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You Can’t Solve A Debt Problem With More Debt

Friday, January 6, 2012 0:25
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Business Insider

“Whoever cannot seek the unforeseen sees nothing for the known way is an impasse.”
― Heraclitus, Fragments

Which path will we take? If we could only grow our way out of our sovereign debt problems. But growing debt creates even more problems if not dealt with, making it even more difficult to deal with; yet getting the debt and deficit under control brings its own form of pain.

As I keep pointing out, there are no easy choices left. Some countries must choose between difficult and very bad, and others are faced with either disaster or calamity. Greece simply gets to choose what it wants to be the cause of a depression. Long and slow or fast and deep? Choose wisely.

It’s that time of year when we start thinking about what the next may hold for us. I am reading and thinking a great deal about my annual forecast issue next week, taking some time off from my usual Friday missive; so this week we look at what I think is one of the best pieces of analysis I have read in the past few months. It is from a private letter for the Boston Consulting Group, and Dan Stelter graciously allowed me to let my friends read it.

Follow this thinking carefully and then think through their outline of what a country would have to do to leave the euro, which starts at the subhead entitled “What if… ?”. Then ask yourself what do you need to do. The short answer from me is that you need to consider more what you already own rather than what you should buy.

At the end of the letter is a link to an in-depth review of what scenarios businesses should be considering, but it will also work for individual investors. Now, let me turn it over to Dan and David.

Collateral Damage

What Next? Where Next?

What to Expect and How to Prepare

David Rhodes and Daniel Stelter

January 2012

This paper covers some familiar ground in order to remind readers of the interplay among the most important economic developments, considers the scenarios for which companies should prepare, and suggests some steps that prudent companies may wish to consider. For those readers who are well acquainted with the economic scenarios described, we suggest that you start reading at “What Should Companies Do to Prepare?” beginning on page 13, below.

The economic travails of much of the West are reaching a decisive stage as the year ends. In 2008, we predicted sluggish recovery and a long period of low growth for the West in a two-speed world. This picture does not now properly reflect the downside risks. The policy of “kicking the can down the road” is failing, as the intensifying crisis in the euro zone and the failure of the G20 summit in late October clearly demonstrate. As to December’s European summit, we describe its impact later in this paper.

Such extreme uncertainty is challenging for companies trying to prepare their budgets for next year—or, more fundamentally, trying to plot their strategic course. It helps to have a clear understanding of what may happen and why it may happen. So before we address the question of which scenarios to expect and how to prepare, let us remind ourselves about the root of the problem: the West is drowning in debt.

A World with Too Much Debt

Total debt-to-GDP levels in the 18 core countries of the Organisation for Economic Co-operation and Development (OECD) rose from 160 percent in 1980 to 321 percent in 2010. Disaggregated and adjusted for inflation, these numbers mean that the debt of nonfinancial corporations increased by 300 percent, the debt of governments increased by 425 percent, and the debt of private households increased by 600 percent. But the costs of the West’s aging populations are hidden in the official reporting. If we included the mounting costs of providing for the elderly, the debt level of most governments would be significantly higher. (See Exhibit 1.)

Add to this sobering picture the fact that the financial system is running at unprecedented leverage levels, and we can draw only one conclusion: the 30-year credit boom has run its course. The debt problem simply has to be addressed. There are four approaches to dealing with too much debt: saving and paying back, growing faster, debt restructuring and write-offs, and creating inflation.

continue at Business Insider:

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Total 4 comments
  • Anonymous

    But what about the Republican Party’s , from Reagan own lips , it is borrower and spend . That is the way to growth!

  • Georgesblog360

    Credit is just access to other people’s money, and that watered down by fractional banking. The problem is that the world has run out of “other people”. Even nations with trade surpluses are holding someone else’s borrowed debt.

  • Anonymous

    I think this segment I found says it all…

    Accusing others and failing to include oneself as part of the blame will not change one’s lack of good fortune even an iota. Replacing one’s false source of wealth with another similar source is not likely to work either. Relying on this alone will only allow things to go from bad to worse, and although things may appear to improve, unless the source itself is rectified, it will only end up being just a temporary fix in preparation for an even greater upheaval. The only answer for a true solution, that will help humankind end to its present economic and environmental downfall, is for humankind to overcome its long–standing obsession with self–indulgence and replace it with a fully–fledged determination to achieve a future wealth that is shared equally by everyone. If this is not quickly adhered to now, then the present crisis will most definitely deteriorate into a far worse scenario that may then be irreparable. (Taken from the book Ztingar)

  • O. Ryan Faust

    Absolutely love the political cartoon. Pelousi, Reid, Boehner & Obama all broken legs from trying to ‘kick the can down the road’, but the can has gotten too big!

    Never heard of Chip Bok, but he’s an Absolute genius..

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