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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DosZap's picture


Try crosing with a vehicle with Texas plates.................

Your transportation will be dissasembled.( they assume EVERY Texan carries weapons).

AnarchyInc's picture

Every Texan should carry weapons.  There are two types of people:  those with weapons and victims.  Us Texans will need them when blood-crazed Lincoln II sends the murderers for the state across the Republic of Texas border after we secede due to insane economy policies.  (Just like the first time).

DoChenRollingBearing's picture

@ Snidley,

I renewed my passport some 6 months ago.  What a trial that was!  And it is MUCH WORSE to apply for a passport if you have never had one.  Very onerous forms and documentation requirements.  I am glad that our daughter already has hers...

Easier to be an illegal here.  :(

Grimbert's picture

I was worried going to the USA last year with a DR10 (look in wiki) from 2003, worried if I classed as a non-visa waiver person as a result. Is my crime 'moral turpitude'? wtf, I searched for hours on the internet trying to find out, and all I could get was Homer Simpson drink driving and not getting thrown into prison, the bastard. The concept of moral turpitude doesn't exist in England therefore I claimed to be an honest person. I had the good fortune to travel to the usa via Toronto where you go through american customs in Canada, so if you fail their tests you don't get sent back to another continent. Just in case I was wrong.

Syrin's picture

Yeah no kidding.   Try to take a third of the property of the productive members of society (post tax property), and see if it doesn't spark an armed uprising.

mkkby's picture

We won't have a 30% wealth tax.  We will have a 30% devaluation over the next 10 years, just as we had the last 10.  No change.  Ho hum.

Whalley World's picture

In an in

In an interview with goldseek radio, Jim Rogers said the new place to be for investment is North Korea and Myanmar!
I wuld prefer Zimbabwe to either of these countries.

Shaktipalooza's picture

North Korea sounds like a terrible bet. On the other hand, I was in Myanmar last fall and it would make perfect sense if you can figure out how to invest safely. Beautiful place that's been held back for a very long time.

The Navigator's picture

Last year I bought bundles of 50 Trillion and 100 Trillion Zim notes to give away as 'funny' gifts and to remind friends of what inflation can bring - wouldn't that be a hoot if those bundles turn out to be worth more than FRNs?
Long Zim Dollars???

Either way, short USD and long anything else of (real) value. 

johnQpublic's picture

before i let them take 28.7% of my wealth, i will empty the bank accounts, money markets and stock portfolio and go on a coke binge motherfucking scarface would be proud of.


i didnt create the problem

and i wont pay for it

keep all your government bennies, i'll take care of my self

even let the roads go to shit

i'll walk or ride my bike

Comay Mierda's picture

if a 30% wealth tax is coming, you will only hear about it after all your accounts have been seized, and you are in a FEMA camp

macholatte's picture

Now consider how loudly the unions and civil servants squealed when they were asked to give up a pay raise, give back 3% of bloated retirement pay, etc., etc. Nothing like this wealth tax is going to happen. They can't even get a little surcharge on income over $1M nor a real cut to spending. The only solution to this is going to have to come from the public and it's probably going to be in the form of serious civil disobedience in the form of uncontrolled mass riots in many, many locations and countires which requires leadership which is not likely.... OR ...... they continue to stall for time and in 10 years the sheeple have been so dumbed down and enslaved that they know not what has happened to them. That is a much more likely scenario in my mind. The oligarchs have no intention in taking a hair cut so don't plan on it anytime soon. JMHO


"He gazed up at the enormous face. Forty years it had taken him to learn what kind of smile was hidden beneath the dark moustache. O cruel, needless misunderstanding! O stubborn, self-willed exile from the loving breast! Two gin-scented tears trickled down the sides of his nose. But it was all right, everything was all right, the struggle was finished. He had won the victory over himself. He loved Big Brother."

1984 (Orwell)


BigJim's picture

I don't think they've got ten years. But I do know they have a mighty fast printer.

DosZap's picture

Comay Mierda,@ 16:44

 after all your accounts have been seized, and you are in a FEMA camp

YOUR accts may be seized, and YOU may be in a FEMA camp,but I guarantee you NEITHER will be the case for me.

Just exactly how many of the enemy would it take to pull your scenario off?, w/out a humongous backlash.

Comay Mierda's picture

the way the feds will try to engineer it is to make you WANT to come to a camp

classic problem - reaction - solution technique

if you dont think thats possible, ask yourself if you would have ever thought before 9/11 that there would be an army of TSA agents at airports having crippled old ladies removing their diapers for inspection before boarding planes. the sheeple begged for this type of police state after that.

and still to this day, steel doesnt melt at 1200 degrees farhenheit, towel heads that cant fly cessna's still cant fly jumbo jets, and bin laden was never indicted by the FBI for those attacks because they lacked hard evidence.

dont take my word for it. research it yourself

DosZap's picture


Been around a LONG time, and am familiar with Hegelian Dialectics, and there is NO Way I would vountarily go into any Govt camp.


I did not say it wasn't possible for OTHERS to do so, I just said I WAS NOT GOING.

What part of NOT GOING do you not get?.

Comay Mierda's picture

then i misunderstood. i will also be one of those who see through the BS and not go

DoChenRollingBearing's picture

JohnQ, Comay, DosZap,

I may be preaching to the choir here, but GET STARTED (those who have started, start accelerating!) in your preparations!  All you other ZH-ers too!

A Fascist America would be a terrible thing (NO, we are not there yet).  Leaving in time is the tricky part.  Leave, and then everything works out OK?  Then you may have a hard time coming back and be stuck in, say, Peru!  Wait too long, they seize your wealth (here) and FEMA-camp you.

A tricky problem.  Stay nimble, stay alert, stay prepared.  Oh, buy gold while you're at it.

DosZap's picture



I hear ya bro,but when I said NO camps for me, that's what I meant.They will not seize my wealth, because I will not have it.

How do you get stuck in Peru(how do you get to stay?),if things are ok here, you have a passport,and can always return.I can think of a lot worse things than being stuck in Peru.

Gonna email ya,have some questions.


DoChenRollingBearing's picture

Fire away brother DosZap!  Emails that is!  Not lead!

Syrin's picture

There are far more than you realize.   Gun and ammo sales aren't at record levels without a reason.   I've stockpiled 2 years worth of food, water, weapons, ammo, etc.  A substantial number of people I know are doing the same.   There will be a SERIOUS backlash if they try anything like this at all.


Suggestion.   Keep as many of your assets OUT of the banks as best possible.

DosZap's picture


They have a clue, but they do not know the extent nor the numbers, nor the expertise levels of those that will stand.

That's the  UNknown variable.

The people I have known have been in/at this all their adult lives, Mil/Ex Mil/LE/Ex LE, preparations have been balls to the wall for a showdown (possibility of one) since at least Clintons first day in office.

Why do you think the .gub has hired and ramped up so much,so fast, and curtailed our rights as they have............systematically taking it apart.

The Navigator's picture

Keep as many of your assets OUT of your house (that require registration, receipts, etc) as best possible also - i.e. guns, ammo, silver/gold - in multiple locations - but don't forget to draw a map an give to next of kin that can be trusted AND don't develope alzheimers.

AustriAnnie's picture

No, you two are the types they don't even INVITE to the camp (they fear you'll incite uprising).

You types, they just shoot on sight.  

Get invisible boys! (Or shoot first)

mkkby's picture

When the tap water doesn't flow and the lights don't come on, everyone will gladly go to the "freedom" center for a meal, hot shower, free TV and video games.  You may be the 1 in a million that won't, but so what?

Uncle Remus's picture

You might want to consider Hezbollah, their shadow government social services and Lebanon.

The Big Ching-aso's picture

For some reason I think that especially blue-collar type union members won't be too happy about all their accounts getting seized plus being interned in non-union FEMA camps for non-payment of their new non-union dues.

Call me crazy but I can see where Operation Fuck the Public at Large (OFPL) will not go quite as smoothly as let's say muddle-judging through a tie on Dancing with the Stars. 


Blorf's picture

Sorry G-man I'm broke!  All those PMs I bought?  Sold on craigslist, money spent on hookers.  Definitely not secured in a foreign country with no US paper trail.

NidStyles's picture

Can't you read? He said they weren't secured. Neither are mine. 

Dick Fitz's picture

While the authors understand the problem, and articulate it well, their solution is untenable and will never work. Taking 30% of the money in the banks as an ex post facto tax and expecting the populace to just swallow it is absurd. Even though it is a fraction of the lower and middle classes that are voicing their distaste for Wall St today, such an action would result in a bloody revolution overnight. Elected officials who supported it would be forced into hiding for fear of lynching, and the dissolution of the federal government would be swift and brutal.

After re-reading the paragraph above, maybe it wouldn't be such a bad thing if TPTB pursued this course of action- at least DC would be dead, and the States would be free to experiment with true freedom and individual liberty.

Dick Fitz's picture

Oh, I must add that the multi-national banks would be robbed of any currency in their vaults, and the gold (if it exists) in their vaults would be liberated. All federal lands would become state property also, with any mineral or energy rights open to extraction.

The more I think about this, the more I support the plan!

Snidley Whipsnae's picture

"such an action would result in a bloody revolution overnight."


People revolt when they are starving and when they see their families starving. I have said this many times but most here have not studied history...or, ignore history.

A plot to assisinate FDR was hatched when he began introducing programs that would relieve the starving...but the plot failed and FDR had the good sense to keep the scheme under wraps.

Of course, the 1% that have most of the wealth will go to great lengths to preserve their wealth but they will not succeed against billions of starving people with no hope.

In times like these some populist (think Hitler) always finds an audience among the hungry. If the current crop of Pols/banksters fail to act they will lose all their wealth to a populist uprising of the hungry. Wanna lose 33%...or 100%?


Sophist Economicus's picture

and FDR had the good sense to keep the scheme under wraps.


Boy, I'll say!   NEVER let the citizery of a Republic know what you're gonna stick'em with until its too late for them to do anything about it

baby_BLYTHE's picture

I believe Max Keiser and Marc Faber had said in Egypt 40% of income goes toward food alone, this was one of the many catalysts for their Revolution. It will be much worse in American when the dollar collapses and inflation explodes during the coming years.

Syrin's picture

*gives Dick Fitz a high five*


Amen to that bro.

Bicycle Repairman's picture

The authors of this article are politically tone deaf.  This could never happen.  They can't even get Greece to pay up.

BigJim's picture

@ Dick Fitz

While the authors understand the problem, and articulate it well, their solution is untenable and will never work. Taking 30% of the money in the banks as an ex post facto tax and expecting the populace to just swallow it is absurd.

Chum, what did Americans do when FDR depreciated their wealth by 69% in 1933... by seizing their gold, then changing the 'price' of gold from $20.67/oz to $35/oz?

Not a fucking thing.

The morons even voted him back into office next election.

But I agree - they're far more likely to just inflate their way out of the problem. It's easier - the sheep won't know what's hitting them.

AustriAnnie's picture

And yet, time and again we have been taxed through inflation, and the populace IS swallowing it.

Fill in the blank:

Between the year ___ and today, the dollar has lost 30% of its purchasing power.

Since that year we have had __ revolutions.

Yep.  The people take it.  And starving people, in fact, don't always revolt.  In history you see many instances where starving people are actually very easy to rule over, they simply accept a loaf of bread for being silent and good (two loaves if they turn in a rebel conspirator or hoarder of illegal goods).

I WISH for people to revolt.  I think that rapid collapses allow for that.  But long, slow, collapses just mean the people accept their loss of freedom in increments and hardly notice.  For this reason i actually find myself sometimes hoping for the most severe, quick collapse possible, while people still have a little fight in them (and enough old timers are alive, as younger generations do not fear gov't nearly enough to revolt, and if younger generations revolt they will almost suredly call for MORE gov't in some Marxists form or another).

Snidley Whipsnae's picture

Well, it isn't like the US has not had extremely high marginal income tax rates in the past... And, we have heard rumors for the past several years of legislation to force retirement savings (401Ks, pension accounts, etc) into US Treasury purchases... As an individual you should take appropriate action if you can... From WIKI...

"During World War II, Congress introduced payroll withholding and quarterly tax payments, Franklin D. Roosevelt tried to impose a 100% tax on all incomes over $25,000[citation needed] to help with the war effort. For tax years 1944 through 1951, the highest marginal tax rate for individuals was 91%, increasing to 92% for 1952 and 1953, and reverting to 91% for tax years 1954 through 1963.[16]

For the 1964 tax year, the top marginal tax rate for individuals was lowered to 77%, and then to 70% for tax years 1965 through 1981. The top marginal tax rate was lowered to 50% for tax years 1982 through 1986.[17]

For tax year 1987, the highest marginal tax rate was 38.5% for individuals.[18] It was lowered to 28%, eliminating many loopholes and shelters, (with a 33% "bubble rate") for tax years 1988 through 1990.[19][20]

For the 1991 and 1992 tax years, the top marginal rate was increased to 31% in a budget deal President George H. W. Bush made with the Congress.[21]

In 1993 the Clinton administration proposed and the Congress accepted (with no Republican support) an increase in the top marginal rate to 39.6% for the 1993 tax year, where it remained" 

DosZap's picture


While that appears WE have been getting off lightly,we have not.

The rates shown for those past years the population did not have all the additonal taxes we have.

Bicycle Repairman's picture

Also there were a million deductions and loopholes.  Comparing today's rates to the past is BS.

Snidley Whipsnae's picture

DZ... So true.

Also, we have been moved into higher tax brackets due to inflation. IOWs, our purchasing power has gone down while our income tax burden has increased.

For that we can thank the Fed and it's scheme of 'inflation targeting.'


Here is an excerpt from a Marriner Eccles paper, made after the economic collapse and during the great depression... Yes, the same Marriner Eccles the Fed Building is named for... Eccles was one whip smart dude and a read of his entire comments is worth your while... link at bottom.

"It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they can not save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying. It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment."


Bicycle Repairman's picture

Marriner Eccles.  Could use him now.  You do have to ask yourself "What is in the upper regions of the elite's Maslow's triangle"?

Sophist Economicus's picture

Thank God we have the STATE protecting us from ourselves....LOL

Golden Showers's picture

Define "wealth".

Since emptying my own bank accounts and riding my bike, I can afford beer and PMs. Got some beans and rice in buckets, too.

Holy Shit! I'm RICH!

-Don't put off for tomorrow what you can do today.



donsluck's picture

Historically, paved roads were first built for bicycles, the cars at the time didn't need them.