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Is This The Debt Jubilee?

Not so long ago the financial world viewed certain numbers as limits beyond which lay trouble. Interest rates near zero, for instance, were thought to risk destabilizing the banking system. And government fiscal deficits above 3% were considered so dangerous that exceeding this level was prohibited by the Maastricht treaty that all eurozone members were required to sign.

Those numbers — 0% and 3% — are still considered bad. But now for the opposite reason: They’re insufficiently aggressive.

A big part of the world, as everyone now knows, operates with negative interest rates. And prominent economists are urging even greater negativity as a way to make government debt profitable and get people borrowing and spending again.

More recently, fiscal deficits — barely below 3% of GDP in the developed world — have come to be seen as dangerously inadequate and in need of dramatic expansion. From today’s Bloomberg:

Say good-bye to the bond vigilantes and hello to the budget brigade

A passel of investors, academics and even central bankers are calling on governments to spend more and tax less to provide a budgetary boost to the struggling global economy. That’s a 180 degree turn from the bond vigilantes of yore who pressed for smaller deficits and less debt about a quarter century ago.

To hear the budget backers tell it, bigger shortfalls are a no-brainer. With interest rates at — or even below — zero in much of the industrial world, central bankers are pushing up against the limits of what they can do to buttress growth. Yet those same low interest rates make it exceedingly cheap for governments to borrow money to finance bigger budget shortfalls.

Deficit spending March 16

“A large part of what monetary policy can do, it has done,” former Treasury Secretary Lawrence Summers told Bloomberg television last month. “In Japan, in Europe, and perhaps on a forthcoming basis, in the U.S., we need further impulses to growth,” including from fiscal policy.

The dirty little secret is that budgets are starting to be loosened in some countries after years of austerity. Yet in many cases, that is more by happenstance than by intent. And the size of the resulting stimulus is small and far short of the more sweeping steps advocated by card-carrying members of the budget brigade.

“There’s pretty widespread consensus in the financial community that fiscal policies should come to the rescue,” said Joachim Fels, global economic adviser for Pacific Investment Management Co., which oversees $1.43 trillion in assets.

Even central bankers are shedding their traditional reticence to stray into the political arena to sound off on the need for a more balanced growth strategy.

Lever ‘Disabled’
“It remains a pity that the fiscal lever seems to have been disabled,” Federal Reserve Vice Chairman Stanley Fischer said in a March 7 speech in Washington.

Canadian Prime Minister Justin Trudeau is leading the charge among government leaders in calling for a more active fiscal policy. “Don’t fall into the trap that thinking that balancing the books” is an end in itself, he said in a March 2 interview with Bloomberg. “It’s a means to an end.”

Budget constraints are in fact being eased by some countries. Government spending will boost U.S. growth about 0.2 percentage point this year, according to the Congressional Budget Office, thanks in part to a deal between President Barack Obama and Republican lawmakers to loosen caps on discretionary outlays. Even such a modest contribution would be the biggest since 2009.

In Germany, it’s stepped-up spending on refugees that’s turning fiscal policy more supportive of growth.

“Germany was neutral in 2015 and is now highly expansionary this year,” Ludger Schuknecht, director general of economic policy and international economy at the country’s Ministry of Finance, told a meeting of economists in Washington on March 8.

China Spending
And China unveiled plans for a record fiscal deficit this year as part of its effort to bolster its sagging economy. The Finance Ministry’s budget indicated on March 6 that the shortfall would increase to 3 percent of GDP from 2.3 percent.

Yet such steps fall short of the efforts advocated by the likes of Summers, who has repeatedly warned that the world economy faces a persistent deficiency of demand that policy makers need to address.

Angel Ubide, a managing director in Washington at Goldman Sachs & Co., complained that government officials are stuck with a long-standing “mindset” that fiscal policy shouldn’t be used to manage the ups and downs of the economy — except, according to Fischer, “in extremis, as in 2009.”

“We should not put fiscal policy in a corner and say we cannot use it,” Ubide said. “With interest rates as low as they are, there are surely public investment opportunities that generate positive returns.”

Mohammed El-Erian, chief economic adviser at Allianz SE, said he’s worried that it would take a downturn in the global economy to prompt concerted action on the fiscal front.

“That is my fear,” said El-Erian, who is also a Bloomberg View columnist. “How much of a crisis do we need as a wake-up call” for policy makers?, he asked rhetorically.

The sense of panic is palpable, and not surprising given the troubles that beset pretty much every part of the global economy. Latin America’s biggest countries are in various kinds of crisis. Japan’s Abenomics policy is widely seen as a failure. Europe has both negative interest rates and deflation, which seems like a deadly combination. US manufacturing is contracting and corporate profits are shrinking. China’s slowdown has sparked the kind of labor unrest that terrifies its leaders.

Hence the calls from the architects of the policies that got us here for something dramatic to save their reputations and investment portfolios. But the one thing that seems to be missing from these glib prescriptions is an acknowledgement that we’ve been there, done that, without the miraculous results now being promised. Post-2008, the world ran huge fiscal deficits. The US nearly doubled its federal debt, China borrowed even more and Japan (already running big deficits) kept on without missing a beat. At this point it’s helpful to revisit the McKinsey & Company study showing that the world took on $57 trillion of new debt between 2007 and 2014:

Global debt 2014

So the question that’s been dogging proponents of negative interest rates — if zero didn’t work why should we expect -1% to do better — needs to be asked of deficit fans: If $57 trillion of new debt didn’t produce a robustly-growing global economy, why gamble on another $57 trillion?

Meanwhile, the two concepts — NIRP and deficits — dovetail in a fairly terrifying way: All the new debt we take on to rekindle growth will have to be refinanced in the future. So the more we borrow now the more we’ll have to roll over then — and the bigger the impact on government budgets of an eventual rate normalization. Unless the ultimate plan is to never raise rates to old-school positive levels, in which case the world of the future is so different from that of the past that we may as well toss existing theories of market dynamics and individual freedom out the window.

A final thought: One way to sell ramped-up government deficits in the face of lingering doubts will be to give the money directly to citizens. This has appeal across the political spectrum — on the left because giving away free money is always popular and on the populist right because it bypasses the much-hated big banks. Coupled with a requirement that recipients pay down existing debts, such a “QE for the people” might bring along even traditional debt-averse economists. In other words, this might finally be the year of the debt jubilee.

21 thoughts on "Is This The Debt Jubilee?"

  1. Hello Mr. Rubino,
    No, this is not the debt Jubilee, nor is it THE Jubilee. The last Jubilee was 1996. The next will be 2045. As I have mentioned before we are entering the sabbatical year. Some believe we have entered it as of March 10th. I believe that we will enter it somewhere around April 9th or 10th. People ask, “Don’t you know when you new year begins?” A day and an hour that no man knoweth, Mr. Rubino.

    Shalom,
    CC

  2. They can’t stop. That would admit defeat and the subsequent loss of power and control. We are all riding this mf’er to the bottom. Prepare accordingly.

  3. I’d still like to know why if they can create money out of thin air in any quantity they want why are the American people still required to pay an income tax?? And if it’s not for the money it must be for the…control of the people. That’s how I see it…

    1. At “naked capitalism” Yves likes to talk about modern monetary theory or MMT. This is just Keynesian economics. Essentially her theory is that since we own the printing press we can never go bankrupt. And while technically she might be right- the problem is that they are taxing the sht out of us- and while we as a nation might not go bankrupt (we are already, it’s just semantics) individuals will. So I chime in as well and say, well why don’t you just print all the money you need- pay our bond interest, social taxes, and leave your hands off my money.

    2. The tax is used to remove some of their printed money from the system. It helps to hide inflation. So the people first get nailed with inflation then get nailed again with taxes to help mask the amount of inflation. Nice system.
      “Without an income tax, the worthlessness of the currency would soon become apparent.” – ( I forget who, maybe Marx )

  4. The reason there has been no growth from all this new debt is that almost all of it is bookkeeping entries at the central bank/bankster and various federal government levels. It has been intentionally sterilized from the masses. But, if they were to release new money/debt/credit (all the same thing of course) they still would not get what they want in the form of stimulation of growth, they would get hyperinflation. They know that and that is why they have not done it. They have tried to stimulate growth from the top down pushing on a string rather than from the bottom up because they understand that organic healthy growth can only come from savings. Since all middle class savings was wiped out in 2008 when savings was either confiscated by banks in the form of home equity, or rendered useless by negative real interest rates, there has been no growth, and all new wealth generated by the economy in the last 15 years has gone directly to the top10% and mostly to the top 1%. Redistribution is the ONLY answer but they will not do it, those who have the wealth will not allow it. So the size of the pie keeps shrinking even as the number of ways it must be sliced gets larger by the day. We are in my opinion no more than 1-2 years away from global revolution. Call it the anti greed revolution, but it will not be fun for anyone, the masses know they will be cutting off their noses to spite their face but they will do it anyway because too many people are just done suffering and the rest are too afraid of financial insecurity to act in any manner. All just another feature of the coming sixth global extinction which you can Google.

    1. You are absolutely correct. This is like the redistribution of land to farmers. Market forces since Reagan days had resulted in very few winners who take all the money on the table in every category of businesses. In the beginning, free market was good as it reduced prices through competition. But when the competition is over and the winners are rewarded, they want to remain at the top by controlling the market. Consequently free market had led to controlled market which we are in now. We can start by reducing the pay of all CEOs. They are just employees and not entrepreneurs. They are the cancer of the system.

  5. I believe The Debt Jubilee will be the Fed buying up ALL the federal government debt. Personal, local, and state debt will be left alone as this is another way to keep all the people in slavery to debt which is what they want long term. The Fed will then “Forgive” the federal debt and make the federal government the ONLY entity with money to give out to all the people that the federal government deems deserving. Those that have been prudent and responsible will get screwed and those that have been irresponsible will be rewarded which is what is happening today anyway. Everyone will be beholding to the Federal Government. Then the final class war will occur and Armageddon will follow. Sorry for the bleak outlook but that is my opinion.

  6. We should look at the issue on a macro basis. NIRP and QE are ways of robbing and stealing money. Bigger, exponentially growing, unpayable debts are sucking in good money that could have been put to good use in main street in generating income and growing the money. Pension funds and savings which are good money are now put into financial products that are not productive, paying financial engineers excessive returns on their unproductive products which will eventually lose money to the extent of losing their capital. Financial products, if allowed to carry on, will have to keep sucking in more money to continue its ponzi. To investors, they rather play the financial products as they appear to be the easy way of making money rather than taking risks in lending to real businesses to make real money. This will flow on to the jobs market whereby with fewer businesses, there will be less jobs. Less jobs mean less consumption which means less new businesses which means less jobs and this is a negative feedback loop to total collapse. The challenge to Central Banks is how they could target where the printed money should go to instead of blindly giving them to the bankers. The first thing to do is to bring back Glass-Steagall Act in total.

  7. Paying down debt is credit destruction and will make the dollar even more scarce.

    If they’re going to give ‘debt relief’ better the Fed buy up ALL the mortgages, then cut the interest rate on all of them to 2%.

    Heck, they could do it for car loans too! And credit cards! And school debt!

    They always talk of 2% like its some magic number.

    Just wait for the ‘magic’ to come!

  8. Cut the crap. Just print the GD money. Its never going to be repaid anyway. And just WHO is “lending” the money? The frickin’ tooth fairy?

  9. Central bankers are a clubby lot, but how does Central Bank A really know how much Central Bank B is surreptitiously printing up in his basement, especially today, when he can do so virtually interest free? What keeps B from printing up enough to buy substantial amounts of A’s national resources? This situation would have been regarded as completely absurd, unthinkable, impossible in 1974 when the world was on the gold standard- and it is worth remembering that the gold standard, besides being completely transparent and simple, was intended to keep nations honest. When France’s Charles DeGaulle realized that there was no way the U.S. could not have massively expanded its money supply to fund LBJ’s concurrent Great Society plus Vietnam War spending, he simply demanded gold for his dollar reserves at the Bretton-Woods agreed rate of $35/oz. That revealed the U.S. emperor had no clothes, and though LBJ deserved the blame (well, the sheep-like U.S. population, every bit as sheep-like today as in the 60’s was to blame for allowing such massive deficits to occur), it was Richard Nixon who bears the stigma of “closing the gold window,” i.e. taking the U.S. off the gold standard.

  10. I can hear the helicopter rotors spinning up on the tarmac, off in the distance.

    I love the smell of monetary napalm in the morning. It smells… like victory.

    For the oligarchy of course…

  11. Just think how terrified tptb would have to be before actually contemplating letting the little guy finally have a win, even if it is just a small and short-term one. By definition the alternative would have to be unthinkable even to a wholly amoral sociopath.

  12. The 3% Maastricht limit to fiscal deficit makes sense, since 3% is the upper limit to long-term economic expansion (historically), and eveybody intuitively grasps that fiscal deficits cannot grow at a higher rate than the economy in perpetuity. The 3% was a little inflexible — at the time the business cycle was considered something that economic genius had vanquished; besides, countries had to monitor each other’s policies to safeguard the common euro currency.
    This inflexibility runs counter to the notion of counter-cyclical spending. And human nature has always had problems with the boom phase of the cycle which requires cutting back on government spending (or increasing tax revenues), much as the 7 fat years required savings to bridge the 7 lean years.
    However it seems far too late to approach the current conditions (unique to economic history) with yesteryear’s economic fine-tuning. Far from the continued and insistent doubling down on growth, the huge debt overhang will either deflate amidst chaos, war, starvation, and death or it will require some plan for an orderly bankruptcy, since it remains obviously true that what cannot be paid back will not be paid back — the only question is on whom the burdens will fall and who will be sacrificed.

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