An old paper prepared by Boston Consulting Group back in 2011, warning that when all other avenues for resolving (or rather, just kicking the can down the road) the US-European debt crisis have been exhausted (austerity, pump priming for growth, debt restructuring, ZIRP, QE, inflation), authorities shall have no choice but to resort to the age-old solution: a large one-off Wealth Tax.
First, the preamble from the old 2011 ZH post:
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 BCG 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.
And as BCG predicted then, and as we have seen played out over the last 3 years of the Eurozone lurching from one crisis to the next on what is basically the same unresolved debt problem, all other alternatives have since 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.
And the amount needed to tax from the assets of the wealthy? Roughly 30%.
Think that number wouldn’t be too far off from what is happening in Cyprus right now. And Cyprus may be just the first little example of what may soon be happening across many other countries and jurisdictions.