It's Impossible For Governments To Grow Their Way Back To Solvency

Tyler Durden's picture

While it might seem like somewhat stating the obvious, it is nonetheless worth driving home to the politicians and public policy wonks who see rates at record lows and perceive a Keynesian borrow-and-spend-fest as once again the solution to borrowing-and-spending too much. As Morgan Stanley puts it, fiscal policy is sailing between the Scylla of chase-your-tail austerity and the Charybdis of sovereign insolvency. In short, it is impossible for developed market (DM) governments to grow their way back to solvency. Doing nothing would sail governments towards the whirlpool of national insolvency – at some stage. But avoiding insolvency would risk being monstered by recession. If 'expansionary austerity' worked, then Europe would now be booming. The outlook for fiscal policy and public sector finances is a major uncertainty for investors and, critically, is part of the reason why risky assets are being de-rated and 'safe' assets are at unprecedented valuations.


Morgan Stanley:The Strait of Mess

Fiscal policy is sailing between the Scylla of chase-your-tail austerity and the Charybdis of sovereign insolvency. It may be possible – with perfect foresight, untrammeled authority, tolerant markets, accommodating central banks and a disregard for political pressure – to navigate between these two threats. History suggests otherwise. Either way, this adds what is likely to be a long-running element of political and financial risk to the investment outlook. Markets are reacting by increasing the rating on ‘safe’ assets, and de-rating riskier assets, including equities.

Most DM governments are essentially broke. Of course, governments are not businesses, so the usual rules do not apply. But it seems that the net present value of governments’ liabilities – including the commitments embodied in current social security policies – exceed the net present value of their assets (including yet-to-be collected tax receipts). Exhibit 1 shows estimates of the (negative) net worth of some G-10 governments, relative to current-day GDP.

Three factors have contributed to this structural problem.

First, the great recession and its aftermath reduced governments’ expected receipts. As is typical after major crises, GDP does not return to its pre-crisis trajectory and trend growth is lower. Exhibit 2, from my colleague Arnaud Mares, shows a stylized version of this pattern, overlaid with the actual OECD GDP through the current cycle, with Morgan Stanley forecasts. The gap between the pre- and post-crisis trend for GDP accounts for a permanent loss of public sector income.


Second, the great recession led to great swap of debt from the private to the public sector. For example, the IMF estimates that government support to financial institutions has been over US$1.7tr, increasing public sector debt by almost 7% of GDP for the countries offering support. As an aside, because debt has been swapped, rather than reduced, aggregate debt in many economies is now higher (relative to GDP) than in 2008.

The third factor is largely unconnected to the current cycle: the escalating cost of ageing and health care. This crystallizes the contingent liabilities embodied in current welfare policies.


In short, it is impossible for governments to grow their way back to solvency. Doing nothing would sail governments towards the whirlpool of national insolvency – at some stage. That may be some time away, although for Europe, the near-term risks are greater, because of its peculiar institutional structure. Exhibit 3 shows the IMF’s estimate of the fiscal tightening required by 2020 to stabilize debt. The figures are changes in public sector primary budget balances (the budget excluding interest charges) as a percent of GDP, with and without the cost of ageing and health care.


But avoiding insolvency would risk being monstered by recession. If ‘expansionary austerity’ worked, then Europe would now be booming. Instead, austerity reduces growth, weakens the private sector (including banks), and ultimately damages the fiscal position it was intended to correct. Taken to extreme, this chase-your-tail tightening leads not to recession, but depression. When there is spare capacity – like now – fiscal changes pack a powerful punch. The IMF estimates that spending changes have multiplier of around 1¼ (Exhibit 4).

A few points:

First, this is largely a developed-economy problem. IMF estimates suggest only modest tightening is required by major emerging economies to stabilize public debt to GDP.


Second, as Arnaud Mares puts it, there is no question that negative-net-worth governments will impose a cost on the private sector. The only questions are when and how. The options are asset confiscation, explicit default, surreptitious default (financial oppression), or conventional fiscal tightening.


Third, how that cost is allocated has significant investment implications, but is inherently a political decision. Investors may hope for an outcome that minimizes financial pain, but history suggests that decision-makers minimize political pain.


Fourth, Europe is struggling to balance medium-term solvency and short-term cycle strength; the looming fiscal cliff in the US will test whether US policy-makers are more adept.


Finally, the outlook for fiscal policy and public sector finances is a major uncertainty for investors. It is part of the reason why risky assets are being de-rated and ‘safe’ assets are at unprecedented valuations. Exhibit 5 shows an index of policy uncertainty and the average US Treasury and German bund 10-year yield (inverted in the chart, so the line goes up as the yield falls). Yields have fallen as uncertainty has risen. To the extent that uncertainty about fiscal persists – and this seems set to be a structural risk – it reinforces our view that in future the valuation on risk assets will be structurally lower than the average of the past 20-30 years.



Source: Morgan Stanley

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Reese Bobby's picture

Barack Romney will save us.

ACP's picture

The more things change, the more they stay the same:


Reese Bobby's picture

Pretty cool.  It does always seem to be "time for a change" in political-speak.  I'm still waiting for some good change.

AldousHuxley's picture
"From Dictatorship to Democracy" as seen in Arab Springs



Formal Statements
1. Public Speeches
2. Letters of opposition or support
3. Declarations by organizations and institutions
4. Signed public statements
5. Declarations of indictment and intention
6. Group or mass petitions

Communications with a Wider Audience
7. Slogans, caricatures, and symbols
8. Banners, posters, and displayed communications
9. Leaflets, pamphlets, and books
10. Newspapers and journals
11. Records, radio, and television
12. Skywriting and earthwriting

Group Representations
13. Deputations
14. Mock awards
15. Group lobbying
16. Picketing
17. Mock elections

Symbolic Public Acts
18. Displays of flags and symbolic colors
19. Wearing of symbols
20. Prayer and worship
21. Delivering symbolic objects
22. Protest disrobings
23. Destruction of own property
24. Symbolic lights
25. Displays of portraits
26. Paint as protest
27. New signs and names
28. Symbolic sounds
29. Symbolic reclamations
30. Rude gestures

Pressures on Individuals
31. "Haunting" officials
32. Taunting officials
33. Fraternization
34. Vigils

Drama and Music
35. Humorous skits and pranks
36. Performances of plays and music
37. Singing

38. Marches
39. Parades
40. Religious processions
41. Pilgrimages
42. Motorcades

Honoring the Dead
43. Political mourning
44. Mock funerals
45. Demonstrative funerals
46. Homage at burial places

Public Assemblies
47. Assemblies of protest or support
48. Protest meetings
49. Camouflaged meetings of protest
50. Teach-ins

Withdrawal and Renunciation
51. Walk-outs
52. Silence
53. Renouncing honors
54. Turning one's back


Ostracism of Persons
55. Social boycott
56. Selective social boycott
57. Lysistratic nonaction
58. Excommunication
59. Interdict

Noncooperation with Social Events, Customs, and Institutions
60. Suspension of social and sports activities
61. Boycott of social affairs
62. Student strike
63. Social disobedience
64. Withdrawal from social institutions

Withdrawal from the Social System
65. Stay-at-home
66. Total personal noncooperation
67. "Flight" of workers
68. Sanctuary
69. Collective disappearance
70. Protest emigration (hijrat)


Actions by Consumers
71. Consumers' boycott
72. Nonconsumption of boycotted goods
73. Policy of austerity
74. Rent withholding
75. Refusal to rent
76. National consumers' boycott
77. International consumers' boycott

Action by Workers and Producers
78. Workmen's boycott
79. Producers' boycott

Action by Middlemen
80. Suppliers' and handlers' boycott

Action by Owners and Management
81. Traders' boycott
82. Refusal to let or sell property
83. Lockout
84. Refusal of industrial assistance
85. Merchants' "general strike"

Action by Holders of Financial Resources
86. Withdrawal of bank deposits
87. Refusal to pay fees, dues, and assessments
88. Refusal to pay debts or interest
89. Severance of funds and credit
90. Revenue refusal
91. Refusal of a government's money

Action by Governments
92. Domestic embargo
93. Blacklisting of traders
94. International sellers' embargo
95. International buyers' embargo
96. International trade embargo


Symbolic Strikes
97. Protest strike
98. Quickie walkout (lightning strike)

Agricultural Strikes
99. Peasant strike
100. Farm Workers' strike

Strikes by Special Groups
101. Refusal of impressed labor
102. Prisoners' strike
103. Craft strike
104. Professional strike

Ordinary Industrial Strikes
105. Establishment strike
106. Industry strike
107. Sympathetic strike

Restricted Strikes
108. Detailed strike
109. Bumper strike
110. Slowdown strike
111. Working-to-rule strike
112. Reporting "sick" (sick-in)
113. Strike by resignation
114. Limited strike
115. Selective strike

Multi-Industry Strikes
116. Generalized strike
117. General strike

Combination of Strikes and Economic Closures
118. Hartal
119. Economic shutdown


Rejection of Authority
120. Withholding or withdrawal of allegiance
121. Refusal of public support
122. Literature and speeches advocating resistance

Citizens' Noncooperation with Government
123. Boycott of legislative bodies
124. Boycott of elections
125. Boycott of government employment and positions
126. Boycott of government depts., agencies, and other bodies
127. Withdrawal from government educational institutions
128. Boycott of government-supported organizations
129. Refusal of assistance to enforcement agents
130. Removal of own signs and placemarks
131. Refusal to accept appointed officials
132. Refusal to dissolve existing institutions

Citizens' Alternatives to Obedience
133. Reluctant and slow compliance
134. Nonobedience in absence of direct supervision
135. Popular nonobedience
136. Disguised disobedience
137. Refusal of an assemblage or meeting to disperse
138. Sitdown
139. Noncooperation with conscription and deportation
140. Hiding, escape, and false identities
141. Civil disobedience of "illegitimate" laws

Action by Government Personnel
142. Selective refusal of assistance by government aides
143. Blocking of lines of command and information
144. Stalling and obstruction
145. General administrative noncooperation
146. Judicial noncooperation
147. Deliberate inefficiency and selective noncooperation by enforcement agents
148. Mutiny

Domestic Governmental Action
149. Quasi-legal evasions and delays
150. Noncooperation by constituent governmental units

International Governmental Action
151. Changes in diplomatic and other representations
152. Delay and cancellation of diplomatic events
153. Withholding of diplomatic recognition
154. Severance of diplomatic relations
155. Withdrawal from international organizations
156. Refusal of membership in international bodies
157. Expulsion from international organizations


Psychological Intervention
158. Self-exposure to the elements
159. The fast
 a) Fast of moral pressure
b) Hunger strike
c) Satyagrahic fast
160. Reverse trial
161. Nonviolent harassment

Physical Intervention
162. Sit-in
163. Stand-in
164. Ride-in
165. Wade-in
166. Mill-in
167. Pray-in
168. Nonviolent raids
169. Nonviolent air raids
170. Nonviolent invasion
171. Nonviolent interjection
172. Nonviolent obstruction
173. Nonviolent occupation

Social Intervention
174. Establishing new social patterns
175. Overloading of facilities
176. Stall-in
177. Speak-in
178. Guerrilla theater
179. Alternative social institutions
180. Alternative communication system

Economic Intervention
181. Reverse strike
182. Stay-in strike
183. Nonviolent land seizure
184. Defiance of blockades
185. Politically motivated counterfeiting
186. Preclusive purchasing
187. Seizure of assets
188. Dumping
189. Selective patronage
190. Alternative markets
191. Alternative transportation systems
192. Alternative economic institutions

Political Intervention
193. Overloading of administrative systems
194. Disclosing identities of secret agents
195. Seeking imprisonment
196. Civil disobedience of "neutral" laws
197. Work-on without collaboration
198. Dual sovereignty and parallel government

A Nanny Moose's picture

Todays combo....Public Group Acts with a side of Protest disrobings.

Reese Bobby's picture

There's a lot of friggin material on that list.  Very, very funny.

A Nanny Moose's picture

A target rich environment indeed.

DaveyJones's picture

where's the public waterboarding?

engineertheeconomy's picture

It's INSANE to just let some random little man that no one even knows, just print Quintillions and Quintillions of Dollars and give it to any Terrorist Organization he desires so they can build Nuclear Bombs orwhatever they like. The Monitoring and Control of this amount of money being stolen should be of utermost concern to National Security Officials. Homeland Security should arrest him immediately. After printing money for 40 yrs, who knows what evil he could be perpetrating. He's 4 feet tall, bald and has a sad rodent like face, especially in the eyes. He goes by the alias "Ben Bernanke" and can be considered unarmed and not hardly dangerous at all as he probably doesn't have the strength to pick up a gun.

Byte Me's picture

Can I have a 187 with a 38 and egg fried rice and extra curry sauce please?

Dugald's picture

No. But you can have WAR.

Dr Benway's picture

The DM will go for the Final Gamble. The last gargantuan gamble where they stake it all on winning miraculously and being able to walk away from the table.


Sweat sloshing down their pale faces, they stake the money they borrowed, the last dimes of their grandmother, funds drawn from credit cards, they push it all into the middle of the table and beg and pray and plead with higher powers to save them.


Guess how the story ends?

Reese Bobby's picture

Probably not well but what does DM stand for in your context?  I have eliminated Dry Martini, Depeche Mode, Dive Master and Dikembe Mutombo.

Dr Benway's picture

Well the article used that abbreviation for Developed Markets and I thought I'd be cool like the kids and use all the current lingo and then you pawned me

Rogue Trooper's picture

True Doc, but I still prefer Depeche Mode....

Said the Politician to the Sheeple....

White.Star.Line's picture

If we wanted a list that counts....

1) Make every act and every decision we make in the best interest of our children and theirs.

Every problem solved........

agent default's picture

AKA the bullshit list.  How to convince yourself that you are doing something while achieving nothing.  Suppose they decide to get violent on you.  Then either:

1) You respond with violence, in which case the list above demonstrably ineffective bullshit.

2) You take it which means repression is successful.

Either way, non violent reactions to oppressive regimes are the bullshit regime shills peddle to the sheeple.


A Nanny Moose's picture

Gandhi may be dead, but he changed the lives of millions.

Peterpaul's picture

Gandhi, a weary UK more concerned with reviving the home soil than maintaining an overseas Empire, and, most importantly, a brutal campaign of murder and rape by Muslim separatists - estimates at over 1 million dead in Punjab during 1946-47 - attest to effectiveness of non-violence in India.

LULZBank's picture

Indians are not non-violent.

Indians got Punjabis (Sikhs to be precise) to fight against "Muslim separatists" in exchange for a separate home country for the "Sikh separatists", i.e. Khalistan, if they will stop "Muslim separatists" from getting their Pakistan.

And guess what happened? Muslims separatists got their country and Sikhs got shafted and still get shafted to this day. Thats because Indians are non-violent.

dwdollar's picture

For every Gandhi there's probably a thousand other nonviolent protesters who are blown up, burned up, strung up, or ran over. People you have never heard of and whose acts were ultimately pointless.

Reese Bobby's picture

Wow, contempt for Gandhi?  Moral compass much?

"As human beings, our greatness lies not so much in being able to remake the world - that is the myth of the atomic age - as in being able to remake ourselves." -Mahatma Gandhi

Matthew 5.3-12


Skateboarder's picture

A nice, presentable frontman, kinda like Einstein.

Reese Bobby's picture

Explain, if you feel like it.  I respect what I know of Gandhi.  A lot.

Skateboarder's picture

Search and read up on Gandhi's views on women, sex, marriage, etc. Like little Indian children who are taught that Gandhi was the greatest, most amazing bees-knees human being to have existed, you are also misguided by an incomplete picture of his life.

He isn't exactly who you think he is. Any man with a decent linguistic sense for English can sit down for a day and pen a thousand impressive quotes.

LULZBank's picture

And most, if not all, of those quotes were mere rearranging of words from quotes of other religious texts and intellectuals.

Not so smart, but approved and accepted plagiarism. Works fine with conditioned ignorants.

falak pema's picture

The greatest weapons against this civil movement check list? 

1° MSM Capture. Control the media and the spin.

2° Regulatory Capture. Control the Judiciary, the lawmakers and the Institutional Notationals. Keep the legal circus inneficient. Keep the system opaque and drowned in circular reasoning.

3° Breed a political/financial spiral that keeps you one step ahead of the crowd. FED fiat pump, false flag casus belli to start foreign wars.

4° Always have a new spiral on your back burner as plan B. 

5° Believe in your own power, nurture it behind the curtain in interconnectivity. Make people dependent on your power.

The hubristic principle of those in purple : the happy few. The sheeple love them. That's History too! Make belief...

mharry's picture

No kidding, unfortunately there are only a dozen if that, elected officials who understand that.

BandGap's picture

Hey! Check you're spelling on these offerings. It's "aging".

And duh, there's only one way out of this mess and that's through the front door. Fill your hands with iron you dumb son of a bitch!

q99x2's picture

The transfer of debt to the public is mis-stated because I and billions of others aren't paying no banksters nothing ever.

What he meant to say was the transfer of debt to the public sector is a fantasy of morons and should not be considered as anything other than accounting fraud.

Further fraud will quickly vaporize any and all wealth locked up in Government bonds, stock markets and foreign exchange indexes. Therefore prepare for an imminent collapse of the financial system.

The system feedback has entered an unpredictable state at this point. Get any and all money out if you have not done so already.

Big time poof coming at ya.

Reese Bobby's picture

Unfortunately I expect a World War before any financial system collapse.


Whatta's picture

WTF is "DM"?...Debt Monger? Douche Muncher? Dead Meat?l

delacroix's picture

developed market, as opposed to emerging market.

RobotTrader's picture

The Paul Krugman "Final Solution" will save everybody and save all countries.


With the 10-yr. at 1.45%, there is zero risk of the Bond Vigilantes forcing any discipline.

Hulk's picture

Man, you have to quit listening to Brinker...

DaveyJones's picture

it's hard to keep track of the economy when your obsessed cheap gas in LA

twotraps's picture

q99x2......agree with you but it may be more sinister than that. Full breakdown is bad for us but really a bitch for the govt......easier to slowly devalue, change rules/incentives and keep the peace. WTF does anyone think the last 4 yrs has been about??

stateside's picture

Governments (Greece and Spain as an example) are choosing to side with NGO's at the expense of good jobs and increased tax revenues.  Eldorado Gold has had permits delayed in Greece as they try to develop their gold projects and Astur Gold had their permits denied in Spain as environmental wackos protest and the governments bow down to them. 

Why should Germany/IMF and others bail out Greece and Spain when their governments deny econmc development?  



El Tuco's picture

Why should Germany/IMF and others bail out Greece and Spain

How else is Greece and Spain going to pay them back? They have to loan more or else the existing debt never gets paid back.


sessinpo's picture

"Why should Germany/IMF and others bail out Greece and Spain when their governments deny econmc development?  "


It's more like taxpayers around the world are doing the bailing out. I ask you, why is it that when referring to loaning and bailing out, it is always stated in a way that these benelovent organizations are doing the bailing out? Where do they get their money? Yes, central banks print money, but what is that backed by? It is backed by the production of the private sector or the tax payers. Without that, then the money printed is worthless. So in essence, what I am saying is that it is not the IMF, ECB, FRB, World Bank or whomever bailing out anyone. It is the taxpayers that are forced to support these corrupt institutions. And that pisses me off.

JustAnotherHack's picture

I don't have a finance degree, or a degree in business (I'm a lawyer), so here is my stupid question:  Why do many articles on this site refer to the "fact" that Europe is being bitch slapped with austerity and it's obviously not working?  Is living on the dole at age 60 "austerity"?

gnomon's picture

Any fiscal action that slows spending on things that people don't really need or could put off is classed as austerity these days because the knock-off effect on GDP is very telling. 

And so down we go.

We had an economy that was whipped up into a souffle of ponzi froth.  It could never be sustained.

Pairadimes's picture

Fuck you, Bernanke!

Ted Baker's picture

Few events are certain this year
(1) Gold will test new highs with or wo further easing, central banks manipulation, etc.
(2) In order to pass Volcker rule the largest banks in the US will have to be broken down into two separated entities.
(3) There wil be war in the Mideast.
(4) Greece will leave the EU.
(5) UK credit rating will be downgraded.
(6) US will continue its down spiral growth
(7) Euro will end up trading around 1.17.
(8) James Murdoch will be prosecuted.
(9) Obama will lose the election.
(10) There will criminal charges against 3 US Banks over LIBOR

Bartanist's picture

I am guessing with the heavy schedule and all only 2 of the 10 will be accomplished THIS year.

sitenine's picture

If you're taking bets, I'll pick (1), (6), and 187 on AldousHuxley's list above for the trifecta.