On Christmas Eve 2013, the best moment to publish a report without the press noticing, the IMF published a most interesting paper which concludes; ‘Historically, periods of high government debt such as the current one have led to .. debt restructurings.’

According to economists Reinhart and Rogoff (also the authors of the infamous study/book This time is different, 2012) ‘the endgame to the global financial crisis is likely to require some combination of financial repression (an opaque tax on savers), outright restructuring of public and private debt, conversions, somewhat higher inflation, and a variety of capital controls under the umbrella of macroprudential regulation […] austerity in varying degrees is necessary, in many cases it is not sufficient to cope with the sheer magnitude of public and private debt overhangs […] This paper highlights four basic lessons from the historical track record, as well as those lessons economists, financial market participants, and policymakers seem to have collectively forgotten […] Given the magnitude of today’s debt and the likelihood of a sustained period of sub-par average growth, it is doubtful that fiscal austerity will be sufficient, even combined with financial repression. Rather, the size of the problem suggests that (debt) restructurings will be needed, particularly, for example, in the periphery of Europe, far beyond anything discussed in public to this point.

So, it’s official now. The Big Reset has to include massive debt restructurings to improve the balance sheets of advanced economies.

NB: We did send a copy of The Big Reset to Mrs. Carmen Reinhart. Her response: ‘Great material! I am fascinated by your analysis on the miscalculation of inflation and historical episodes of QE.’