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Is a Debt Jubilee the Next Big Meme?

by John Rubino on October 21, 2012 · 25 comments

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.

 

  • fazsha

    This is brainless. The difference between the biblical debt jublilee and this is that the creditors saw the 50 year debt jubilee coming, and thus could adjust their lending accordingly – that is, scale back in the years leading up to the 50th year. It served as a braking device. This would just blindside creditors. The US never proposed a debt jubilee in the post WWI period when THEY were the creditors – oh no, then debts were sacred obligations. (Read Garet Garrett’s book The Bubble That Broke the World.) No, a jubilee is out of the question. What is not out of the question is for each individual debtor to individually default and declare their bankruptcy. It would be a bit more drawn out of a domino-effect, but then each party would be responsible to decide for themselves their own ability to pay, or lack thereof, and accept the consequences.

  • Chris Eaton

    I love it when people speak of moral hazard when the banks are the ones who have behaved in the most immoral manner.

  • Exodus 22:25

    I have another Biblical idea. Instead of a jubilee bring back usury laws. Mandate that the ZIRP extend to all consumer debt. Lock it in until a bench mark is hit (like $2 Trillion). Is it immoral? No more immoral than getting money at .25% and then charging 4% (1600% increase) on a mortgage or 17% (6800% increase) on a Credit Card.

  • Caz

    We are witnessing a slow motion car wreck and there’s no easy way out for anybody – banker, lender, debtor, gov’t, corporation, individual, etc. Just gotta hope you can survive by amassing enough commodities that other people don’t steal, to make it through the tough times.

  • DavidN

    fazsha is correct. The Biblical requirement was known ahead of time, but it was also coupled with a prohibition against charging interest (to fellow Jews). What people don’t seem to see is that money is just a way of assigning control over stuff. Money backed by gold or silver is still fiat because real estate and oil are true wealth. Oil can be moved around, real estate can’t, so any nation that uses more energy than it produces better have something else to trade if they want to survive in the long run.
    That’s why the Euro isn’t stable. Europe doesn’t have oil.
    The bigger problem is the size of government. Government doesn’t produce anything of value, it just steals from some and gives to others (mostly itself). Less government would mean more for the masses.
    Real resources are also declining in the face of growing population. Twice as many people are alive today as in 1968, but there is far less oil, gas and coal left. This energy party will end one day and end badly for all if transportation doesn’t change. 1/2 of US oil consumption is for moving cars around. That can’t go on for much longer.
    Another world war is probably around the corner, barring some miracle in fusion electrical power research. At some point it will become attractive to just wipe out your enemies and take their stuff than just sit around and wait to die with nothing to do.

  • concerndcitizen

    There won’t be a jubilee, after all the banks just spent 100 years working hard to get things where it gets really fun for them….foreclosure!!

    That’s what’s next. Sure, they could print up a bit more money to pay off certain groups, but you shouldn’t expect to get any. If Obama is re-elected, unions and other constituencies will benefit. If Romney is re-elected, banks and rich guys will benefit. Neither one of these puppets control the shots, however.

    As for usury, it really isn’t about interest, it’s about lending something that doesn’t exist and charging interest for that. All bank debts are created “out of thin air”. How can it be moral to charge interest for something you just made up?

    If you want to be fair, just have a jubilee on all debts created out of thin air. If you borrowed something tangible, you should pay it back. Poof, the U.S. govt debt would be gone over night.

  • Edward Ulysses Cate

    I could understand that central banks forgave debt, since they created the money out of thin-air in the first place. However, who ends up with “title?” The 1889 book “Great Red Dragon: Foreign Money Power in the United States” maintained that THEY want to “own the earth in fee-simple.” That is, “clear title.” Perhaps that explains the Feds recent actions to absorb $85 Billion in mortgage paper per month to infinity ( or once they own it all.”

  • raphicle

    A creditor is responsible for the debt they sell. Bankruptcy is the borrower’s option. The legal system has attempted to make it more difficult to file, however this procedure should be the jubilee that keeps creditors in check. This is a known option, it would not destroy markets. It would correct them. Creditor beware.

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  • stonehillady

    There is only one solution, it reset the clock 3600 years ago, made all that were slaves free & all those in Power out of Power…that was a Polar Shift. The celestrial beings from the cosmo’s know we are in grave danger of collapse from this hideous system, that is why Nibiru or wormwood or Red dragon is about to show it’s face again & flip this Earth to clean it up. So, you can debate how to get rid of the evil money changers but, I’ll bank on a total wash out, it might in the long run be the Only answer to our world which will lead to lead to a Nuclear One & that won’t be allowed so the next best thing is a Polar Shift to clean the Earth & Make Old New & New Old again.

  • Chris Eaton

    Wait a second….haven’t the banks been bailed out? Doesn’t that mean they have already, in essence, been compensated for all the bad loans they made? Are we saying that banks deserve to get paid back TWICE for their bad decisions? Maybe I’m just missing something…

  • TheContrarianView

    John,

    The fact that something in immoral has never stopped government from doing it anyway. It sometimes seems to me governments sole motivator. But I digress…
    The problem with all those debt forgiveness schemes is that they do not mob up the liquidity that was created in the process. For example, the Federal Reserves creates money out of thin air and buy long dated bonds. Then it extinguishes the debt by gifting the bonds to the Treasury. The Treasury then destroys the bonds. Oh what a wonderful economical miracle! Right?
    No ‘debt’ wrong! The problem is the money that the Fed created out of thin air to purchase the bonds is still in circulation. Eventually, it will circulate in at increasing velocity, driving up prices at an increasing rate. In other words, the Zimbabwe comes to the West.
    The scheme that the Australian numerologist (the MSM term is economist) is proposing would do essentially the same thing. It is quite possible that the newly debt free consumer pushes down the money-velocity accelerator even harder. One wonders when this guy will score the ultimate booby prize coveted by the elite numerologists – the Noble Prize in Economics.

  • Rachael

    First, an idea is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.

    Sounds to me here like we’re still solidly in the first stage……..

  • DR01D

    A central bank debt jubilee won’t happen for this basic reason.

    If the Federal Reserve earns a profit the gains are handed over to the US Federal Government as revenue. On the flipside if the Federal Reserve takes a loss the deficiency is incurred by the US Federal Government. So if the Federal Reserve monetized all $16 Trillion worth of Federal government debt and then wrote it off the US Federal Government would be forced to bail out the central bank on it’s $16 Trillion dollar loss. This would leave the Federal Government in the exact same position, owing $16 Trillion.

    … or maybe I’m missing something.

  • Gray North

    Would a theoretical debt jubilee forgive mortgage debt?

  • Cochise

    A debt jubilee might not be as far fetched as it seems. However, it most likely would come with conditions. All your debts could be erased as long as you agreed to abide to certain conditions such as agreeing to follow a worldwide constitution in which you give up your present constitutional freedoms-freedom of speech, freedom of religion, right to own property, right to bear arms, etc. In other words, you agree to become part of a global goverment-make that you agree to become a slave. For those who prefer to keep their freedom, they will become ostrasized by the masses-and persecuted relentlessly until they relent and give in. They would not be able to buy or sell or take part in any economic activity. Tyranny knows no bounds.

  • kopavi

    Much has been written about the biblical precedence for a “Debt Jubilee”. A Baptist minister friend of mine has pointed out that while this is mentioned in the bible, there is no historical evidence for it ever actually happening. All talk and no action. Things haven’t changed much in those several years, huh.

    • paper is poverty

      I believe there is archaeological evidence of quite a number of debt cancellations in Mesopotamia and ancient Egypt and likely elsewhere, though they may have happened very differently than is described in the bible. And I don’t know that debts between individuals were cancelled… it was generally debts to the state and the royalty that were cancelled. Likely a good way to avoid revolution when the peasants grew restive.

  • Bruce C.

    I think a “debt jubilee”, presumably for the middle class via the tax-empowered sovereigns, is just a politically correct and sociably acceptable version of out right defaults. Mathematically and financially they are the same thing. But morally, philosophically and economically they are not, and I actually think mass defaults by the middle class is akin to a tax revolt and is long past due. Things like that are actually much more empowering than waiting for the government to sanction something self-serving. Too many people have forgotten that Government – and I’m loosely including the central banks and the TBTF banks and crony corporations – are necessary evils opposed to the well-being of the populace and the individual in particular. I can assure you that money – fiat currency – is not what it’s all about. It’s about power and control over others, and they use the guilts and religious morality of the masses as psychological cattle prods. (That’s a big reason why the “investors” bought bundled mortgages without much scrutiny, because they didn’t think so many people would default on them so willingly.) Defaults would put the onus on them, forcing them to deal with their own sick system. Look at Europe, and the US increasingly too: Laws have become nuanced and selectively enforced by whim. The fact that people think that derivative contracts will be enforced despite economic chaos is an honorable yet naive testament to the belief in the sanctity of law enforcement. People are the ones who enforce laws and they are rarely consciously suicidal. After all, Greece hasn’t “defaulted”, they’re only “deleveraging”. So relax. Let’s take the game to them first.

    • paper is poverty

      Regarding mass defaults… what would happen if someone got a social media campaign going in which people would pledge to (say) send in their mortgage payment a week late? Or just stop paying the mortgage altogether? Or what if a hundred thousand unemployed or underemployed college grads signed up to deny student loan payments in a given month? If you can organize the overthrow of governments via Facebook and Twitter, why not bank / tax protests? But I guess we know the answer: that would lead to the fastest revocation of a Facebook page or Twitter account in history.

  • richo345

    I think it can work as follows.

    It would take two steps. Step one, all debts, public and private are wiped out. Start over. Step two. Because all debt is someone else’s asset, this would bankrupt many. So, create the money and pay off the creditors. They start over too. Where to get the money for this? Credit from central banks. Thus central banks now have quadrillions of debt on their balance sheet. So? Turn them into bad banks, then let the central banks go bankrupt. This extinguishes the debts, but does not bankrupt the creditors, only a central bank goes bust. Reconstitute it again the next day, and the world starts out fresh.

    It would not necessarily create hyperinflation. The money paid to the creditors for the bonds is just exchanging one asset for another. The holders of the bond would have gotten all that money eventually anyway when they would have received their money when the bonds matured. They are just getting it a little earlier.

  • http://www.facebook.com/people/Tesla-Berry/100003892763288 Tesla Berry

    when all property has been put through a sales grinder to ensure everyone is encumbered. debt is THE property. and repudiation of debt, or merely the inability to pay that debt (deflation), it the biggest threat to property rights (price stability of debt).

    without continuing fiscal and monetary stimulus all property (debt) holders, especially banks , will be insolvent. WITH continuin fiscal and monetary stimuls all property holders will wind up the slave masters of people forced to starve becasue they cannot afford food or a roof over their heads. you cannot make too much profit on starving people who cannot afford to borrow money to buy more consumables which are themselves built using encumbered property that you own. so it’s not exactly a win win. the only true success is the absence of failure, the drive to survive.

    we either go forward into slavery or backward into deflationary collapse. either way it should be interesting. if i were a betting man, i’d bet on slavery and collapse both but i’m not sure which one first.

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  • http://www.facebook.com/don.inodessa Don Inodessa

    This idea is real easy to implement. We all just stop paying the bills. Stop authorizing the Government to collect taxes, they are supposed to work for us after all, not us for them. And finally, take this country back a few years before the Federal Reserve and Homeland security and re-institute our Constitution. Nothing hard about it. We all just do it.

  • Dennis Richardson

    Yes, it is. As Steven Keen describes it, many people can grab a hold and begin to understand his ideas. The Hebrew God told me many years ago that Leviticus 23 would become well known and men (like Keen) would promote a world wide debt cancelling Jubilee. It appears to be happening as I was told. Hammurabi’s actions 38 centuries are going to become common knowledge and Habakkuk 2:14 and Isaiah 11: 9 will be quoted.


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