Courtesy of Russ Winter of Winter Watch at Wall Street Examiner
Two terrific write ups from Boston Consulting (BC) are available entitled Stop Kicking the Can Down the Road and also Back to Mesopotamia. The later goes right to the heart of what is necessary to reset the global economy. Taking each country and applying a less sickly debt level equal to 180% of GDP they present the (my) case. Anything over 180% represents a serious debt overhang. It is only when one totals up all the enormous haircuts of wealth does one truly appreciate the problem. That is especially made true when the powers to be can’t even step up to the plate to write off and restructure a nation as far gone as Greece which in 2009 would have needed an overall haircut of $175 billion, almost all of it government debt. Now it is much more. The problem of course is that Portugal and Ireland need big debt forgiveness in their household and corporate (banking) sectors which are far worse off than Greece’s. I have no idea why they used 2009 debt levels as the numbers are much higher now, nearly 100% government debt in the case of the US. Still the first chart gives us a handicap of what is required and the second chart offers the update.
In order for Euro zone as a whole to get back to sustainable levels, about $8 trillion in debt needs to go. For the US it is $11.5 trillion. They didn’t cover Japan, but you get the picture. Interestingly BC suggests giving the haircuts primarily to the wealthy and banksters where the real money is. Boa ideia! Without debt write offs there are only three other ways to deal with this, grow, but in the case of these countries growth only comes with huge commitments of government spending and debt which far offsets any stimulative benefit, and that has now backfired. Next is save and payback, also known as austerity, which is hard to get off the ground and takes years to execute. The last option is inflation, which I have railed about incessantly as an economy destroyer and distorter. Serious inflations diminish economic growth.
In kicking the can, BC discusses the current regime of financial repression, whereby interest rates are pinned will below GDP growth and inflation. They suggest (using 2009 data) that if the US could keep interest rates 3% below GDP growth, then the debt overhang could be worked off in 13 years. The problem as we have seen in the last year is that this approach is fitful and has been rendered completely worthless when debt levels are growing at double digits levels. So in reality financial repression has been a complete farce.
Finally BC discusses all the dangerous napalm laying around as monetary base, by far the highest in the history of the US at 17% of GDP. As the QE2 experiment ran it’s course, the Fed had to put a hold on it, and now within just one quarter, and after a very modest dip in monetary base (MB), the markets have given up most of the run up seen during QE2. This offers clues as to what to expect should more be drained off. BC states that more MB will need to be reduced should interest rates start rising because of national credit concerns or loss of faith in the whole Wizard of Oz system. According to BC (pages 14-15) there is enough nitro glycerin in place that an increase to 1.5% interest rates in 3-month Treasuries would result in hyperinflationary conditions should the Fed fail to drain off $1.3 trillion in the MB.
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