A Magna Carta redux could prove to be the responsible way of dealing with a number of systemic imbalances and other pressing considerations.

In reality, the prospects of global economic growth in the context of prevailing indebtedness are faced, on one side, by the Scylla of austerity measures and the Charybdis of stimulus packages that invariably lead to higher states of indebtedness. Essentially, a damned-if-you-do, damned-if-you-don’t conundrum.

The threat posed by Scylla entails accommodating, on one side, the imperatives for sometimes draconian austerity measures, which could, however, have a dampening effect on growth by restricting demand.

In Portugal, the government has cut state pensions by up to 10%, cut public sector salaries by 5% and increased the value-added tax to 23%, one of the highest rates in the world. Subsequently, the government fell.

Similar measures are being taken in Spain, Ireland, Greece and elsewhere. Furthermore, the reactions to such measures should not be overlooked — witness the demonstrations that regularly take over the streets of Athens, Paris or Lisbon (and Madison, Wisconsin).

On the other side is Charybdis — the prospects for inducing growth via stimulus packages confronted by mounting debt that can lead to stagnation. When total debt in Japan rose beyond 90% of GDP, for example, the effect of adding further debt was to restrict growth. In other words, in the current situation, chasing growth to breach the surface of the ocean of debt does not break the vicious circle — it reinforces it.

We are unlikely to navigate safely between these two ancient monsters. There is no evidence that the prospects for a debt tsunami would dissipate in their own right. Now that Social Security payouts exceed income — more than $200 billion this year and trending towards $1 trillion within the decade, according to the 2009 Financial Report of the U.S. Government — entitlement programs in the United States are reaching the point of no return, adding significantly to the debt service burden each year.

The key is to address the issue of solvency as a guiding light among the “grand strategies” and tactical measures pursued by policymakers.

Many developed and developing economies are also exposed to increasing demands on the state to finance a range of social commitments, from pensions to infrastructure-development financing. U.S. states such as California, New York, Florida, New Jersey, Ohio, Indiana and Wisconsin are tackling budget shortfalls of up to 30%, and cities such as Chicago are facing deficits of close to 10%.

In Europe, cities like Lisbon, with its 7.3% deficit, are urgently looking for ways to cut costs, while entire regions in Spain, Britain, Belgium and elsewhere are themselves insolvent, adding their buckets of water to the debt ocean.

The examples of the devastating effect of the debt burden range from the unsustainable premiums countries like Greece and Portugal must incur when raising funds, to the case of Iceland, where the whole country went bankrupt.

This is where one must ask: What are the other options?

The key to achieving a breakthrough in the short term is to address the issue of solvency as a guiding light among the “grand strategies,” and tactical measures pursued by policymakers. It has been said that no one learns anything from history, except that no one learns anything from history.

Indeed, the debt crisis that struck less-developed countries in the 1980s was made progressively worse by additions of liquidity until finally, years later, solvency was addressed through the so-called Brady bonds.

Even though such approaches will entail sacrifices on both individual and global scales, mechanisms with the same impact, if not of the same ilk, should have been put in place as a form of exit strategy on the eve of the global economic crisis. Now they are an imperative.

All the relevant institutions — central banks and the International Monetary Fund especially — are only able to add liquidity to ailing private and public institutions. The governments and the private financial markets should have had in place plans to reduce the burden of debt-ridden borrowers and add to their capital base. When the financial crisis struck, this was done in a few cases (General Motors, Chrysler, AIG) — but on an entirely ad hoc basis.

Prioritizing solvency on its own will hardly reverse the descent toward global indebtedness.

Efforts have been made to utilize austerity strategies to engender a momentum toward competitiveness and cost-cutting that would go beyond the state and affect the private sector, thus increasing the overall solvency of a given country’s economy.

Some of these steps were hinted at in the cost-cutting plans of a number of European countries, and have been mooted for the United States, too. However, applying existing market mechanisms, such as bankruptcies, even for those entities considered “too big to fail,” would have had a much stronger impact on the private sector.

However, prioritizing solvency on its own will hardly provide a triggering mechanism for reversing the descent toward global indebtedness and returning to sustainable growth. A tangible input on a par with 13th century Venice and the bullion-rich knights from the Fourth Crusade has not appeared on the horizon, and the long-term solution cannot be predicated on the expectation of an external stimulus.

What’s more, even if such a stimulus were available, the interconnectedness of global markets today would inhibit equilibrium. These days, robbing rich Peter to pay poor Paul would in fact only invite more troubles for Paul. And, ultimately, it is not the right way, despite the attractiveness of King John’s famous subject, Robin Hood.

The realistic, forward-looking and hopefully sustainable solution would require a new Magna Carta. Such a solution would entail the redefinition of the social contract among the government, Main Street and Wall Street.

The commitments and entitlements of this social contract could be a major factor establishing the framework for domestic and global economic relations and determining not just today’s, but also tomorrow’s financial liabilities.

Shaping such a bold new arrangement — a Magna Carta redux — could prove to be the responsible way of dealing with a number of systemic imbalances and other pressing considerations. Such an advancement would entail a number of positive and negative strategic repercussions, depending on one’s point of view.

In the era of the new Magna Carta, winners would be the savers, the investors in capital assets and productive activities and those who respected the rules of the game. The losers would be the speculators, the reckless spenders and the crooks.

Importantly, it will provide the framework for successfully braving the ocean of debt, reversing the global slide toward pervasive indebtedness. Furthermore, it could provide the preconditions for a qualitatively new form of economic growth, fundamentally altering the incentives and impediments to economic activity.

We live between the Scylla of austerity measures and the Charybdis of stimulus packages that invariably lead to higher states of indebtedness.

Notably, it would also realign entitlements and rights away from the expectation that we have all, collectively and individually, become “too big to fail.” This would also enable the functionality of market risk, which the current social contract, in particular in the West, has endeavored to eradicate.

Such a transformation would allow markets to be more efficient. After all, imposing risk outcomes is the manner in which the market operates, infuses innovation and energy into the economy, and calibrates economic activity.

There is no argument that the build-up of the preconditions for the 13th century Magna Carta were, to a large extent, the result of the economic and financial nadir of the period emerging from the previous 800 years of social, political and economic exhaustion, often accompanied by rigid social structures, stifling intellectual repression and constant warfare.

We should start in earnest the redefinition of the existing social contract toward a new Magna Carta before getting into a comparable crisis.

It is not feasible to expect and wait too long for matters to somehow improve on their own and continue “business as usual,” or, alternatively, to anticipate that the social contract would redefine itself. Given the accelerated socio-economic developments, it should not be permitted that the evolving crisis force its own realities upon us.

From whatever perspective one considers such a choice, it will not be an easy one. The complexities of its implementation are mind-boggling, and going through the process would be painful and may lead to significant upheavals.

On a brighter note, being at this crossroads and choosing this path could lead to similarities with the exit from the financial and non-financial lows that presaged the European Renaissance — a new Renaissance, perhaps.