The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis"

Tyler Durden's picture

Denial. Denial is safe. Comforting. Religiously and relentlessly abused by politicians who don't want nor can face reality. A word synonymous with "muddle through." Ah yes, that "muddle through" which so many C-grade economists and pundits believe is the long-term status quo for the US and the world just because it worked for Japan for the past three decades, or, said otherwise, "just because." Well, too bad. As the following absolutely must read report, which comes not from some trader of dubious credibility interviewed by BBC, nor even from an impassioned executive from a doomed Italian bank, but from consultancy powerhouse Boston Consulting Group confirms, the "muddle through" is dead. And now it is time to face the facts. What facts? The facts which state that between household, corporate and government debt, the developed world has $20 trillion in debt over and above the  sustainable threshold by the definition of "stable" debt to GDP of 180%. The facts according to which all attempts to eliminate the excess debt have failed, and for now even the Fed's relentless pursuit of inflating our way out this insurmountable debt load have been for nothing. The facts which state that the only way to resolve the massive debt load is through a global coordinated debt restructuring (which would, among other things, push all global banks into bankruptcy) which, when all is said and done, will have to be funded by the world's financial asset holders: the middle-and upper-class, which, if BCS is right, have a ~30% one-time tax on all their assets to look forward to as the great mean reversion finally arrives and the world is set back on a viable path. But not before the biggest episode of "transitory" pain, misery and suffering in the history of mankind. Good luck, politicians and holders of financial assets, you will need it because after Denial comes Anger, and only long after does Acceptance finally arrive.

First, let's recap why BCG thinks all the alternatives have been exhausted

We believe that some politicians and central banks - in spite of protestations to the contrary - have been trying to solve the crisis by creating sizable inflation, largely because the alternatives are either not attractive or not feasible:

  • Austerity - essentially saving and paying back - is probably a recipe for a long, deep recession and social unrest
  • Higher growth is unachievable because of unfavorable demographic change and an inherent lack of competitiveness in some countries
  • Debt restructuring is out of reach because the banking sectors are not strong enough to absorb losses
  • Financial repression (holding interest rates below nominal GDP growth for many years) would be difficult to implement in a low-growth and low-inflation environment

Inflation will be the preferred option - in spite of the potential for social unrest and the difficult consequences for middle-class savers should it really take hold. However, boosting inflation has not worked so far because of the pressure to deleverage and because of the low demand for new credit. Moreover the inflation "solution" while becoming more tempting, may come to be seen as having economic and social implications that are too unpalatable. So what might the politicians and central banks do?


Since the publication of Stop Kicking The Can Down The Road, a number of readers have asked us what would happen if governments persisted in playing for time. To what measures might they have to resort? In this paper, we describe what might need to happen if the politicians muddle through for too much longer.


It is likely that wiping out the debt overhang will be at the heart of any solution. Such a course of action would not be new. In ancient Mesopotamia, debt was commonplace; individual debts were recorded on clay tablets. Periodically, upon the ascendancy of a new monarch, debts would be forgiven: in other news, the slate would be wiped clean. The challenge facing today's politicians is how clean to wipe the slates. In considering some of the potential measures likely to be required, the reader may be struck by the essential problem facing politicians: there may be only painful ways out of the crisis.

At this point BCG goes into the details of why it is long overdue for reality to be finally acknowledged. We will skip this part as any regular readers of Zero Hedge are all too aware of reality, and how it is masked constantly by the mainstream media and its agents in all walks of life. The truth is far, far uglier than anything anyone in a position of power will tell you because acknowledgment would imply the need to come up with solutions that involve more than merely extending the event horizon for a little longer. Alas, even politicians now realize there is only so far that the can can be kicked.

There is one thing we would like to bring to our readers' attention because we are confident, that one way or another, sooner or later, it will be implemented. Namely a one-time wealth tax: in other words, instead of stealth inflation, the government will be forced to proceed with over transfer of wealth. According to BCG, the amount of developed world debt between household, corporate and government that needs to be eliminated is just over $21 trillion. Which unfortunately means that there is an equity shortfall that will have to be funded with incremental cash which will have to come from somewhere. That somewhere is tax of the middle and upper classes, which are in possession of $74 trillion in financial assets, which in turn will have to be taxed at a blended rate of 28.7%.

And if the prospect that very soon a government near you will force you to hand over a third of your wealth, here is the rest of the terrifying analysis of what will happen to the world in order to get it back in order:

A Program for the United States

The situation in the U.S. is different from that of the euro zone and, in a way, would be less complicated  to resolve.  The U.S. has all the levers with which to address the crisis and would not need to coordinate 17 countries with divergent interest. But some facts would need to be acknowledged before decisive action could be taken:

  • In spite of massive intervention by the Fed and the US government, growth remains anemic
  • The deleveraging of private households will have to go on for many years
  • The real estate market has not yet stabilized. About 11 million US households suffer from negative equity (their mortgage outstanding is higher than the value of their home). And the supply of homes is still in excess by 1.2 to 3.5 million (depending on the data used to estimate this number).
  • The US government deficit is not sustainable and will need to be brought to acceptable levels, which will slow growth and amplify the problems of the private sector.
  • In spite of a significant weakening in the dollar, the U.S. is still running a trade deficit that cannot be blamed on China alone. It reflects a lack of competitiveness in some key markets and the low proportion of manufacturing in the U.S. economy compared with countries such as Germany and Japan.
  • There is a striking similarity between the US and Japan in the development of stock and real estate prices (See chart below). A correlation does not mean causality, but it is a sobering picture should Ben Bernanke and his team fail to reflate the economy.
  • The interventions of the Fed, notably the programs designed to buy financial assets, have created a monetary overhang that could be the basis for sizable inflation in the future.

Addressing the debt overhang.

The US would also  need to reduce the debt overhang of the government, of consumer loans besides mortgages, and of non-financial corporate sector in the same way as in Europe. As exhibit 2 shows, the total debt overhang in the US equals $11.5 trillion or 77% of GDP. In the somewhat unlikely event of the US following the same path that Europe might pursue, a one-time wealth tax of 25% of financial assets would be required. As in Europe, this would also require the following initiatives.

  • Cleaning up the banking sector by calculating the losses and recapitalizing as needed – even if it means wiping out existing shareholders.
  • Additional taxes on real estate, including an increased capital-gains tax to offset the support for the real-estate market.
  • Creating an incentive for corporations to invest in R&D and new machinery by taxing profits not reinvested.
  • A commitment by the government to restrict its debt level and to prepare for the increasing costs of an aging population by either limiting benefits or raising the retirement age.

Addressing the fundamental issues of the US Economy.

We have argued for a long time that the US economy needs to address some fundamental issues in order to become globally competitive again. In putting an end to muddling through, the government might also embark on a major restructuring of the economy:

  • Reindustrialize and grow the share of the manufacturing sector from the current low of 12% of GDP to 20% of GDP . This might then allow a rebalancing of trade flows.
  • Revisit income distribution.  Most U.S. families cannot make up for their income shortfall with increased credit – and 41 million Americans are officially considered to be below the poverty line.
  • Take action to reduce dependency on imported oil by investing in new technologies and modernizing existing infrastructure.
  • As in Europe, an administration that truly bit the bullet would take a long-term view and invest more in education.

All this is still speculation. But history shows that the US economy, like no other, is capable of adjusting and implementing quite radical changes. And in our view, some of the actions described above might be pursued by the US government if things do not improve soon.

BCG's conclusion:

The programs we have described would be drastic. The would not be popular, and they would require broad political coordinate and leadership – something that politicians have replaced up til now with playing for time, in spite of a deteriorating outlook. Acknowledgment of the facts may be the biggest hurdle. Politicians and central bankers still do not agree on the full scale of the crisis and are therefore placing too much hope on easy solutions. We need to understand that balance sheet recessions are very different from normal recessions.  The longer the politicians and bankers wait, the more necessary will be the response outlined in this paper.  Unfortunately, reaching consensus on
such tough action might requiring an environment last seen in the 1930s.

Full report:


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Tsar Pointless's picture

Shit. Then there is only one thing left to do.


Dow 30,000, here we come!

Cynical Sidney's picture

either end the fiat enslavement or convince the world reserve status of the dollar guarantees world security and continuing globalization

slackrabbit's picture


Youre right....hmmm...maybe zimbabwe is the safer place to move to.

Pinto Currency's picture

What a brilliant idea.

Instead of writing down the debt and breaking-up the TBTF banks and reforming the currency, tax the assets of those who still hold them in country.


That's one way to deal with the looting of a country by the financial sector and its enabler, self-owned central bank.


Oh, and keep the central bank and debt-based money in place so that we can do it again.  That will go over REALLLL GOODDDDD.  Hyuk.

That Peak Oil Guy's picture

Assuming 3% growth to GDP while the cost of oil will continue to rise is probably a bad call.

-3% sounds like a more realistic number for long-term planning.  That is probably overly optimistic as well, though...

gmj's picture

Economists seem to be genetically unable to comprehend resource depletion.  Therefore, none of their predictive models will work.  But it isn't just an economic problem.  In a few decades, it will become a question of survival of our modern technological civilization.  The future will not follow the trendlines of the past.  The data is all out there, but the experts are too specialized to comprehend it.

Bicycle Repairman's picture

Rhodes and Stelter?  That's a comedy team, right?

PierreLegrand's picture

Oh yea Peak Oil bullshit...please we will be burning more oil in 20 years than we are now.

Jack Burton's picture

Yes, sure, but what will the price of that "more oil" be in 20 years time?

It ain't about lack of oil, it IS about what it will cost to explore, develope and pump that "more oil".  Peak Oil doesn't mean there isn't plenty of oil, it means the new oil that is found is expensive to produce. Big difference between Saudi oil just under the sand and oil from tar sands or deep water oil off of the Falklands or new arctic oil produced in the newly ice free portions of the arctic sea.

Dr. Acula's picture

>what will the price of that "more oil" be

When priced in gold, probably the same as it is now. The same as it was 60 years ago.


CrazyCooter's picture

60 years ago, some red necks in East Texas threw up some wood derricks, drilled, and pumped oil at great profit.

A similar field might exist in the Beaufort Sea off the North shores of Alaska.

Now, do you think the price of oil 60 years ago is the price of oil today is the price of oil tomorrow?

The energy inputs required to produce are steadily going up. At some point it will take as much energy input as there is output at which point its game over. At that time, there may still be a lot of oil somewhere, but it won't get developed.

It's unfortunate that so many people in the world rely on food production levels which are only possible due to fossil fuel inputs. I am 30 something and if I live to see 70 something I will have lived through some of the darkest moments in our species history.



Phil Free's picture

With usage-levels scaling as they are now, it's projected that after (aprox.) 2050, there will be no more oil left in the ground. 


All major reserves tapped.  Sure, they'll work to stretch availability with difficult/expensive extraction techniques w/ oil shale and such, but.  The sand countries that have one singular export - oil - will not be happy.  Along with the oil-consumers.  So, 40 years out things will get very interesting.

Oh regional Indian's picture

Peak Everything is correct. Even Peak Manliness and Womanliness. 

Tipping point is definitely behind us.

Of Tipping Points and Shape Shifting




AustriAnnie's picture

Doesn't matter how much oil is in the ground.  If the gov't declares an Energy Czar that controls it, you bet its gonna cost ya.

And I think we are looking at a situation where gov't (or friends of gov't) will be controlling a good deal of resources and distributing them "to each according to his need" (er, votes and campaign contributions).

I think politics are more important to consider, rather than arguing over how much oil there is.

How much of what we pay today is pure tax?  The cost to us of oil, not just at the pump, but the tax dollars that go into regulation and gov't "studies" and regulation of the transport of oil, and regulation of the environmental impact, and on and on.  Then you add that our tax dollars purchase most of the world's oil for our military, we are already paying a massive cost that has very little to do with the science of drilling it out of the ground.  Has much more to do with WHERE (within which nation's boundaries) the oil exists, and the control of that oil (domestic production as well as use, and geopolitically on the world stage).


buck4free's picture

You've got it Sir. Financial economy is the Matrix. Political economy is the real world.

Michael's picture


Queen Elizabeth II and Queen Beatrix will have to take a hair cut on their oil revenues in the not too distant future.

The Big Ching-aso's picture



Unless I missed it being mentioned, BCG has missed the biggest initiater and thus the biggest forthcoming 'tax' of all.   War.   World war.     All in the guise of international security.   Everyone's gonna pay either by fiat or by blood one way or the other, brother.   The economic engines of man against man are ready to rock and roll like never before.    There's no business like war business.   You can bank on it.

gmj's picture

Human population has increased by 500% since 1900.  I argue that this is mainly due to the utilization of fossil fuels for fuel, transportation, fertilizers, pesticides, plastics, tires, etc.  I argue that this is a population bubble, and is unsustainable without fossil fuels.  


"The era of cheap oil is over.  Current trends in energy supply and consumption are patently unsustainable--environmentally, economically and socially--they can and must be altered."  Nobuo Tanaka, executive director of the International Energy Agency (IEA), in World Energy Outlook 2008.


Oh, by the way, it's not just peak oil.  It's peak everything.  Go ahead and try to cleverly innovate your way out of that.  I predict that the human race will do what comes naturally, until it's much too late (which it may already be).  Then the usual mechanisms will take care of the population problem.  It's our choice:  controlled adaptation to the future, or uncontrolled.

Phil Free's picture

Heh.  Peak oil.  They sweat now.  40 years out, year 2050, projected all major oil reserves tapped? The "military-industrial complex", the world at large .. there will be much gnashing of teeth.

Ranger4564's picture

You can argue whatever you want but you'd be wrong.  Populations in Western countries with most technological development / access and use to fuel rose much less than the rest of the world that was not as technologically developed, and had little access to the fuel.

fishface's picture

yeah preserves the system and keeps parts of everyones debt.


This isn't about setting the serfs free.

Pinto Currency's picture


You would probably need a border fence to prevent people from flooding into Canada.

Ron Paul not so dumb.  Not dumb at all.


SeanJKerrigan's picture

That's whats amazing about that comment... I know people who are so indebted, they are seriously considering leaving the country to escape their loans.  There's talk that if this continues, the gov could make it very difficult to get a passport if you have significant debt.

In short: RON WAS RIGHT.  Again.

DosZap's picture


I know people who are so indebted, they are seriously considering leaving the country to escape their loans.

That makes ZERO sense...........if they are that far in debt, how the hell they going to leave, and what will they live on when they get there?.


Diogenes's picture

They will get jobs and start over just like millions of immigrants have done in the US. Starting from scratch in a country with a viable economy could be tempting for a young person with $100,000 worth of debt, a fresh degree, and a job at Best Buy.

The smart ones will max out their credit cards and start fresh with new wardrobes.

AldousHuxley's picture

Or they can come up with some bull shit "management consulting" business like BCG and write fluff pieces to pay for that useless "social" MBA with questionable ROI. BCG makes money bilking clients, so they don't have time for conslutants to write for free. The authors must be on the bench to write useless crap like this to ask for government money printing. When they do ignore them.


David Rhodes

Senior Partner & Managing Director
Global Leader – Financial Institutions Practice


Dr. Daniel Stelter

Senior Partner & Managing Director
Global Leader – Corporate Development Practice

Seer's picture

I'm a US citizen (born and raised), in which case I cannot comment on what immigration requirements are, but I CAN tell you that immigration to other countries (Canada, New Zealand, Australia to name a few) has strict requirements that immigrants have valid means of financial support (either their own financial assets or support from a sponsor).

People need to understand that debt isn't just public, it's also private (which, I believe, is greater than public).  With lots of debt being owed to financial institutions, many that are international.  You can run, but you cannot hide...  Better believe that TPTB are going to account for this.  Of course, one could probably "escape" to some "rouge" country, but I'm not thinking that such places are going to welcome poor white trash.

AldousHuxley's picture

when corporations outsource, they bring up "global diversity initiatives" to get you used to living the life style of the 3rd world workers.


NidStyles's picture

You need to get out more. Many poor third world nations have such an exchange rate that a poor white trash person with 10K is like a King. 

SeanJKerrigan's picture

Understand that much of this debt is student loan debt, which I'm sure you know, cannot be forgiven in bankrupcy court.

For example, a friend of mine is in 80,000 in student loan debt.  That amounts to about $800 in payments a month and adds about $15,000 in addition over the life of the loan.  She got this while studying Spanish abroad.  If she was not able to find a job here, she was seriously considering leaving the country as a way to refuse to pay her debts, which for her was totally plausible considering her ability to speak and interact with people in those countries.  Also, native English speakers are in high demand overseas.  She was planning to go back eventually anyway with the little bit in savings she had left, so it is possible.

There are others I've spoken to online who have similar circumstances, although they're thinking more along the lines of Australia.  Anyway, my point is, the idea that the government would want to keep people who have large debts inside the country is completely plausible.

EDIT: By the way, I fully recognize that it is largely her fault for agreeing to take on so much debt.  Also, about my friend, she did manage to find a job making a somewhat decent wage, although she will have to live at home for a wihle.  So things will work out for her.

Bicycle Repairman's picture

"She got this while studying Spanish abroad. "

Stop it!  I'm tearing up already.

Stares straight ahead's picture

Yes!  A real hardship case.  Where do i donate?

knukles's picture

When they make English the official language of Amhurikuh and throw all them immugrunts outta here, then she'll wish that she'd stayed the fuck overseas and taught or tended bar or whatever there instead of coming back here to the Lump of Hopportunity and bitched and pissed and moaned about being unemployed.  Hell, just go to El Salvador or somewhere and bitch about it.  Fit right in.

Jesus H., everybody is feeling the stiffie!
So what's all this crap about student loans, unemployment?
It's here now, real time, pervasive about the whole fucking country and right here in My Own Fucking Home In River City.
Deal with it.

Direct your anger, resentments, whatever where it will do some good.
Write your congresscritter, and maybe they'll sic the feebies on you and toss your ass into the camps till you brioghten up and do something productive.  Like participate in a National Service Day.


It is sooooooooooooooo fucked up.  

sgorem's picture

+14 trillion. (just please don't "sugar coat" the situation:)

SeanJKerrigan's picture

Like I said, not looking for sympathy for her in any way.  She brought it upon herself for the most part.  BUT, when you've got huge debts to pay, (or your rich and don't want to pay double taxes) leaving the country or renouncing your US citizenship has its draw.

CrazyCooter's picture

Well, if she is going to pack it in, have her read Richard Maybury's "What ever happened to Justice?". It is written for a young audience, but its points are pretty simple and sound; common law legal system is good.

The book scores all the nations based on a variety of criteria presented in the book.

Oh, and don't listen to Simon Black, I think his advice sucks (if you are not independently wealthy).



Cull Morgan's picture

> Richard Maybury's "What ever happened to Justice?"

Cooter, you're an interesting enough guy that I googled the book and now bought it.

Been wanting to learn more about common law ever since I tried to educate myself about all laws relevant to my mortgage. Fascinating to try to understand the history of it: livery of seisin, etc. "This turf and twig I give to thee, as free as Athelstan gave to me, and I hope a loving brother thou wilt be." But I digress...

P.S. Can't stand Simon Black! I know a bit about living in foreign countries, enough to tell that SB has no clue. He sounds like a precocious 15-year old writing articles about exotic locales based on their Wikipedia pages.

AldousHuxley's picture


Might as well be heard because her representatives only listen when there is money involved > wall st. lobbying money.


Otherwise, she can also go protest at her own university who is the one who screwed her over. Go hold a sign that says "degreed and unemployed" at the prospective student office. I'm sure the school will throw her some bs work to shut her up.



CrazyCooter's picture

If you had 100MM in cash and the cold logic calculation to travel the world and "sample its riches" you would sound like SB. Life is different when you can buy the locals. But that is a dangerous road when your interest is not real.

I am a simple man. I cut out the back of junk mail envelopes for scratch paper (e.g. grocery lists, etc). I have my simple pleasures though, we all do (e.g. peerless coffee).

But at the end of the day, I value community and my place in it.

Let me paint the picture in American terms. Just the other day, I saw this in the news up here:

The guy who is fighting against the mine has a multi-million dollar lodge and gives out a turkey to all the local residents every year. But he doesn't give a shit about the locals; he wants to bring in his "investors" and be "cool". Not a bad deal for the price of a few turkeys. Now he is getting his ass hung out when folks are looking at real work/jobs that will last decades.

It is a very interesting "debate" when you really dig in past the sound bytes. Read. Think. Come to your own conclusions. Just don't be spoon fed for god sakes.




Anonymouse's picture

Words of wisdom, Cooter.  Well said

Tompooz's picture

If there is  the smallest chance of confiscatory taxation, even if you are not very wealthy, it makes good sense to have an escape plan to spend your creative and productive energies in a (developing) country where you will be allowed to keep your capital and encouraged to grow it. 

ali-ali-al-qomfri's picture

sorry, and so some foreign country is going to willingly take American  debt-refugees, because they have a piece of paper degree that says they certified debt whores. you finished it honestly, she brought it on her self with some false scam of an education. Good luck anyway. you'll only make it past the guards at the border if you have gold to donate.


AustriAnnie's picture

Actually many work abroad programs offer free room and board plus plenty to live on (often tax free as "work internships" or "charity work" teaching English abroad.  

In 2002 I was offered a job teaching English with pay at $40 an hour in California for a church organization that was sucking grant money from the Federal government for outreach programs.  I did not take it because it was clearly a bureacratic nonprofit nightmare.  But this girl has many options.  Resort communities in South America have many opportunities for Americans who are bilingual.

Unlike Asia and Europe where everyone learns English in school starting at a young age, places in Mexico have demand for bilingual speakers, and like having Americans on their staff because many yuppie American tourists are scared to death of dealing with anyone who is not American.

Also, if she speaks Spanish she can suck the gov't for some eco grant to go study the rainforest in Costa Rica or some crap, and she'll make a fortune.

Good gawd, I can think of a million things she can do to earn a living in the U.S. or abroad.  Her problem, from what it sounds like, is that she doesn't actually want to WORK.  Might be a problem of a slightly inflated sense of entitlement, perhaps?

mkkby's picture

Shhhh.  Don't tell them all they have to do is stop paying or declare bankruptcy.  Let morons like that go.  Please.

SPAREPARTS's picture

Think of young people with 100k debt or 250k get educated borrow and blow this pop stand, thats my advice

Snidley Whipsnae's picture

Have you tried to renew your passport recently?

Try to get into Canada if you have a DUI on your record...

I don't have a DUI but have friends that do and cannot gain entry into Canads (and probably other countries).

When I first began traveling to Canada the only question asked by Canadian Customs was "do you have any American bacon?". If one did, customs confiscated it.

This ain't the relationship that I remember from 8th grade civics where it was stressed that 'America and Canada have the longest unguarded border in the world'. lol