Guest Post: The Shape Of The Debt Reset

Tyler Durden's picture


Submitted by John Aziz of Azizonomics,

I was asked recently by Max Keiser who benefits in the case of a debt reset, and when we should expect such an event to occur.



I don’t think I answered it as comprehensively as I should have. I talked a little about the fact that events leading up to such an event could be extremely messy and its impact unpredictable, and so it is hard to say who will benefit, although we can expect the powers-that-be  — and particularly the Wall Street TBTF banks — to try and leverage events for political and financial gain. And of course, all three kinds of debt reset — heavy inflation, liquidation or an orderly debt jubilee — would look very different.

Here’s the problem:

The crisis in 2008 was one fuelled by excessive total debt. As society became more and more indebted the costs of servicing debt became proportionally higher, which has made it harder for countries to grow. Instead of individuals investing their income, or saving it and using it to start a business, a higher and higher proportion of income becomes taken up by the costs of paying down debt.

Historically in a free market system, these kinds of credit bubbles have ended in liquidation of the entire bubble and all the bad debt. However the Fed’s money printing since 2008 (much like the Bank of Japan’s money printing in the 90s) has done just enough to keep the debt load serviceable.

The worrying thing is that Japan — which experienced a very similar series of events in the 1990s — remains in a high-debt, low-growth deleveraging trap. While the USA has managed a small decrease in indebtedness since 2008, it could take a very, very long time — Steve Keen estimates up to 15 or 20 years — for the debt level to fall to a level where strong organic GDP and employment growth is possible again. In my view, it is more likely (especially considering the Japanese example) that (with continued central bank assistance) there may be no long-run deleveraging at all, and that we may have entered a zombie cycle of reinflationary QE followed by market decline and deflation, followed by more reinflationary QE, etc. 

The point that I didn’t really emphasise to Max Keiser is just how beneficial a debt reset — so long as society comes out of it in one piece — will be in the long run. As both Friedrich Hayek and Hyman Minsky saw it, with the weight of excessive debt and the costs of deleveraging either reduced or removed, long-depressed-economies would be able to grow organically again. Yet after years of stagnation, a disorderly liquidation or inflation would surely be accompanied by financial, social and political chaos. And the cost of kicking the can and remaining in a deleveraging trap — as Japan has done (and as the US is now doing) — can have serious social consequences, such as elevated long-term unemployment, a deterioration in skills, diminished innovation and decreased entrepreneurialism.

I think this underlines the importance of trying to achieve the effects of a debt reset in an orderly way before nature forces it upon us again, and before we have spent a long time stuck in the deleveraging trap with a huge debt load relative to GDP, elevated unemployment, and very low growth. The least unfair way of doing this would seem to be the modern debt jubilee advocated by Steve Keen — print money, and instead of pumping it into the financial system as per QE, use it to write down a portion (say, $6,000) of each person’s debt load, and send out cheques up to an equal amount to those who are not indebted. Unlike with quantitative easing, because everyone gets the same quantity of new money, nobody receives a disproportionate transfer of purchasing power via the Cantillon effect, as happens not only with quantitative easing but also with more traditional monetary policy operations such as interest rate cuts, which are strongly correlated with disproportionately strong growth in the financial sector and bank assets. And the inflationary impact of the new money would be shared equally by everyone — rather than screwing pensioners or savers — because everyone would receive the same amount.

This is obviously not ideal, but it is surely better than remaining in a Japanese-style deleveraging trap.

Yet while most of the economic establishment remain convinced that the real problem is one of aggregate demand, and not excessive total debt, such a prospect still remains distant. The most likely pathway continues to be one of stagnation, with central banks printing just enough money to keep the debt serviceable (and handing it to the financial sector, which will surely continue to enrich itself at the expense of everyone else). This is a painful and unsustainable status quo and the debt reset — and without an economic miracle, it will eventually arrive — will in the long run likely prove a welcome development for the vast majority of people and businesses.

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Tue, 08/14/2012 - 11:01 | 2703770 mrktwtch2
mrktwtch2's picture

tell us something we dont that to much to ask for??

Tue, 08/14/2012 - 11:13 | 2703812 Stackers
Stackers's picture

Did you know the sky is blue because blue light waves are easier to scatter than longer red and yellow wave lengths ?

Tue, 08/14/2012 - 11:25 | 2703845 CIABS
CIABS's picture

I didn't know that John Aziz was a British kid in a T-shirt.

Tue, 08/14/2012 - 11:26 | 2703846 economics9698
economics9698's picture

Bankruptcy is the best option because it cuts off the flow of money to bankers.

Tue, 08/14/2012 - 11:39 | 2703893 French Frog
French Frog's picture

"This is obviously not ideal, but it is surely better than remaining in a Japanese-style deleveraging trap."

Unfortunately, every politicians would rather a big event did not happen under their watch, hence why the path of least resistance might just be a  Japanese-style deleveraging trap that goes on and on and on...

Tue, 08/14/2012 - 11:45 | 2703909 giggler123
giggler123's picture

It is important to point out that it worked for Japan when the rest of the world is OK but having everyone doing a Japan at the same time has not been tested.

Tue, 08/14/2012 - 12:03 | 2703970 economics9698
economics9698's picture

1.  Bankruptcy

2.  Austerity.

3.  Inflation.

4.  War.  

Tue, 08/14/2012 - 12:10 | 2703991 economics9698
economics9698's picture

Financial blow ups generally take 3 to 5 years, more towards the 4th and 5th year. 

Japan was a saving/exporting country and not like Europe/China/ or America.

Look for the fireworks soon.  When Germany, France, Spain, Italy breaks ranks you will see a lot of action in the bond market.  When that happens…

Economically the solution to prosperity is bankruptcy and a return to sound money.

Tue, 08/14/2012 - 12:57 | 2704144 Roger O. Thornhill
Roger O. Thornhill's picture


You missed showing it the way the cabal sees it.

1.  Bankruptcy

2.  Austerity.

3.  Inflation.

4.  War.  

5. ?????

6. Profit!


Tue, 08/14/2012 - 11:41 | 2703898 economics9698
economics9698's picture

John you need to lose the British accent.

Tue, 08/14/2012 - 12:04 | 2703974 economics9698
economics9698's picture

Who voted this down?  Never liked the Queens English.

Tue, 08/14/2012 - 11:35 | 2703880 Praetor
Praetor's picture


Nice facts, now s(he) knows.

Did you know the sky is blue due to the scattering by nitrogen gas molecules in the atmopshere? If we had a completely carbon dioxide atmopshere the sky would be red. ;-)

Did you know that neither of these gasses care about hyperinflation or debt jubilee?

Tue, 08/14/2012 - 12:46 | 2704109 francis_sawyer
francis_sawyer's picture

Neither does the Honey Badger...

Tue, 08/14/2012 - 11:05 | 2703781 realtick
Tue, 08/14/2012 - 11:51 | 2703920 Spigot
Spigot's picture

IMO the first two charts are appropriately viewed within the context of wave theory. The third chart (Fed) is not a market, not subject to wave theory. However, is it helpful to understand how actions on that chart effected the prior two charts.

Tue, 08/14/2012 - 11:06 | 2703785 Seorse Gorog fr...
Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

Did he just get out of bed?

Tue, 08/14/2012 - 11:06 | 2703786 Shizzmoney
Shizzmoney's picture

Bankers and economists expect that loans created by these debt bubbled will be paid....with interest....and made 100% whole.

They'll be lucky if they get 66% of that.

The fact that credit markets don't know this yet.....provess to me that a) they are really fucking stupid or b) manipulated by Central banks.

It's obv the ladder, with a little of the former.

Tue, 08/14/2012 - 11:07 | 2703789 centerline
centerline's picture

As if populations, social complexity, resource consumption, etc., etc. can continue indefinately.   

I am tired of the "growth" mantra.  Ever thought that "growth" is over?  What then?


Tue, 08/14/2012 - 21:24 | 2705575 Shizzmoney
Shizzmoney's picture

I am tired of the "growth" mantra.  Ever thought that "growth" is over?  What then?

That's what she said

Tue, 08/14/2012 - 11:09 | 2703795 LawsofPhysics
LawsofPhysics's picture

"...which has made it harder for countries to grow"


Stopped right there. Grow the fuck up.  Humanity is at the limits of growth, given the current state of technology.  In the absence of a debt jubilee, more debt or inflation will only lead to more capital and resource misallocation and malinvestment.

While TPTB may be able to print all the capital they want, not so with resources, hence, the dogs of war are barking louder every day,

hedge accordingly.

Tue, 08/14/2012 - 12:15 | 2704005 Spigot
Spigot's picture

IMO your equation has the terms in the wrong place and relationship. IMO the universal and continually expanding usage of debt has enabled humanity to grow itself beyond a level of sustainability within the context of the failure of such an economic infrastructure. We have added hundreds of years of growth in less than 100 years. The economic system is what is failing. Quite unfortunately, the end result for many will be very painful, or even fatal.

Tue, 08/14/2012 - 12:26 | 2704043 LawsofPhysics
LawsofPhysics's picture

Wrong, that is exactly what I am saying, thanks for proving once again, if you can't dazzle them with brilliance, then baffle them with bullshit.  eCONomics is a made-made construct, Nature really does not give a shit.

Tue, 08/14/2012 - 12:28 | 2704054 AnAnonymous
AnAnonymous's picture

IMO the universal and continually expanding usage of debt has enabled humanity to grow itself beyond a level of sustainability within the context of the failure of such an economic infrastructure.


What humanity? 'Americans' have grown themselves beyond a level of sustainability.

The other part? Not so much.

The world is finite and this is an 'American' world order.

In a finite world, when one participant has enough consumption superficy to consume beyond level of global sustainability, every other participant is de facto crushed by the excess of consumption, no matter one's own sustainability.

There are people around the world who are in a much more sustainable ways of life than the 'American' way of life. They have not grown themselves in the current state of the world.

No matter their actions, they are crushed by 'American' global impact on consumption.

Removing the non 'American' populations will not remove the sustainability issue.

Removing the 'American' populations, on the other hand...

But hey, 'Americans' are used to speaking on behalf of humanity so they have to fail to distinguish between themselves and others in cases like that.

Tue, 08/14/2012 - 15:07 | 2704684 forexskin
forexskin's picture

heya! and me thinking i was going to have to wait to tell the idiot to fuch off!

any more brilliant but pointless insights to offer? idiot?

Tue, 08/14/2012 - 16:06 | 2704895 odatruf
odatruf's picture

At least I could follow this rant.  Not talking about US Citizens(ism) helps.  He's still an asshat, however.


Tue, 08/14/2012 - 16:32 | 2704965 Panafrican Funk...
Panafrican Funktron Robot's picture

Where did Americans come from?  Who controls currencies?

Tue, 08/14/2012 - 14:13 | 2704233 Aziz
Aziz's picture

I would love for the true believers in Malthusianism and imminent Limits to Growth to read this and at least reconsider the parameters of their ideology.

Tue, 08/14/2012 - 15:19 | 2704726 LawsofPhysics
LawsofPhysics's picture

The 2 billion or so people that don't have enough food or clean water have a considerably different perspective.

Pull you head out of your ass and go study biological cycles such as the carbon, nitrogen, and sulfur cycle, to name a few.  all element flow through different oxidation states as a requirement for life on this planet (in a human-friendly form).

Either way, the planet will be fine, humanity will change it's ways or die.  Same as it ever was.

Tue, 08/14/2012 - 15:23 | 2704746 AnAnonymous
AnAnonymous's picture

Humanity does not have to change its way.

It is US citizen to include people who are out of consumption of a resource as an overconsuming pressure.

But hey, US citizenism is as US citizen does.

Only US citizens have to change their way of doing and this wont happen as their US citizen nature is eternal.

Tue, 08/14/2012 - 16:36 | 2704969 Panafrican Funk...
Panafrican Funktron Robot's picture

Probably the more useful deliniation would be white people, brown people, and yellow people.  The white and yellow people are going to need some substantial adjustment.  The brown people have already been living the suck.  You sound like a white dude, probably from the U.S. to boot.  Tell me, are you personally ready to live/die "sustainably"?

Tue, 08/14/2012 - 11:09 | 2703796 Mrmojorisin515
Mrmojorisin515's picture

I think the idea would work, but at the same time it doesn't take into account the giant companies that also make up a part of the status quo along with the banks and government.  I assure you sir that they are just as guilty as the banks, so even though this solution looks good on paper, an organic collaspe might be the only true solution.

Tue, 08/14/2012 - 12:00 | 2703958 XitSam
XitSam's picture

Unless the citizens suffer something far, far worse than what they have up to now, they will immediately start the debt cycle over again.

Tue, 08/14/2012 - 11:12 | 2703805 loveyajimbo
loveyajimbo's picture

So sending out $6,000 to each citizen... would be around $10 Trillion?  Would cause a brief spike and then we are stuck with a vastly higher debt load?  How would this in any way solve the main problem of over spending in DC and the structural lack of jobs?  Sounds more like an Obama election ploy... this author is usually sharp, bu tthis one flew over my melon.

Tue, 08/14/2012 - 11:55 | 2703936 Almost Solvent
Almost Solvent's picture

I don't think there would be any "debt load" - just FRNs printed out of thin air with no bond or other debt instrument attached to the issuance.


Inflation would most likely be an issue, however.

Tue, 08/14/2012 - 11:57 | 2703943 David Wooten
David Wooten's picture

It's actually only $2 trillion if you're counting US citizens.  But who's counting?

Tue, 08/14/2012 - 14:20 | 2704489 StackAttack
StackAttack's picture

I, for one, cannot wait to use my $6000 bribe check to buy 3-4 oz of gold.


Tue, 08/14/2012 - 11:12 | 2703806 Mrmojorisin515
Mrmojorisin515's picture

it also doesn't get to the root of the problem, which is money itself.  Now i am not foolish enough to try and suggest and answer to that, but under the current system the insiders will always win.  Why have we been reading this blog for so many years if we propose solutions that don't take into account the true problem?

Tue, 08/14/2012 - 11:12 | 2703807 Yen Cross
Yen Cross's picture

 Santelli just plugged Z/H on those , bogus "Retail sales" numbers. Nice work Tyler!

Tue, 08/14/2012 - 11:15 | 2703813 TahoeBilly2012
TahoeBilly2012's picture

Yea, and so this isn't enabled by the "enablers", but some mass moronic over shoot. They wouldn't of course be using the scenario to take out the rest of the Central Banks worldwide they are still after WHILE they put us broke debt slaves in total lockdown. This isn't planned, it's coincedental. I am tiredd of listening to would be intelligent US "men" take this subject about 1/3 of the way through intellectually....jive.

Tue, 08/14/2012 - 11:14 | 2703815 centerline
centerline's picture

Just FYI, printing a shitload of cash to give everyone a check DOES screw the savers in terms of immediate currency debasement.  It also has serious worldwide ramifications.  Given the host options in front of us, it is the "kindest and most equitable" of options - but really is nothing more than another "kick-the-can" move at best.



Tue, 08/14/2012 - 11:16 | 2703823 LMAOLORI
LMAOLORI's picture



"The crisis in 2008 was one fuelled by excessive total debt"


I feel sooo stupid here I thought the crisis was caused by the TBTF banks making sub-prime loans and then selling them to investor's worldwide as prime.  I also thought when they found out AIG couldn't cover they were like sharks smelling blood in the water. 

Hangs head in shame.

Tue, 08/14/2012 - 11:34 | 2703877 Lednbrass
Lednbrass's picture

So I am clear on this, your argument is that taking a loan is in fact not debt?

Tue, 08/14/2012 - 11:38 | 2703890 centerline
centerline's picture

I think he forgot the /sarc just make sure everyone got it.  Debt has to come from somewhere, eh?

Tue, 08/14/2012 - 11:47 | 2703912 LMAOLORI
LMAOLORI's picture



"Lednbrass So I am clear on this, your argument is that taking a loan is in fact not debt?"

No I am not saying that at all one person's debt is another person's assets. It is however fraud to sell something as AAA grade prime when it is in reality something akin to taco bell meat which I believe was 88% beef.

Tue, 08/14/2012 - 11:58 | 2703949 Dumpster Fire
Dumpster Fire's picture

I'm afraid to ask what the 12% is.

Tue, 08/14/2012 - 12:36 | 2704076 LMAOLORI
Tue, 08/14/2012 - 11:18 | 2703827 AGuy
AGuy's picture

"The fact that credit markets don't know this yet.....provess to me that a) they are really fucking stupid or b) manipulated by Central banks."

I think your over looking something important. If a large number of loans go bust, then all those bankers are out of a job. Most Bankers are working to hide the problem so they can continue to collect a paycheck. Most of the Bankers know about the problems, but promote propaganda using the media to hide the truth.

This is probably true for most institutional investors that are managing OPM (other people's money). Notice that most pension plans are heavly invested in this crap, yet where is the money of the investment managers? Its in US treasuries, PMs and other risk-adverse investments. If they really believed in the Credit markets, they would have invested there personal savings in the same crap that they invested OPM in. The Money managers make money of paper returns and projections. They make huge projections over a 5 to 10 year period, so they can get big bonuses now. By they time the projections are realized as huge losses instead of profits, they already made their money.





Tue, 08/14/2012 - 11:18 | 2703828 Dr. Engali
Dr. Engali's picture

Didn't the need for continued never ending growth get us into this mess? How about a nice steady economy where people can make  a living and get to save some of what they earn instead of having their wealth transfered to either end of the spectrum?

Tue, 08/14/2012 - 11:23 | 2703839 Dr. Richard Head
Dr. Richard Head's picture

THAT'S UNAMERICAN!!!! (at least in today's Amerika)

Tue, 08/14/2012 - 11:28 | 2703853 poor fella
poor fella's picture

but.. but... but.. what about the global economy and free-trade?!?!?  [said in the whiniest voice one can muster]

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