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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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Wed, 07/25/2012 - 22:28 | 2651800 Reese Bobby
Reese Bobby's picture

Barack Romney will save us.

Wed, 07/25/2012 - 22:30 | 2651803 ACP
ACP's picture

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


Wed, 07/25/2012 - 22:35 | 2651810 Reese Bobby
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.

Wed, 07/25/2012 - 22:49 | 2651847 AldousHuxley
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

Wed, 07/25/2012 - 22:55 | 2651855 Reese Bobby
Reese Bobby's picture

I have to go take a 188.

Wed, 07/25/2012 - 23:09 | 2651884 A Nanny Moose
A Nanny Moose's picture

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

Wed, 07/25/2012 - 23:13 | 2651901 Reese Bobby
Reese Bobby's picture

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

Wed, 07/25/2012 - 23:20 | 2651915 A Nanny Moose
A Nanny Moose's picture

A target rich environment indeed.

Thu, 07/26/2012 - 00:19 | 2652067 DaveyJones
DaveyJones's picture

where's the public waterboarding?

Thu, 07/26/2012 - 01:14 | 2652130 engineertheeconomy
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.

Thu, 07/26/2012 - 03:28 | 2652238 Byte Me
Byte Me's picture

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

Thu, 07/26/2012 - 05:41 | 2652293 Dugald
Dugald's picture

No. But you can have WAR.

Wed, 07/25/2012 - 23:21 | 2651918 Dr Benway
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?

Wed, 07/25/2012 - 23:37 | 2651968 Reese Bobby
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.

Thu, 07/26/2012 - 02:01 | 2652182 Dr Benway
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

Thu, 07/26/2012 - 05:20 | 2652287 Rogue Trooper
Rogue Trooper's picture

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

Said the Politician to the Sheeple....

Thu, 07/26/2012 - 05:44 | 2652294 Dugald
Dugald's picture

Err, Dumb Mutt ?

Wed, 07/25/2012 - 23:39 | 2651975 White.Star.Line
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........

Wed, 07/25/2012 - 22:59 | 2651864 agent default
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.


Wed, 07/25/2012 - 23:11 | 2651892 A Nanny Moose
A Nanny Moose's picture

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

Wed, 07/25/2012 - 23:24 | 2651925 Peterpaul
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.

Thu, 07/26/2012 - 05:46 | 2652296 LULZBank
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.

Wed, 07/25/2012 - 23:28 | 2651932 dwdollar
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.

Wed, 07/25/2012 - 23:58 | 2652030 Reese Bobby
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


Wed, 07/25/2012 - 23:45 | 2651993 Skateboarder
Skateboarder's picture

A nice, presentable frontman, kinda like Einstein.

Thu, 07/26/2012 - 00:02 | 2652039 Reese Bobby
Reese Bobby's picture

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

Thu, 07/26/2012 - 00:41 | 2652094 Skateboarder
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.

Thu, 07/26/2012 - 05:50 | 2652302 LULZBank
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.

Thu, 07/26/2012 - 08:13 | 2652586 Reese Bobby
Reese Bobby's picture

Fair answer.  I will.

Thu, 07/26/2012 - 05:35 | 2652286 falak pema
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...

Wed, 07/25/2012 - 23:01 | 2651868 mharry
mharry's picture

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

Wed, 07/25/2012 - 22:38 | 2651819 BandGap
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!

Wed, 07/25/2012 - 22:39 | 2651821 q99x2
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.

Wed, 07/25/2012 - 22:50 | 2651848 Reese Bobby
Reese Bobby's picture

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


Wed, 07/25/2012 - 22:45 | 2651833 Whatta
Whatta's picture

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

Thu, 07/26/2012 - 02:02 | 2652184 delacroix
delacroix's picture

developed market, as opposed to emerging market.

Wed, 07/25/2012 - 22:47 | 2651838 RobotTrader
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.

Wed, 07/25/2012 - 23:16 | 2651909 Hulk
Hulk's picture

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

Thu, 07/26/2012 - 00:28 | 2652078 DaveyJones
DaveyJones's picture

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

Wed, 07/25/2012 - 22:51 | 2651849 twotraps
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??

Wed, 07/25/2012 - 22:59 | 2651856 stateside
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?  



Wed, 07/25/2012 - 23:12 | 2651890 El Tuco
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.


Thu, 07/26/2012 - 09:17 | 2652785 sessinpo
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.

Wed, 07/25/2012 - 22:58 | 2651862 JustAnotherHack
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"?

Wed, 07/25/2012 - 23:13 | 2651898 gnomon
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.

Wed, 07/25/2012 - 23:00 | 2651865 Pairadimes
Pairadimes's picture

Fuck you, Bernanke!

Wed, 07/25/2012 - 23:15 | 2651899 El Tuco
El Tuco's picture

Always good for +1.


Wed, 07/25/2012 - 23:12 | 2651894 Ted Baker
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

Wed, 07/25/2012 - 23:36 | 2651967 Bartanist
Bartanist's picture

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

Wed, 07/25/2012 - 23:44 | 2651988 sitenine
sitenine's picture

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

Wed, 07/25/2012 - 23:52 | 2652012 illyia
illyia's picture

Few events are certain this year
(1) Gold will test new highs with or wo further easing, central banks manipulation, etc. YES
(2) In order to pass Volcker rule the largest banks in the US will have to be broken down into two separated entities. YES TO PROTECT THE GUILTY BY MASS CONFUSION. IT WILL MAKE LITTLE DIFFERENCE.
(3) There wil be war in the Mideast. Blah. Blah. Blah...
(4) Greece will leave the EU. ditto.
(5) UK credit rating will be downgraded. ditto.
(6) US will continue its down spiral growth. ditto.
(7) Euro will end up trading around 1.17. I HAVE 1.12
(8) James Murdoch will be prosecuted. ONE DOWN. 100K TO GO...
(9) Obama will lose the election. UNLIKELY.
(10) There will criminal charges against 3 US Banks over LIBOR. OR MAYBE 5... IF MARGIN STANLEY LIVES THAT LONG...


Thu, 07/26/2012 - 07:54 | 2652532 TrumpXVI
TrumpXVI's picture

Points one through seven look good.

I'm struggling with eight through ten; prolly ain't gonna' happen.

Wed, 07/25/2012 - 23:14 | 2651903 twotraps
twotraps's picture

Hack....I'm sure you will get lively responses to your question. Perhaps it's harder for them to print, they must, but maybe they need to be less obvious. Austerity might also be more palatable politically. Funny how there is country specific austerity....but no political unity for the euro currency countries, only economic unity via the ECB. I also think that like the US they have a huge PR problem in that they must maintain the illusion that's it's not all a silly game with no rules or consequences..........austerity looks good, shows some effort that bills will get paid bla bla bla. The assumption is that there is a mkt to protect and allow to function, but it's really about control. We all have downside if it all tips over, but the goats are really in a jam....way to hard to start over and convince people they should be trusted. Austerity will not help, it buys time until the next ' risk sharing mechanism ' is invented after 3 more yrs of European meetings!

Wed, 07/25/2012 - 23:32 | 2651951 Son of Loki
Son of Loki's picture

Printing has worked so well, with record high banker bonuses the last four years. Why grow when you can simply keep printing?

Wed, 07/25/2012 - 23:33 | 2651959 Bicycle Repairman
Bicycle Repairman's picture

Governments will begin to look for capital, wealth, cash, etc. wherever it is and seize it.  Taxes, asset seizures, eminent domain what have you.  I mean in hyper-drive.  They'll start with the easiest political targets and move on.  The money is out there.  It's just on strike and, citizens, you know that ain't fair.

The preceding does not reflect the views of the poster and is presented as a public service.

Thu, 07/26/2012 - 01:26 | 2652149 lewy14
lewy14's picture

I've been thinking about how this is going to be done... trying to get ready for what's coming.

You can never overestimate the stupidity of the state, but I doubt even they are stupid enough to demand a collective $4T in cash on a day certain, when there's only $2T base money in the entire system.

The expropriations will have to be in kind - no liquidations.

The trigger will be when our external debtors start requiring collateral (as Finland is already doing with Greece).

If I ran the Treasury and the Whitehouse (and was a sociopathic fascist, which, nota bene, I am not - this is prediction, not advocacy, folks) I would simply ask the top financial insitutions and wealth managers (all of whom I conveniently have by the balls already for LIBOR and every other scandal) to put an asterisk by the accounts of everyone with assets on deposit of over (say) $1M. 

They can continue to trade and invest, but withdrawals will be restricted (can transfer within the system, but not outside - and not to cash or gold, except within limits) and the custody of the assets will be subject to a sovereign lien. 

Essentially the assets of the wealthy will be re-hypothicated - offered as collateral for the Treasury securities which will continue to be issued to cover ever higher deficits.

The banks and wealth management outfits will work to calm their clients, tell them nothing has really changed, etc... many wealthy people will approve as they buy into the whole "give something back" mentality or they see the step as essential to prevent the collapse of the dollar... meanwhile the connected and truly powerful will be able to get out (see, e.g., the capital flight of the kleptocratic elite of China)...

When the reset / default / margin call comes, a good chunk of the ownership of the corporations domiciled in the US, our land, buildings, mineral rights, etc, will simply be transfered over to China and the Gulf Arabs. 

The "path of least resistance" is the path the elites most often take. I see this as the path of least resistance.

Wed, 07/25/2012 - 23:41 | 2651982 lasvegaspersona
lasvegaspersona's picture bonds......that actually does work...until....

Wed, 07/25/2012 - 23:47 | 2651998 chump666
chump666's picture

Governments are stupid. 

Wed, 07/25/2012 - 23:49 | 2652006 kito
kito's picture

Its impossible for morgan stanley to grow its way back to solvency...............

Thu, 07/26/2012 - 01:09 | 2652122 Essential Nexus
Essential Nexus's picture

Europe hasn't had any austerity, unless austerity means spending more money perpetually YOY.

Thu, 07/26/2012 - 01:43 | 2652126 sitenine
sitenine's picture

Correct.  You just have to view European austerity through the ponzi lens, and things become a little clearer.

Thu, 07/26/2012 - 01:28 | 2652148 gwiss
gwiss's picture

In a debt/credit based money system such as our own, the vast majority of our money is borrowed into existence.  This is done by banks through fractional reserve lending, and through the shadow banking system which does the very same thing using the same process using repos and rehypothecation.  In this system, increased debt equals increased money supply, and increased money supply has the effect it always does, which is to juice the economy.  But, at some point this system reaches debt saturation, which is the maximum amount of debt the population and businesses can carry, and thus also the maximum size of the leveraged money supply.  At this point, the economy either goes into hibernation, or it contracts as debt is paid down.


In a debt based money system, there is no way to deleverage without shrinking the money supply, and shrinking the money supply always means recession/depression.


Question to ask ourselves is, which happens faster -- the slowdown of business (recession) which accompanies the shrinking money supply or the deflation of paying down the debt? 


If paying down debt happens faster, then life is good, because deflation makes falling asset prices perceptually valuable faster than the business slowdown of recession can drop their relative price, and prices reach equilibrium as demand re-enters the market.  But, if business slowdown happens faster than paying down debt, this is disaster, because business slowdown forces endless selling of assets into a bidless market, which remains bidless because the assets are constantly perceptually valued as worth less in total than the money supply they helped create.  Even though the money supply tries valiantly to keep pace with falling asset prices through bankruptcies, write offs, and actual repayments, it is like a skydiver whose parachute has already opened trying to catch one still in free fall.  Thus, perceived value of assets never becomes enough to once again warrant the extension of of further credit based on the value of the asset, and thus the money supply cannot organically reinflate to create a sustained recovery.  This rabbit hole goes very deep before it stops, because there is no inherent floor to the ratio between the credit money supply and the perceived value of tangible assets -- rather, that relationship is all relative.


Of course government recognizes that there is a problem and valiantly steps into the fray to re-animate the party like a boozed up black sheep brother in law trying to revive an irredeemably dull wedding party.  Initially the market is relieved and as government borrowing steps in to re-inflate the money supply the market tries in good faith to participate because it honestly wants to have a good recovery, and thus studiously ignores the blatent cognitive dissonance of extending credit to an entity whose mechanism of payback rests  squarely on the same consumer whom the credit market already cut off as incapable of further borrowing.  Thus everyone smiles and laughs nervously and self consciously as they flood back onto the dance floor in response to the brother in law who has commandeered the mike and declared it "time to get this party started!"


But, the trouble with government is that it has no intrinsic awareness of the rules of respectful mutually cooperative society to begin with, and this only gets worse when it is intoxicated with the mission of saving society.  Thus, it doesn't know when to stop.  Emboldened by its initial success, it figures that if some is good then more must be better, and thus it continues to replace consumer driven credit inflation with government credit inflation, just as the brother in law tries to replace genuine spontaneous group celebration with individual animation that he pours into the party unstintingly.  The party quickly ceases to be about the wedding celebration and instead becomes about watching the antics of the brother in law, whose misinterpretation of this attention as success drives him to ever more frantic and ridiculous attempts at amplifying the fun.  Somewhere between shoving his booty in Aunt Clara's face and giving Grandma Maud a lap dance family members recognize that a line has been crossed, and when he drops his pants to moon the groom he is quickly and quietly and permanently ushered from the party. 

Thu, 07/26/2012 - 05:57 | 2652307 twotraps
twotraps's picture

Gwiss, really enjoyed that. Well done. So how can it play out in reality? I thought for a while that they would allow a decent amount of deflation...say S&P 900 to prove that 'mkt forces still exist' and that the entire financial universe is not a silly game with No Consequences for some whatsoever....and therefore the govt has been running a giant pretend account al this time...........I figured that doing that might make them look better AND keep much of the current structure in tact, allowing for eventual reflation back up. The extreme scenarios don't work for me only because they're too much hassle for goats. to handle, like extreme inflation or extreme depression with DOW 3000 or something.

Great post.

Thu, 07/26/2012 - 09:57 | 2652633 gwiss
gwiss's picture

Twotraps, I think the problem is that the true believers in government don't see it that way, and actually believe the fraud that capital equals fiat, and thus suffer from a paradigm flaw which blinds them to what is really going on.  Their dials don't really reflect any reality, and instead are just painted on the window, and thus they never see the bump coming when they run off the road and over the curb, and it takes them by surprise, because the scene they've painted on the inside of the window shows them still on the road.  Thus, they blame the crash on the unpredictable and unnecessary animal spirit lemming urge to run off the cliff  -- "what we have to fear, is fear itself!" 


I think that some in government do understand the reality of my original post, but they are more concerned with maintaining control, and thus pander to whichever way they see the wind of popular opinion blowing, and are somewhat amoral about the whole thing, in that they will pitch whatever story keeps them at the steering wheel.  The problem is that since the vast majority of our population has no useful conception of money, their opinion tends to wander, and thus actions of government tend to zig and zag in a somewhat random fashion.  In short, I don't think anyone, myself included, has any idea how it will actually play out.  However, that being said, Bernanke is human, and I think he has been stung by criticism and the recurrent failure of intervention to keep the jet engine lit, and at this point wants the population to lean with him in the direction of easing rather than complaining bitterly about the fiat being jammed down their throat. Thus, he will not intervene without a sharp correction, because only then will the population beg the Fed to ease, and will cheer mightily when it happens.  Because the correction has not been sharp enough, deflation expectations are currently too low, and that is the primary guage the Fed uses.


I'm not actually a believer in the "government with a big sinister master plan" idea.  I think that there are certainly some in govenrment pushing for a particular centrally controlled outcome and willing to do whatever it takes to achieve it, but I think they are outnumbered by glory seekers with no ability at all except to spew sloganistic sound bites, and thus it becomes an exercise of herding cats for those seeking to control the nation.  But, they are screwing with an insanely complicated piece of technology, and don't reallly have any idea what they are doing, and thus even though they have no intention of holing the thing below the waterline, they may accidently do it anyway, and in this case I don't think an extreme outcome is impossible.

Thu, 07/26/2012 - 11:26 | 2653305 dizzyfingers
dizzyfingers's picture

 "I don't think an extreme outcome is impossible"

What a bland and soothing way of saying "a universe-class crackup is just around the corner..."

Thu, 07/26/2012 - 12:25 | 2653543 twotraps
twotraps's picture

Thanks for the reply.  I agree with 'no master conspiracy' comment only because the bulk are not that smart about the economy.  They have the luxury of not having to understand because their First Objective usually does fine in covering it up, and that is keeping the populace complacent with bullshit and rule changes to both pander and keep the peace.

What I meant to say, or feel strongly about is just illustrated today....mkts up on a rumor of intervention.  They actually do play a role and I thought one possible scenario was to allow the mkts to break down a bit before jumping in with intervention.   There is no way to know.   They have done an awesome job of slowing down the entire process simply with what they may or may not do since they have proven their ability to take action with ZIRP and printing.   They have our attention...we wait....the mkt hacks around....corporations raise huge cash just in case...............and nothing is really accomplished other than to waste their most precious asset -- which is the 'time' the bought with all their action thus far!!!!!!   WTF?


Without a huge shock or rule change of some sort, we could be here in another 4 yrs talking about the same shit.  Again, enjoyed your post.

Thu, 07/26/2012 - 07:19 | 2652430 bozzy
bozzy's picture

Gwiss - nicely put and entertaining too. But: which are you - the implacable enforcer or the bad-boy-brother in law? These are well formed characters from everyone's life - you don't write soaps by any chance? On a more serious note, it is difficult to share your somewhat charitable view of the insouciant administration simply trying to do what's best. In my model, the only consistent property shared between the protagonists is the desperate urgency of self preservation at the expense of any and all other groups.

Thu, 07/26/2012 - 10:01 | 2652914 gwiss
gwiss's picture



Yes, I agree, all simply seek self preservation -- that is human nature.   Some see individual safety in herding, while some see it in hunting alone.  Thus those who propose herding do so because they believe this best for their individual outcomes.  In my original post, I believe the brother in law to tries to re-ignite the party because he wants to be the one to save the party, not because he ranks the interests of the other guest as higher than his own.


You ask whether I am the boozer or the enforcer.  Remember the parable of the blind men and the elephant, each one convinced that the specific part he was feeling described the whole elephant?  In a way, this is economics and philosophy.  Mises, Hayek, Fisher, Minsky, Friedman, and even Keynes have useful descriptions about how certain facets of an economy work.  Thus to some extent, I worship at all the alters, not because I am somehow smarter, but because I accept that reality is deeper and more complicated than I can ever understand.  It is a polytheist rather than a monotheist world, and each solution comes with its own drawbacks.


Austrian economics, which really more describes the acceptance of an Aristotelian "physical reality is trump" paradigm and the subsequent attempt to accurately trace causality through this paradigm, has the best description and prescription for creating a stable system.  But, we do not currently have an economy based on this paradigm.  Thus, embracing austerity and ending the nonsense of monopoly markets for wages, interest rates, and money supply is the fastest way to convert our current system back to one based on Austrian principles.  But, since we don't currently have an Austrian system, this will be very painful for those who are still mired in a Platonic "world of Ideas is trump" mindset.  We have to respect the reality that Austrian solutions won't make a non-Austrian system run again, and as much as we would like the alcoholic to stop drinking, he won't do so until he recognizes to his core that sobriety is superior to intoxication, and that he wants sobriety more than he wants intoxication.  Rehab doesn't do squat, because it tries to convince the alcoholic of something that he has not yet accepted.  Thus an Austrian system will not work if the population doesn't yet want it.


Along these lines, conversion to an Austrian system will be too painful for many, with the result that partway through they will rebel and jump in the direction of whomever promises to stop the pain. All totalitarian systems begin from this seed.


I actually think Steve Keen's solution of inflation given directly to the people, who must pay down existing debt before being allowed to spend, is the best way to restart the system we have.  But, since the system we have steers itself into oblivion automatically, this is not really a good long term solution.


To some extent, we must embrace pain if we wish to learn and change.  There is no shortcut to that process.  As the saying goes, "Great nations rise and fall. The people go from bondage to spiritual truth, to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependence, from dependence back again to bondage."  If we are starting from apathy and dependence, there is no way to reach spiritual truth and its accompanying great courage except to go through bondage again.

Thu, 07/26/2012 - 09:25 | 2652810 acetinker
acetinker's picture

Brilliantly stated remarks, thank you!  My daddy would simply have called our situation a "self-eating watermelon".

Thu, 07/26/2012 - 03:01 | 2652222 huckman
huckman's picture

Global Default- bring it!

Thu, 07/26/2012 - 03:04 | 2652226 Johnk
Johnk's picture

Two words: ice floes

Thu, 07/26/2012 - 04:57 | 2652276 falak pema
falak pema's picture

Charybdis of austerity and Scylla of insolvency; says it all. No way out for governments!

How did we get here in first world  DM?

the Government sold out to the private oligarchs! Since the deregulated Big Bang! Twenty years of private gravy train!

Has this happened before? Yes during the Crusades! The Templars were richer than the States! How did they get rich?

As MIC of that age turned bankers thanks to their system of private Trusts, where the rich left them their wealth in order to win eternal peace in Heaven through charity to the GOOD cause!

And all the while the Templars were running a private system of churches where they competed directly with the Catholic church collecting more money from the people! They got richer than rich as a network all over Europe and in Holy Land! 

After a hundred years of this type of side business, the Templars having lost the Holy Land as soldier-priests, came back to lord it out as private Oligarchs richer than the kings!

As the king of France, Philip the fair, was bankrupt from fighting wars he decided to take out the banksta Templars and confiscate their wealth! The best and the brightest of that age were now the hunted! 

Game over for the TEmplars, the WS bankstas of that age.

Lesson to be learnt from history!

Watch the Statists now cream the private sector by extorting their ill gained wealth to fill the coffers of the  state! 

History will repeat in first world! 

Thu, 07/26/2012 - 04:59 | 2652277 juujuuuujj
juujuuuujj's picture

It's not impossible - Bulgaria did it at the expense of a third of its population emigrating, and its people becoming the poorest in all of Europe. 

Thu, 07/26/2012 - 05:12 | 2652282 ak_khanna
ak_khanna's picture

Countries around the world are taking on more debt without any fruitful attempts to curb their expenditures. This has resulted in a much more fragile and artificially held up financial system which is on a much shaky ground than it was in 2008. In 2008 companies failed due to excessive leverage and debt and now countries are likely to default because they took on the same bad debt on themselves. The borrowing costs or bond yields for these countries are again at record highs for the year due to their deteriorating financial condition. No economic recovery is possible until large scale job creation takes place, the chances of which are miniscule.

Thu, 07/26/2012 - 06:34 | 2652332 Escapeclaws
Escapeclaws's picture

Terrific article, though there are grammatical mistakes mostly involving agreement of nouns and verbs. Definitely worth reading and saving. A great synopsis of what has happened though there is nothing that we haven't seen before. The value is in how well everything is put together into a narrative.

Thu, 07/26/2012 - 06:50 | 2652351 Heroic Couplet
Heroic Couplet's picture

Close Swiss Bank accounts and Cayman Island accounts. See if that helps.

Thu, 07/26/2012 - 07:08 | 2652394 overmedicatedun...
overmedicatedundersexed's picture

would you trust your money with an Obuma , a Ben, a pelosi, a bush?? well you do.

try hiding out in PM's or, old stamps or books..but anything in banks, brokers lol brokers, ira 401k's,well that is one low hanging fruit to the NWO sociopaths.

Thu, 07/26/2012 - 07:05 | 2652389 Bogdog
Bogdog's picture

I need a happy place.

WHY is EURUSD spiking high this morn?

Thu, 07/26/2012 - 11:29 | 2653324 dizzyfingers
dizzyfingers's picture

"WHY is EURUSD spiking high this morn?"

Lies, obfuscations, cartel-owned media asleep?

However, here at zh, fine minds are awake and active.

Thu, 07/26/2012 - 07:08 | 2652393 extendedorder
extendedorder's picture

The only viable way out for the politician pigs is inflation no doubt.

Thu, 07/26/2012 - 10:07 | 2652972 dizzyfingers
dizzyfingers's picture

 The simple truth is that WITHOUT the Federal Reserve System there can be no continuing march towards socialism, and WITH IT there can be no free economy. That is why the adherents of liberty and capitalism cannot rest until the Federal Reserve System has been abolished. (Sennhoiz, American Opinion, April, 19,58; quoted ir Kenan, Federal Reserve Bank, p. 251; emphasis added.)

Thu, 07/26/2012 - 10:30 | 2653075 falak pema
falak pema's picture

the FED is the true expression of US capitalism; a private bank that answers to no one except its own shareholders; the TBF oligarchs of global capitalism.

Change your language and you may learn to discern fiction from reality. 

Thu, 07/26/2012 - 10:16 | 2653008 dizzyfingers
dizzyfingers's picture


Hans F. Sennholz


Thu, 07/26/2012 - 11:12 | 2653254 dizzyfingers
dizzyfingers's picture

"'safe' assets are at unprecedented valuations"

...."unprecendented"... doesn't that mean overvalued?


Thu, 07/26/2012 - 11:30 | 2653328 covert
covert's picture

careful anticipation is the key to success.

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