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The idea of a
"debt jubilee" -- that is, a wide-spread forgiveness of debt as a
way to reset the US financial system -- has been bouncing around for a while.
But it hasn't gained mainstream traction because it seems, at first glance,
to be too simplistic to be worth serious thought. It must have a fatal flaw
that would jump out as soon as one looks at it, which makes looking a waste
of time.
But the idea
keeps bubbling up, so the other day I finally decided to try to understand
it. And the story, as with most apparently simple things, is more complicated
and harder to dismiss than it seems at first.
According to
Wikipedia, "The concept of the Jubilee is a special year of remission of
sins and universal pardon. In the Biblical Book of Leviticus, a Jubilee year
is mentioned to occur every fiftieth year, in which slaves and prisoners would
be freed, debts would be forgiven and the mercies of God would be
particularly manifest."
Note the
fifty-year cycle, which is not that far from the 60-year Kondratieff
Wave, at the end of which debt is forcibly erased through mass default.
The problem
with the classical jubilee concept is spelled out by Martin Hutchinson and
Robert Cyran in a 2011 New York Times article:
The
Downside to a Debt Jubilee
Good ends do not justify bad means. That philosophical observation applies to
proposals for a big American debt jubilee that are now doing the rounds. The
basic idea is to slash consumer debt, which is an admirable aim for an
overleveraged nation. Household debt is still 90 percent of gross domestic
product, down only modestly from the 2008 peak of 100 percent. But even
bank-haters should recognize that this cure might be worse than the disease.
To start,
writing off debts would not necessarily increase economic growth. Every
liability is also an asset, so while a dollar that is no longer required for
debt repayment might add some cents to consumer spending, it is also a dollar
cut out of a bank's capital or of an investor's net worth -- subtracting from
resources and confidence.
And
write-offs big enough to change consumer behavior would probably be big
enough to destabilize banks. The Federal Reserve or the government would need
to help, presumably by injecting newly printed money as capital. Such
government control is usually inefficient, and abundant printing of money
increases the risk of uncontrolled inflation, which has its own way of making
people feel poorer.
The issue of
moral hazard also cannot be ignored. Much of the excess debt was incurred
through irresponsible mortgage refinancing, which peaked in 2006 at $322
billion, representing 2.4 percent of G.D.P. The reckless use of houses as
A.T.M.'s was a major factor in decapitalizing and
destabilizing the American economy. Forgiving such debts will teach the wrong
lesson: borrow in haste, repent never.
Finally,
investors would rightly see a jubilee as an attack on property rights. That
runs the risk of throwing markets into disarray and discouraging foreign
investors from buying assets in the United States. Risk premiums on both debt
and equity capital would increase.
There are
better ways to deleverage. Higher inflation does the job more naturally,
without invidious choices about whose debt got reduced. But inflation also
discourages savers, weakening capital formation. The best way to get debts
under control is the hard slog of paying some back and writing the rest off.
Sound money,
including interest rates above inflation, would help by preserving existing
capital and promoting savings. After all, capital creation, not its
destruction through debt forgiveness, is what makes capitalism work.
The fact that
one person's debt is another's asset does seem to be a concept-killer. But in
the ensuing year several jubilee proponents have proposed updated versions
that address this flaw. Jump to minute 17 of the following interview with
Australian economist Steven Keen for his proposal. In a nutshell, he thinks
we've reached a debt "event horizon" where we can't grow fast
enough to escape the pull of deleveraging. His solution is a kind of
quantitative easing for the masses, where the Fed gives individuals
newly-created dollars with the requirement that they pay off their mortgages
and credit cards.
And then
there's the mounting federal debt held by the Fed. Consider this, from a
DollarCollapse.com reader:
John,
As an average
guy that has accumulated a small amount of wealth over the last 30 years of
working and saving, I am terrified as to what may lie ahead. I read Dollar
Collapse daily and also have read tons of information from guys like Jim
Rodgers, Peter Schiff, Gerald Celente, Charlie
McGrath etc. And while what all you guys say makes perfect sense to a
"work / save / spend within your means" kind of guy like me, I am
seriously wondering if we are really going to go down the path you guys all
prescribe to.....hence the reason for this note. I hope you will indulge me and
maybe even answer me back as I really am terrified and not sure how to
proceed.
Specifically,
what if the powers that be have another form of "exit/reset" of the
system that guys that think our way don't see? So I propose this
hypothesis...
If the
Central Banks of the World become the lender of last resort and take on more
and more and more of the percentage of sovereign and business debt....why
can't they just "forgive" all those loans when things get really
bad? I mean ultimately they were loans out of thin air anyway. They just wipe
out the loan, and take the whole thing off of their balance sheet...wouldn't
it actually strengthen the remaining dollars? It may sound far fetched, but why would they "reset" the
system, when they can just "forgive the loans" reset everything
back to zero and in the end still have the dollar and still have control of
the money.
Now we've
entered some interesting territory, and as with so many financial things, the
difference between traditional and "modern" is the introduction of
fiat currency. In past debt jubilees, money was real, and debt could only be
forgiven if the other side of the balance sheet was likewise affected. The
debtor's gain was the creditor's loss, which meant no net gain in societal
wealth.
But with fiat
money so much of the financial system is fictitious that it opens up some new
possibilities. The Fed is currently buying the majority of the debt issued by
the US government, which in effect means the government is lending itself
money (yes, the Fed was created as a private institution, but in recent years
it has effectively merged with the Treasury and the military/industrial
complex to form a single globe-spanning empire. It's all one thing now.). So
what would be lost by different branches of the fiat currency monolith simply
zeroing out some bookkeeping entries? Just like that, the "national
debt" shrinks by a third or more. Hmmm...
Same thing
with the quantitative-easing-for-individuals idea, in which dollars are
created out of thin air and passed to the banks, via the banks' customers.
Individual debts fall, bank loans are converted to cash, and systemic net
worth increases by the amount of debt that's eliminated.
This probably
won't happen, and would be profoundly immoral if it did. But because a modern
electronic printing press makes such alchemy possible, it will be seductive
to a desperate society that's been shaped by the idea of voting for free
stuff. So expect to see the jubilee concept become a topic of mainstream
debate we drift closer to Keen's debt event horizon.
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