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Has The Debt Jubilee Already Started?

by John Rubino on January 23, 2013 · 27 comments

There are three fairly radical ideas floating around the monetary policy world right now. The first is economist Ellen Brown’s belief that governments should stop borrowing money and simply create the currency they need, thus bypassing central banks and government bond markets. The second is Australian economist Steve Keen’s debt jubilee, in which governments give newly-created money to individuals with which to pay back their debts, in the process resetting the system with lower leverage. The third is that trillion dollar platinum coin thing, where Washington just conjures that much money out of thin air and uses it to evade statutory debt limits — which looks like an ad hoc mash-up of the first two ideas.

Until yesterday these proposals seemed like provocative curiosities, fun to think about but too far off the mainstream radar screen to become official policy anytime soon. Then reader Bruce C responded to a DollarCollapse post about the impact of rising interest expense on US and Japanese budgets:

All of the Treasury bonds owned by the Fed are at effectively zero interest because all interest payments from the Treasury to the Fed are returned to the Treasury. That actually means that total net interest expenses for the Treasury are currently decreasing with time as the Fed buys about $85 billion worth of Treasuries each month (which is about 90% of all new issuances). As long as the Fed is willing to do this the current deficit spending by the US can continue for a lot longer than most analysts think possible (I mean for decades).

I don’t know if Japan’s central bank (the BOJ) reimburses the Japanese Treasury of its income from government bonds but if it does then there won’t be any need to sell JGBs to outsiders who may demand higher interest rates. For the same reason explained above the Japanese government could literally enjoy decreasing debt servicing costs despite rising price inflation. Again, that can’t last forever but I wouldn’t hold my breath.

This got me to thinking about the way in which the Fed buying bonds and returning the interest payments resembles the three proposals above – and wondering if they’re all really the same thing accomplished with different mechanisms. In the Fed interest repayment, debt Jubilee, and trillion dollar coin strategies, the money is filtered through various intermediaries, while in the Brownian scenario it is just created and spent. But in each case, the government creates and spends money without reference to the bond market or budget deficit or anything else.

Is this debt monetization? Or the elimination of the concept of government debt?

At first glance, the flaw in all scenarios in which government takes direct control over the money supply is that, well, government has control of the money supply. That would remove the last vestige of external pressure to control spending and open the floodgates for every vote-buying scheme now festering in the minds of blue-state senators, neo-con chickenhawks, corporate CEOs, and public sector unions. Why would a government that doesn’t have to answer to the bond markets ever limit its spending? Taxes, it seems, could be cut to zero while Medicare and the military rise to infinity, all paid for with newly-created cash. Steve Keen, to his credit, couples his debt jubilee proposal with strict new limits on lending and the elimination of fractional reserve banking. But there’s no guarantee that such changes would pass as part of that package.

Have we already put such a system in place, waiting only for the guys sitting around the debt ceiling negotiation table to recognize the cornucopia they’ve created?

Is this the unexpected last act of the fiat currency experiment, in which the pretense of outside control falls away and big government really lets fly?

What would happen to the currencies of countries that free themselves from budgetary restraint and simply buy whatever they want when they want it? Will the dollar, yen and euro become the last barometers of public faith in government, or will they be managed via derivatives fueled with Treasury cash?

Is this the Austrians’ crack-up boom on a global scale?

And finally, precious metals. How would gold behave in a world of literally unlimited money creation?

These are brand new, not-fully-formed thoughts and questions, so implications and answers will have to wait for another day.

  • http://www.facebook.com/people/David-Zuniga/1389494145 David Zuniga

    Tiny fly in the ointment: Article I of the Constitution. As you well know, John, the only U.S. money authorized in the Supreme Law is ‘coin’ (Sec 8) and specifically ‘gold and silver Coin’ (Sec 10). Anything else is financial crime.

    Of course, organized crime is what Congress does; I realize that. Judge Andrew Napolitano has described the crimes in half a dozen books over the past decade, and Thomas DiLorenzo’s newest book does the same thing; it’s entitled Organized Crime: the Unvarnished Truth About Government.

    How long will a free people put up with criminal — indeed criminogenic — servants? No longer! This year, we begin enforcing the Constitution for the first time in history.

    Economics is 90% ethics and 10% math. Communism has always been a failed idea — and counterfeiting eventually corrupts the entire marketplace. Fraud and theft are simply wrong.


  • Agent P

    In short, it’s called ‘MMT’… And there current examples aplenty to see why the concept shouldn’t be dismissed – especially when it’s actually taking place right in front of us. Not that I necessarily agree with the concept, but it’s happening nonetheless. Our fiscal/monetary leaders already know this. The only wild card in the whole scheme is keeping public perception in check, and/or guided in the right direction so as not to trigger lack of confidence in the system or outright panic, both. Yes, this can continue on for a Long Time – until of course, it no longer can – which, when that time does arrive, it will likely arrive rather quickly – without fanfare or announcement beforehand…

    Look not to U.S.-centric policies for the answer, you won’t get anything but further confusion & doublespeak – which is precisely what ‘they’ want, as confusion generally leads to paralysis and/or general acceptance that things are the way they are, and besides, the Superbowl is around the corner… No, to understand the ramifications of where we’re headed, pay attention to what our outside global neighbors are doing with regard to resources, land and Gold – i.e., what they’re Buying and the relationships/treaties/pacts/trade agreements, etc., they’re making with other resource-producing countries – including those who are growing tired of U.S. foreign adventurism and hegemony.

  • concerndcitizen

    Of course under any of these scenarios, gold and silver would go through the roof. Something for nothing is nothing and all the money generated would eventually enter circulation in some fashion, causing massive inflation as people flee worthless paper money. Watch the actions of those in control. If they don’t value this form of money, you probably shouldn’t, either.

  • Tom G

    I’ve stated previously that this “debt jubilee” or federal money laundering scheme is quite likely. All the western nations have the same debt problem and they dominate the world financial system – for now. So, of course, they’ll enable a way to get rid of the debt. But, their debt and probably no break for the working man.

    We all know it will never be paid off. At some point they just eliminate the debits and credits and sanitize all the balance sheets. Meanwhile, to keep our creditors happy, let them convert their debt to equity by buying US land, tollways and energy companies. This is already going on right under our noses. http://www.infowars.com/does-china-plan-to-establish-china-cities-and-special-economic-zones-all-over-america/

    How will gold do? Well, the key to the whole plan is keeping interest rates at zero, i.e. negative interest rates. Gold does best with cash losing value daily so it will do extremely well in this environment. This could go on for twenty years. The hard part of the debt sanitization plan is, as you describe, keeping the neo-cons and big spenders under control. No small task.

  • Silverbug2155

    I don’t really think there is any waiting for answer here JR. History is good enough for me where no fiat currency has ever survived monetization of it’s own debt.There are consequences for these actions and the US is no different and will not escape the ravages of inflation and possibly some form of hyperinflation. Step on China’s toes with their 40% holding of US Debt issues and they can easily cause some pain by dumping it all. What do they have to loose at this ppoint in time? They have already hedged their dollar position by investing in resources around the globe and making alliances with the resource rich countries.Who needs exports?

  • John G.

    Why focus on the net interest expense and who it gets remitted to? It seems to me that the bigger problem is that the cash spent by government — in ever increasing amounts, from debt monetization — goes directly into the economy. Ever increasing amounts of cash chasing the same production and asset base ultimately results in higher prices. Yes, right now, BLS does a good job hiding the soaring costs of college, health care, and food. But, with the strong growth in money supply, now — M1 and M2 are now growing 10-11% annualized — higher prices should be manifesting shortly. I think that smoldering, then burning, then roaring, price increases will stop the debt monetization, and such will happen sooner rather than later.

  • billhopen

    Yeah John,

    Wouldn’t it be great if I could just go to a store and write checks for as many Mercedes coups, diamond rings, & ermine lined pajamas, as my heart desired….and not worry about what backs the check? and it wouldn’t bit be great if USA could take $1700 worth of platinum, pound it flat, stamp a trillion on it, and then order up 10 state-of-the art aircraft carriers. Wow

    I believe Keene’s Jubalee plan, in order to keep it fair for savers, calls for giving cash payments to everyone not in debt, and paying down debt for others, say $100000 or $200000 to every US household? so that would come out to 40,000,000,000,000 way kool only 40 platinum coins and the whole program is paid for! YES! college tuition paid off, mortgage paid down, credit cards wiped clean and many many people walking around with $200,000. cash in their pocket ready to spend spend spend into that new growing economy. Personally I’d just run out and borrow again in order to spend into the next expected jubalee (WE COULD HAVE THEM YEARLY, HELL MONTHLY!)….also to spend that money right quick before it became worth less (in about 10 seconds after the “freedollar” checks hit, prices of real things will rise in dollar terms and the velocity of new buck money will be measured in multiples of the speed of light.

    OK, I’ve calmed down….seriously folks, keep your savings in gold, silver, land,and other useful physical assets…………this doesn’t end well where ever it goes

  • Antiehypocrite

    Everyone could have a money printing machine at home. No need to work – just print 100k off every now and then … for spending money – you know?

  • Doug

    Oil is the only limiting factor in the money printing game. The Fed can buy and sell stocks, bonds and mortgages at will. Gold has no real effect on the economy, it went from $250 to $1700 and it has had no effect. The only thing that the Fed has no control over is oil. When gas is so expensive that low wage workers simply can’t afford to go to work, we will have a recession and asset prices will fall for a while. Oil is the only economic number to look at, everything else is a lie. When oil is at $70 the world is in recession, when it is at $120 it is about to be in recession.

  • Joe Wazzzz

    I picked up a book in a used book store the other day called “The truth about the national debt” written in 1996. The nut of it is, we don’t have to worry about the national debt because the only thing we have to do is just control spending. . . . Seriously? The federal government will spend and print money until the dollar collapses . . . period. Then government will return to the local level and the federal government which will not be able to pay any of it’s bills will be ignored by the public. There will be no welfare, no social security, no medicare and a lot smaller military. They will try to give the American people an attitude adjustment by starting a war and they may succeed. Buy silver, stock pile food, arm yourself, plant a garden and hang on.

  • Walther11

    It is my understanding that the FED has forgone the practice of returning all interest payments to the Treasury. As an accommodation to the FED for its newly expanded and bloated balance sheet the Treasury has agreed to this.

    I see no great difference between what is described above and what Germany did during the Weimar Republic, and we all know how that turned out. There is a medallion commemorating Germany’s 1923 hyperinflation in Germany that says it all, it states; “On 1st November 1923, 1 pound of bread cost 3 billion, 1 pound of meat: 36 billion, 1 glass of beer: 4 billion.”

    Gold went to a trillion marks per ounce. At some point, people ask themselves the question “Why should I work for these pretty pieces of paper?” When they answer this question, the game is over.

  • Lexington Larry

    One flew over the cuckoo’s nest, or one escaped from the loony bin (John R.), or John may be just throwing this out to make us all think. Or, maybe he didn’t see Ron Paul’s article about the financial crisis and the possible solutions (trillion dollar coin). Ron Paul states “But in just a few short sentences Professor Hans-Hermann Hoppe eviscerates
    the Krugmans of the world by pointing out the obvious: If governments or central
    banks really can create wealth simply by creating money, why does poverty exist
    anywhere on earth?” http://lewrockwell.com/paul/paul842.html

    Just like Antiehypocrite says – we could all have a money printing machine at home. No need to work!

    I agree 100% with Fabian for Liberty – the dollar once backed by gold, and then oil (Petro Dollar), is now backed by death. Yes, death. If other countries don’t like it, or accept it, there’s something “backing it up” – ie: we’ll bomb the hell out of you, and bomb and kill you into submission. So, for now, the U.S. is able to get away with some activity unbecoming of a civilized being, but how long will this last?

    Make no mistake about it, the end result of this will be WW3. How can the U.S. continue to import goods from all over the world, and have paper (the green variety) be our primary export?

    • Alex K

      God Bless you Lexington Larry, you have summed it up perfectly. The Fed is a criminal cartel that was created to keep the US in perpetual debt, as are most of the CB’s in the developed world. What fools like John Rubino don’t care to discuss or perhaps even contemplate is the absurd stupidity of Government borrowing “DEBT” not money from the FED – as all bonds and Federal Reserves notes are debt obligations – every time they need more money. The debt is created, but the interest to repay the debt isn’t, so it is impossible for the debt to ever be fully paid down. Of course, when governments spend insane amounts of money on military buildup, wars and social and other largesse they cannot afford the fact that THE Fractional Reserve banking system is the problem gets lost in the noise. Yes, I think we are sadly heading for WWIII. Many countries, in particular Russia and China are sick of the petrodollar and I think when the US / Israel, (whoever it is – my bet is the US, but time will tell) invade Iran, for not taking petrodollars, God help us all. The world will sink into an Abyss not seen for a very long time.

  • http://profile.yahoo.com/J75TJPBXVQSCH4NABQB2KNHZ5E Rich

    All these schemes, no matter what the label, amount to Keynesian money printing. That’s all these people (economists) can come up with. The fancy labels are nothing more than ego pacifiers. They need to pretend that their idiot certificates ( read PhD) have a value.

  • ccitizen60

    As with any asset the price of money is determined by supply and demand. The above note suggests a rapid rise in supply which should result over time in a decreased price of money (for example, less gasoline for a dollar dollars are priced in terms of gasoline). Once people realize the debasement is going to be ongoing the demand for dollars will fall as well, potentially very suddenly. Consider how quickly the price of a stock changes when new information regarding the underlying firm surprises the market. The change in share price is often almost instantaneous, virtually on the next trade, and entirely due to a change in demand since there is no change in supply in that instant.

    No doubt the supply of currency will continue to rise, probably at an increasing rate going forward, but it is the change in demand that will cause a violent rise in prices; no doubt surprising the typical economist.

    Incidentally the interest rate is not the price of money, as many seem to believe, it reflects peoples time preference or the rate of exchange between present and future consumption.

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  • WorkingClass

    Anybody can create money but wealth creation requires labor. To get money and wealth in proper relation one to the other I favor free gold. Repeal legal tender laws and don’t tax gold. Let fiat money compete with gold. This would keep the issuers of paper honest. The powers that be of course will never agree to this. Their power depends on their monopoly on money.

    • Alex K

      So the only solution you have WorkingClass is buy Gold, silver, whatever you can afford and that will help you deal with the inflation to come. We don’t need an end of the world scenario for the dollar to lose most of it remaining value, just a currency crisis and the inevitable switch to another reserve currency, whatever, whenever that will be. It is an inevitability, so it’s a matter of time. If you are in the US and you are saving in USD, …. Weimar Germany or something like that. Don’t listen to the fools saying it could never happen here. Their is a race to debase currencies by many Central Banks, but the are far more trillions of dollars to be sold than any of the other currencies, so when the selling begins (has begun really) watch out!

    • Joep Meloen

      In the Netherlands we can buy tax free gold bars or coin. Silver coins are also taxfree but have a very large premium, about 20%.

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  • Bruce C.

    I think that what is going on today monetarily is mostly out of desperation, as well as the “radical” proposals being presented. All are attempts to maintain the status quo, not to solve anything fundamentally, so keep that in mind.

    That they represent the next stages of the Austrian’s “crack up boom” is quite possible. After all, Hayek’s point is that if the response to the first sign of a credit bubble (which even the most Keyensian or Modern Monetary Theorist agrees occurred in 2008) is not to allow deflation and de-leveraging to occur and thus suffer only the mildest possible adjustment, but instead is the redoubling of efforts to reflate the monetary system (which the most Keyensian and Modern Monetary Theorists still recommend) then a catastrophic currency collapse is inevitable.

    Only Keene’s “debt jubilee” (i.e., debt forgiveness/write-off) proposal provides a way to de-leverage the system (but it fails to eliminate the ultimate cause of credit bubbles themselves: fiat money, central banking and fractional reserve lending.) The other two are clueless.

    One would think that gold/silver would flourish in such a crazy environment, that is if one believed that the central banking system will not pull through once again. As of late January, 2013 most talking heads and heads of institutions are sounding pretty perky. So most people are hedging their “bets”. We shall see. Personally, I think we’re just beginning to see how perverse and distorted things can become. Not that it will end well, but that the end may never seem to arrive.

    • Bruce C.

      Some more thoughts:

      Since we’re considering radical monetary ideas, isn’t it interesting that the Fed (and all of the central banks for that matter) could literally just write off all of its “assets” – those government bonds that are hanging over so many countries today and causing all this angst? What that would mean, literally, is the Fed would simply declare a “jubilee” and “burn” its bond papers and the US government would be relieved of all interest payments and principle repayment obligations. Instant de-leveraging, but by an institution that created the original debt out of nothing to begin with. What real loss could the Fed claim in such an act? There would literally be no “material” loss. Other than its own operating expenses what “costs” would it have to absorb? Fiat money really is inherently worthless. Debt write offs by any other entity – those operating in the “real” economy in which there are actual counter parties involved in all transactions – WOULD entail “material” losses, but not a central bank which is literally the source of money for nothing.

      Here’s another way to look at it: Imagine some “evil genius” in his proverbial basement who has discovered a way to make flawless counterfeit Federal Reserve Notes. Then, much like a “Santa Claus”, manages to disburse this counterfeit cash to millions of people. Bags of cash delivered to every door step. The recipients then deposit the cash into their bank accounts and ultimately pay off all of their debts with it. Presto! All the debts are paid off and the creditors are paid in just they way they wanted, with fungible FRNs. Then, as the Fed senses that the money supply is increasing it then sells all of its bonds on the open market to take the excess cash out of the system. It would never know the difference between the cash it produced in it’s own basement from that produced by the counterfeiter. Besides, even if it did figure it out after the fact, what would it do about it? What could it do?

  • Chris

    There are only 2 basic ways of having a debt jubilee. First, the creditor forgives the debt and this will lead to deflation as asset prices will fall accordingly. Secondly, a third party, like the Fed, print money and pay off the creditor and this is inflationary. Inflation will grow rapidly as it feeds on itself and Fed is not careful, interest rate will have to increase rapidly to stop it. Ask Paul Volker about it. Rapidly rising interest rate will definitely kill the economy and ultimately lead to deflation. All other methods of debt jubilee are variants and Fed used terms to confuse the markets to get away with using the words ‘money printing’. Before the last GFC, the mortgage market was being manipulated in the same way by the elites using fanciful terms like CDOs, CDSs, CDOs square which were CDOs covered by CDSs to be resold as AAA CDOs. I would think that other countries are already trying to devise a new trading system to bypass the US$ so that they could carry on trading even if US banks become problematic as experienced in the last GFC when markets seized up and trading stopped. This puts the US bond market at risk.

  • Erc Seitz

    Ellen Brown must have graduated from the University of Zimbabwe.

  • http://www.facebook.com/vincecate Vincent Cate

    Yes, these different ways of spending money out of thin air really come down to the same thing.

    Another two things that are really about the same is short term government debt and excess bank reserves. In both cases some money is off the street, so not causing inflation, and earning some interest. In both cases it could come back onto the street fast. If you think of the Federal Reserve as part of the government, then these two cases are really exactly the same thing. In effect, the government has found a way to increase the real national debt without increasing the reported national debt. It will be interesting to see how long they can fool the market.

  • Reese

    Well, we all know the system is corrupt and broken which only enriches a few elite….seems to me that even a gold backed system is limited due to the finite amounts (not every country in the world has gold to begin with). I would encourage a debate on a concept that controls the “amount of currency in circulation” to be tied to a ratio of 2 finite resources that every country has….people….and land……determine somehow exactly how much “money” needs to be in circulation for any given population….and then divide the total acreage within the country by that amount…..then monitor and revisit the calculation every census….if more “money” is needed in the future based on the rise or fall of the population….adjust the amount per acre of land……simple…..Just a thought, seems to me it would be better than any other measure since all countrys around the globe have these 2 finite resources…people and land.

    • Joep Meloen

      You would call it NWO.

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