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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X.inf.capt's picture

damn, and i was going to back up the truck on monday....

DoChenRollingBearing's picture

I'm visiting the ATM again on my way home...

X.inf.capt's picture

hey, bearing, thanks for the advise earlier, i think ill stay with silver, though, 

im not as rich as you:)

baten's picture

It's not that they are ignorant - it's that they know so much that isnt so...

Mark Twain

Ethics Gradient's picture

I agree completely. Except that bit about hamsters, but then what you do in your free time is none of my business.

Ruffcut's picture

Denial is easy. Then comes turd polishing, candy coating, capital raising by diluting, diluted planning, printing, manipulating, lying, cheating, conning, candy coating turds, an occasional easter egg hunt and there you have it.

upWising's picture

Don't matter how much frosting you put on a pile of still aint a chocholate cake.

I'm putting new battrys in my magic wand and re-soling my magic tap shoes.  That should work!

slewie the pi-rat's picture

ok, now the new juice for the magic wand is a great idea, i think

but if you have worn out the soles on your magic tap shoes, you might just put them up for a while and maybe hold off getting them re-furb'd til after christmas...

agent default's picture

This seems to be the way it will be implemented.  Stagflation will in fact do exactly what the article describes in an almost imperceptible way.  It will be just like the 70's, with equities going nowhere and commodity prices going up.  And no real political cost, because the process will be slow and will not shock the masses.

AustriAnnie's picture

Agree on all but the "political cost"

I think there will be huge cost, because the masses have priced in a recovery.  The exponential increase in credit has gone on long enough that people now in their 20's and 30's have known no other way.  They do not consider that debt was what got them everything they own.  They want not only their previous purchasing power back, they want it increased.

They simply NEED to have their free credit money machine turned back on.  I just don't see any way the masses will endure having their cable shut off and their gas tanks empty, without demanding the gov't steal from someone and give to them.  And the gov't will oblige.  I think the unrest has begun, albeit quietly and in isolated incidents.


Tuffmug's picture

BCG = more useless brainwashed idiots who believe more government coersion and taxation are the solution to every problem!

BORT's picture

It will take a civil war to get to this solution

Phil Free's picture

Try a world-wide, global revolution. 


When wallets and stomachs empty, eyes will widen and feet will move.

High Plains Drifter's picture

but, but , but, the deflationistas like mish will say that we are going into a deflationary depression..............

jdelano's picture

Morgan Stanley CDs now at 457 bps---far wider than soc gen. I smell smoke. Did zh light the match? What exactly is going on at ms?

darkstar7646's picture

Frankly, it is about the only way to get to the next election -- Print AND basically Jubilee the mess.

Between now and the moment that the President for the next four years is successfully projected by the networks, it basically has to end.

There is too much anger, resentment, and the like on the table for the next 15 months to go by without massive violence (even if only on the basis of the election and economy -- as I think we have hit the point where a significant portion of the voter base now believes that, for the future of the country, another significant portion of the voter base must be done away with and killed!) on an even larger scale than we've seen now.

Edward Fiatski's picture

Holeeee shit, indeed! Up on HFT volume.

Trillions of transactions. Per second, bitches. :)

darkstar7646's picture

What did I hear, that the average share of stock is held for 8 seconds?

There is no freaking "stock exchange" anymore -- the machines set the price and financially rape the real-time human traders blind.

Comay Mierda's picture

perfectly normal, nothing to see here, move along

upWising's picture

i'm going long on that yellow police tape; that helps keep folks movin' past all the stuff there ISN'T there to see.

 Also goin' long on that factory in Nebraska where they make "zero's"  When Ben and his helicopters are done, we're gunna need a lot of zero's


 and remember:
Jesus was American...that's why the BIble is in English. 


knukles's picture

If Jesus was Americun, the Bible woulda been in Americun, too.
Fucking simpleton.

Imminent Crucible's picture

No, no, no. King James was American, that's why the Bible is in Gideon's room at Motel 6. How can you guys be so stoopid?

Mr_Wonderful's picture

Actually Jesus never existed but that´s another story.

I posit that in last decades stupidity has become a norm as ever larger unemployment reservoirs have needed to be filled/hidden. Every idiot has a so called degree and by now the bar is about two inches above ground. Your dog probably could have good chance of landing a job at the Treasury. So, stupidity has in time become stimulative to the economy, something that is bound to crash down to earth with serious consequences, perhaps as early as next month.This is bizarro world as opposed to the market and its compnies where the incentive to hire total idiots for management would seem to be very limited. But in this system you have the intellectually challenged in charge and their hopeless policies damage and confound he market and its necessary functions. It can´t end well.



SheepDog-One's picture

SO sick of seeing the same old bullshit day after day. Wheres the SEC? Oh I remember, theyre worried about adjusting market breakers. The big one is coming and wont be recovered....this is conditioning only.

WhatCouldGoWrong's picture

Easy now, big dog. What do you mean, "where's the SEC"? They're right there for all to see. The chairman of the SEC, or his designants are part of the PPT.

For those ammo and food hoarders now amongst us and the young G-20 protesters taking a break from anarchy to post on ZH from their parent's basement, here's the wiki definition for the PPT;

WhatCouldGoWrong's picture

My guess is that you're looking at a PPT volume spike not HFT volume. Most of the HFT volume is exiting ES at that time of day. Today would have been truly ugly if your +20 day ends up in the red. Something had to be done....

Veteran's picture

le systéme D always seemed to work for the french

I am a Man I am Forty's picture

wait, hold on, i'm going to get my check book out.......fucking not

Chicago bear's picture

Good time for Dems to implement plan C: hand over control to Ron Paul now that the pin is out of the grenade. Then, 2016, liberal fascism/global government answers to the fact that he implemented austerity and taxed the rich against his pledge.

Who let this piece of analysis out of the BCG office? Don't they understand their clients need to keep the cat in the bag.  

upWising's picture

that's exactly the plan.  Let the next dude try to get the hysterical, madly scratching cat anywhere NEAR the bag, much less in it. It aint liberal fascism/global's greed.

Bicycle Repairman's picture

I hope Rick Parry publicly endorses this plan.

High Plains Drifter's picture

but, but , but , perry has friends with black hats and beards...

Bicycle Repairman's picture

I know.  Who better to introduce this POS that is also DOA.

darkstar7646's picture

Perry has been anointed by the Bildeberg Group, it appears.

My guess: He's the next President.


Ha! You think this is a Democratic plan?  Democrats aren't smart enough to conceive of this approach; they will merely do to the Republicans what the Republicans did to them in 2008--hand over a steaming pile of shit and say "your turn, but don't expect one iota of help from us." 

darkstar7646's picture

You honestly believe we make it another five years...

That's delusion enough!!

AcidRastaHead's picture

What? The extend and pretend strategy isn't going to solve the crisis?  Where's that dollar loving reporter when you need her.  She's got the answers.

kevinearick's picture


The S&P goes through 0 with a 40 VIX, and the Obama venture capitalists let out another $1B for solar, to dramatically increase amps while driving more holes in the magnet. Does it get any better?

Stupid + paper = stupid + paper

If you adjust for inflation/computer money, we are in a depression. If we were monetizing future productivity there would be a counter argument, but we are not. We are monetizing government, of, by, and for government. Government workers are paying themselves with artificial demand to put everyone else out of business. It’s not the fault of stupid individuals; they are playing the system the way it was designed to be played, of, by, and for zombies.

The private sector walks away, and the government takes over. If you’re a government-related worker that has made the latest cut, it doesn’t get any better, until the next cut. Government is not capable of producing an economic profit, try as it might, and placing a gun to the head of economic producers is counter-productive, especially when they can shut the economy off with a switch on their way out.

Currency has no intrinsic value. Giving 4% loans to the people creating massive economic losses and 0% loans to the governments employing them is not going to solve the problem. It is the problem, and inflating the balance sheets of corporations with no real economic function doesn’t help any. They cannot maintain what they have, but they want to build more? What is the function of Home Depot(Boeing,etc) at this point, and why isn’t its balance sheet elastic?

If you don’t set your own tax rate, you don’t own, have an equity stake in anything. Only make-workers make decisions based on government self-reinforcing data. Do the same when you want to build a bigger catapult. Government is simply a fulcrum supporting a counter-weight, which may be replaced at will. Normally, you are better off with the devil you know, but you only have yourself to blame if you think it’s God.

Every so often, the spring is released to reach the next orbit. Don't fight city hall; become city hall.

Re-examine the voices in your head frequently. Are they pulling you back or propelling you forward? Where are they coming from?

Stoploss's picture

You left out that the biggest loan went to the solar company run by Nancy Pelosi's brother in law.  Coincidence?? I think not.