Historically, there are only four real paths. It’s always about shifting losses — the question is who pays.
1. Growth (the cleanest, but hardest)
- The economy grows faster than debt
- Debt shrinks relative to GDP
- Rare, requires productivity, innovation, stability
Examples: USA after WWII, Germany after 1950
Reality: today almost impossible without additional tools
2. Inflation (the most commonly used)
- Debt stays the same in nominal terms
- Purchasing power falls → debt is “inflated away”
- A hidden tax on savers and the middle class
Used when:
- debt is in the domestic currency
- the central bank cooperates with the state
Examples:
1970s USA, post-war Europe, today’s USA/EU
Inflation is politically the least painful — people don’t understand it immediately.
3. Financial repression
- Artificially low interest rates
- Forced purchases of government bonds (banks, funds)
- Capital controls, regulations, taxes, withdrawal limits
Effect:
negative real yields → creditors pay debtors
Examples:
USA 1945–1980, Japan long-term, EU indirectly
4. Default / restructuring
- Partial debt write-offs
- Extended maturities
- Lower interest rates
Used when denial is no longer possible
Examples:
Greece 2012, Argentina repeatedly, Russia 1998
5. War (an extreme reset)
- Physical destruction = economic reset
- Debts erased via inflation, default, or a new order
Historically common, politically unpopular today — but not impossible
How high household debt is dealt with
Households have fewer options than states. Typical scenarios:
A. Inflation + wages (soft scenario)
- Real wages rise
- Debts remain nominally the same
- Installments “hurt less”
Works only if:
- loans have fixed interest rates
- incomes grow at least as fast as inflation
B. Refinancing / extending maturities
- Longer repayment periods
- Lower monthly payments
- Higher total interest paid
Very common
Politically safe
C. Bankruptcy / personal debt relief
- Part of the debt written off
- Loss of assets and credit score
- Social and psychological costs
Used en masse during crises
USA 2008–2012
D. Selling assets
- Real estate, investments
- Reduced consumption
- Economy-wide deleveraging
Leads to crises
(deflationary pressure)
E. Moral hazard (politics)
- State rescues debtors
- Partial debt forgiveness
- Losses transferred to taxpayers
Examples:
mortgage moratoria, COVID measures
Summary
Debts are never resolved without pain.
The pain is only shifted.
- Inflation → savers
- Taxes → workers
- Default → creditors
- Recession → employees
- Financial repression → pension funds