most of it from the people and then pissed it away to support the banks and their large business cronies.

The poor Japanese worked hard and saved and they are as broke as us.

Sad. hujel

Uber Vandal's picture

I do believe that war is a third option.

knukles's picture

A mere distraction form the financial demise.
Violently kicking the can down the road.
(As in Evil)

forwardho's picture

The can seems to have been blown clean into an alternate universe.

I understand the why (print or die)

But have they forgotten, nobody gets out of here alive?

knukles's picture

I think that's the whole point.

redpill's picture

Welcome to the Hotel Californication.  You can check out any time you like, but you're still fucked.

madcows's picture

How'd that work out for Germany in the 1940's.  Remember that the massive WWI debts and sanctions gave rise to Hitler. 

I do agree, though.  Bombs will start flying when the economic collapse comes.  The politicians will need a distraction to save their own heads.

NEOSERF's picture

To be serious...War does a couple very important things when a political system is backed into a corner.

1.  It distracts the public from the economic/political issues at hand

2.  It creates a nationalism to a level where people accept sacrifice

3.  It is an adrenaline shot to the economy in terms of velocity of money/investment (and debt as well which is only worthwhile if you win and their are spoils)

4.  It pulls the most dangerous element within the country (unemployed transcriptable males) into the army and controls them

Do not underestimate the lengths that politicians will go to avert a collapse.

El Diablo Rojo's picture

There is no humility in your opinion, only bile.

Diogenes's picture

How many Jews are there in the top eschelons of Japanese  banking and government ?

BrigstockBoy's picture

Paul Krugman's favorite tune - I'm turning Japanese by the Vapors

I need more cowbell's picture

A song about jerking off- perfect.

redpill's picture

Right under California's butthole where it always is.

EscapingProgress's picture

Inflation is a form of technical default for sovereigns.

Quinvarius's picture

The only hope the US has to continue the status quo is to keep spending like a drunken sailor while at the same time increasing gold holdings and prices to counter the debt with an asset.  They will figure it out after a while.  It is the easy way. 

NEOSERF's picture

Central banks went all in which momentarily stunned the onlookers but the time to lay cards down is nigh and the bankers hold poor cards for this size ante.  The recovery meme is drawing to a close.

Absalon's picture

Chart makes no sense.

madcows's picture

Boy, I think we ought to really take on more debt so that we can get out of this debt hole.  FORWARD!

s2man's picture

I already got out of town, three years ago. 

trendybull459's picture

What is Federal system was making us "angst" affraid is talking:oj oj oj if you do not save our banks!We are going into hole!

This is what we were needed to let happened,but for now this will happened sooner rather of later and on riots and not ratios,vote with us on FED pool and read and leave comments on our new page:

shovelhead's picture

Engrish second language spamming.

Blobbing up goodness.

dscott8186's picture

Japan leads the way, heck we've got a decade or two based on that chart. No worries, kick that can down the road, it's worked before and it will work again based on past experience...


Disclaimer: Past performance is no guarantee of future return.  Just kidding, only Capitalists have to make that disclosure, Socialists can make promises until they run out of your money or the paper and ink run out.


Diogenes's picture

We're way past the point of no return.

resurger's picture

Excellent REad +5