The Decisive Question Is: Who Will Push the Reset Button?

We are currently seeing the “growth through low interest rates and high debt” economic model fail. It looks as if it will be an expensive “restart.”

Astonishingly, U.S. economic experts often respond to the question of how the world’s largest economy will find its way out of its debt trap with, “Muddling through.” With that, they do not mean relevant management theory (don’t laugh, it really exists), but rather a true muddling through. Have fun with that: The United States has a debt ratio of around 100 percent of the GDP. Above all though: Only roughly 56 percent of government expenditures are currently covered by tax income.

Sorry: An economic austerity program that merely proposes debt reduction will unfortunately be too small. To get to a tolerable 60 percent of the GDP (that would be the famous Maastricht criterion), the U.S. would need to reach primary budget surpluses of 10 percent of the GDP until 2020. That means income would have to exceed expenditures (minus interest payments) by roughly $1.4 trillion. Every year. Does anyone believe that? Above all, does anyone believe this will succeed with muddling through?

The U.S. is rapidly approaching the path where many euro countries already stand: behind the debt limit with no return. They have arrived at a point where the diverse austerity and aid programs only slow the escalation of the debt ratio. To actually get the debt under control, they would need to shift their budgets to permanent structural surpluses. That is not realistic.

The situation that we now see in Europe resembles that of a seriously ill patient who is administered high doses of pain medication (in the form of rescue packages, solvency injections and low interest rates) at regular intervals. Every time the effect takes hold, those gathered around the sickbed breathe again: It’s working! And then [they are] embarrassed to look and surprised when the effect fades after a few days.

That’s not how one heals patients. At the beginning there is normally a proper diagnosis without self-deception. And it is: We are watching the “growth through low interest rates and high government debt” economic model fail. The debt is climbing higher and higher and growth is becoming slower and slower. The recognition that economic stimulus no longer functions above a certain debt level is, of course (at least officially), not yet political mainstream. Just as little as that recognition, debt above a certain level can no longer be restored to “conventional.”

That this level has been reached in Europe and the U.S. can be seen when one compares the debt not in relation to the GDP, but to government income. It is not available for the liquidation of debt unless one wants to dispossess the citizens. Thus, with debt ratios approaching 180 percent (if one very kindly includes social security) to 400 percent (measured by federal tax income), even Austria, which is ascribed model child status in international comparisons, stands there exposed.

Without a restart, it will work neither in the U.S. nor in Europe. The question is who will push the button for the debt restart. And what this looks like. Several possibilities are open: simple cancellation of debt (improbable because of the potential for political conflict), currency reform (likewise improbable) and “inflationing” away government debt (very probable), to name only the most important.

The last might be the most charming for those in power; that is, if hyperinflation doesn’t get out of control, those asked to the cash register properly will not truly realize their dispossession. In such cases when there is a time lag, there are also visually respectable salary increases and savings interest rates. Even if the central banks strictly deny it, the ECB and the Fed are already laying the groundwork for this variation with their flood of liquidity. Perhaps not intentionally, but rather out of utter helplessness. Which, of course, doesn’t change anything.