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Sludge Report #189: Jubilee - Halve The Debt!
Sludge Report #189 - Halve The Debt!
By C.D. Sludge
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In this edition of the Sludge Report:
Jubilee
The Debt Bubble
The Beauty Of Simplicity - Lets Just Halve The Debt
What The Bursting Of A Debt Bubble Means
So Why Not Just Halve The Debt? The Paradox Of Money Supply
How To Halve The Debt
The Folly Of Picking Winners
Resolving The Crisis Of Confidence
The New Zealand Situation - We Don't Really Need This Solution - Yet
The Global Perspective - This Would Need To Be Global
And Finally… A Developing World Perspective On Jubilee
In ancient Babylon the concept of Jubilee involved the regular cancellation of debt - Wikipedia explains it thus:
Advertisement - scroll to continue reading"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 fifty years, in which slaves and prisoners would be freed, debts would be forgiven and the mercies of God would be particularly manifest.
These Babylonian kings occasionally issued decrees for the cancellation of debts and/or the return of the people to the lands they had sold. Such "clean slate" decrees were intended to redress the tendency of debtors, in ancient societies, to become hopelessly in debt to their creditors, thus accumulating most of the arable land into the control of a wealthy few.
Sound at all familiar?
The current debt crisis is often referred to as a debt bubble. The trouble with bubbles of course being that they burst, as this one has now.
Several thousand years ago they had a solution to this - to burst the bubble regularly in a manner which was predictable. These days however we seem to think that when the bubble builds and then bursts we should just accept that it is now a time for universal suffering. Perhaps we even think that we deserve it.
With the benefit of hindsight clearly this crisis has been caused by a failure of both the system and of human behaviour. Personal greed (particularly by the property owning baby boomers) and a willingness to believe that it will always be jam today (especially in the developed world) are indeed partly to blame.
However we should also not forget that the economic system is a product of human ingenuity. We created it and we are its masters. It ought not be our master. How can something entirely of human construct be so much more destructive than the worst hurricane.
For now however we appear to be completely in its thrall.
All the kings horses and all the kings men cannot stick the banking system together again.
So far as the global crisis is concerned nothing that has been done over the past six months appears to be having any effect.
The Beauty Of Simplicity - Lets Just Halve The Debt
The beauty of the idea of Jubilee debt cancellation is that it is very simple.
And money is also relatively simple - even if not well understood.
Money is created when it is borrowed. Money is then destroyed when it is paid back or when debt is written off.
So if we were to collectively cancel a very large amount of debt - by way of a Jubilee - we would simply destroy a lot of money a great deal faster than the current (very painful and unmanageable) process does.
Importantly we would also do so in a manner which is transparent, fair and comprehensible. These characteristics are of course the opposite of the characteristics of the current machinations of central banks and Government treasuries.
What The Bursting Of A Debt Bubble Means
The problem we face at present with the bursting debt bubble is that the amount of debt owed to our banks now exceeds the value of the assets it has been lent against - our houses, our businesses and our countries.
And in the case of the present crisis - i.e. the bursting of a debt bubble of monumental size - a 50% debt cancellation would effectively just turn back the clock to the 1990s.
Which is not even very far.
Think about your personal situation for a minute.
Many houses and companies and countries are now worth less than 50% of what they were only a few months ago. However many of those same assets are now worth previsely what they were just 10 years ago.
Halving the debt would simply give all of these households, companies and countries a fighting chance again. It would be like turning back the clock.
Personally in the 1990s I had a mortgage of $120,000, now I have a mortgage of $260,000. While I am earning more than I was back then, I am not earning that much more and the minimum wage has barely moved.
The balance sheets of a huge number of households, companies, and countries around the world are exactly the same. Halving the debt would not actually be that big a move.
So what would be the economic effect of such a measure?
Or put another way - is there a reason that this superficially attractive solution is actually a dopey idea with no merit at all?
So Why Not Just Halve The Debt? The Paradox Of Money Supply
In answer to this question the first thing you need to do is be wary of the language of debt.
Currently if you read the newspaper, listen to the radio, listen to politicians on the TV or read the economist everybody is telling you the same paradoxically stupid thing.
UK PM Gordon Brown tells his people that his government should not let its industry crumble - rather the Government should "borrow" to get themselves through the crisis.
In the Economist you read that several Eastern European countries are facing the need to borrow up to 20% of their GDP in order to finance their expected fiscal deficits.
Here in New Zealand Dr Alan Bollard told us only yesterday that New Zealand is an "externally financed country" and hence has to keep international bankers happy.
Of course there is an element of truth to all of this. Banking is international and for some reason we have for most of the past five decades out-sourced much of the credit creation in the world to the Americans, The Japanese, The Chinese and the Germans.
However borrowing when talked about by banks and borrowing when talked about by humans is not the same thing.
And right now when all of the major economies (and all of their banks) are also screwed the idea of "borrowing" more money from them makes not a great deal of sense.
If there is someone out there with a few $trillion to lend us all then how come nobody knows where he lives? Why haven't we asked him to bail us out already?
This is not to say that bank debt creation through lending is a bad thing. Nor that this is not what would immediately start happening again once half the debt gets cancelled. That is precisely what would happen and that is why we would do it.
However lets hope that on the way to understanding how we can halve the debt without making the sky fall on our heads we may more widely understand that it is wrong to think - as many people do - that they have borrowed the money for their overseas trip from some Chinese peasants savings scheme.
The truth is that this is not the way the money system works.
How exactly it does work is a question that everybody should be asking their bankers and not one which is worth explaining right now.
However it is worth explaining how a debt cancellation programme might work and what its effects would be.
Well for starters you would concentrate on bank created debt and bank created and issued paper.
It would not be desirable to halve the debts owed by banks to their retail depositors nor to halve the debts owed to truly deposit financed institutions like credit unions and finance companies. Some special mechanism might be required for these kinds of debt - however as they are such a tiny fraction of total debt this would not be too difficult.
Superannuation fund owned commercial paper however could be halved as could all bank paper and all debts owed to banks including mortgages, personal loans and credit card balances.
Super funds might think this disastrous but on the flip side while their paper debt holdings would be halved - the likelihood of this paper turning into paper would be a great deal less. And their investments in equities - now completely illiquid and rapidly looking like vapourware - would suddenly have growth potential.
You might also think that halving bank debt would inevitably require a halving of deposits - but it would not do so.
Deposits are not equal to bank lending (hence the reference above to Chinese peasant savings). Under the fractional reserve banking system banks are allowed to lend 10 times (and often even more) what they take in in deposits.
This is why some banks in NZ are currently offering 6% on term deposits while the official cash interest rate is 3%.
Right now deposits are like gold.
And when it comes to a halving of bank debt - maintaining the value of both deposits, bank capital and bank equity is the trump card.
The reason banks are currently falling over like flies and shifting all their risk to us taxpayers is that their "debt financed lending" - i.e. the money they created and lent to the guy in the string vest in the everglades is being written off. And when it is written off bank reserve rations fall and they are prevented from lending new money. And this is precisely what they are currently doing.
This is a vicious cycle which further damages the economy, asset values and ultimately leads to further writeoffs.
However if banks and bank depositors are allowed to keep their deposits and their capital (and their shareholders equity - which is presently heading towards zero) - but have their debt halved instantaneously - then their balance sheets suddenly improve dramatically.
Suddenly the 50% drop in the value of some of the securities they have lent against is manageable. The unimaginable writeoffs that they cannot imagine have been implemented (through the halving of the debt) and they can get back into the business of lending again.
In the meantime there is suddenly no more need for us taxpayers to take both the risk and the responsibility of trying to put the smashed credit machine back together again.
Some banks may still fail. But these will only be the truly stupid ones. Healthy businesses, families and countries will be back in business.
And this leads to one of two particularly attractive aspects around the idea of halving the debt.
As previously mentioned the current response to the credit crisis is being driven by on the one hand central bankers, and on the other hand Government treasury departments.
These institutions are full of economically literate people who know that one of the worst possible things that can happen in a crisis like this is for them to be given the responsibility for deciding which businesses to support and which to allow to fail.
The reasons for this are well understood.
Adam Smith's invisible hand is obviously not always effective - but it is certainly better than Stalin's or Mao's or Hitler's or Kim Jong Il's, or Pharaoh's.
Central control of investment allocation and decisions carries with it moral hazards which we know from painful historical lessons that we do not want to repeat.
But how can a treasury department spending 3 trillion dollars - like the US Treasury has just done - do so in a way that does not pick winners? How can Barack Obama avoid becoming Pharaoh?
At present the institutions are trying to accomplish this by keeping themselves at arms length.
They talk about creating bad banks, about taking over ownership of banks, but of still allowing them to operate independently. They are trying their best not to take over decision making - but it is very very hard. And also very very frustrating as unsurprisingly many good bankers do not want to lend to anyone in the current situation.
But then there is avarice, greed and opportunity, and rewarding failure.
When faced with a system which effectively involves writing government cheques with lots and lots and lots of zeros on them - how can any government run system possibly stop the money being stolen.
When the US invaded Iraq organised criminals - corporate ones - stole millions from the US Treasury. What do we think is happening now when 10 times the sum of money is up for grabs.
And this aspect of the problem of bailouts has a very nasty twist in its tail.
As taxpayers we are financing a bailout architecture which is inevitably rewarding the very same financial criminals and fraudsters who made so much money as the balloon went up. Now they are making even more as it falls.
Sure some very smart people lost a bundle in all of this - but some even smarter ones are making a fortune as Rome burns. This is how humanity works.
And this is the opposite of Jubilee.
Rather than returning society close to some equilibrium - even more power and wealth is being concentrated into an even smaller number of individuals.
By contrast simply halving the debt as a global response to the crisis would simply eliminate all of the above problem. No real decisions need be made except to proceed. What then happens happens.
Some individuals, businesses, banks and countries would still be too indebted after having their debt halved to survive.
The market would be allowed to go back to doing what it does best, finding the places where resources ought to be invested.
Meanwhile the central bankers and treasurers would get back to what they really need to do after this crisis - establish a new order in banking which prevents the catastrophic misallocation of resources which has occurred over the past decade.
Resolving The Crisis Of Confidence
The second arm to the current crisis, the first being the broken banking system, is a crisis in business and consumer confidence.
Unsurprisingly everyone the world over is feeling like shit. Even if people understand what is going on they see no way out.
How many people really believe that the bankers, politicians and economics boffins know a way out of this crisis? Do you?
Faced with these conditions everybody is choosing to dig in, hunker down. We are all saving our pennies. Putting off the TV, car, fridge, holiday purchase and instead planting vege gardens and scooters.
Now some of this stuff is good - and hopefully we will keep doing it after things improve.
But some of it is not so good - a contracting economy in which nobody is spending will die from lack of oxygen. In addition to putting off TV purchases people are not going to the dentist, not insulating their houses and eating cheap junk food.
In order for this crisis to be resolved we need to fix the banking system and also re-inject confidence into the body politics.
Given the current state of morale something big is required. Something bold. Something which people can understand and something which genuinely will get them out spending again - even if it's just on a new rotary hoe for an urban artichoke farm.
Again speaking personally I can think of nothing more confidence enhancing than having my mortgage payments and credit card bills halved.
The New Zealand Situation - We Don't Really Need This Solution - Yet
NZ;s Reserve Bank Governor Dr Alan Bollard informed us at yesterday's economic briefing that the NZ economy is expected to only spend six quarters in recession.
Since this recession started at the beginning of 2008 - this means NZ could be growing again by June.
Which would be great. And I sincerely hope it is true.
It is true that New Zealand is not suffering this global crisis as hard as most of the rest of the world. Here in godzone we are missing three things that most of our wealthy trading partners possess 1) a manufacturing industry and 2) a financial services industry and 3) any real savings base.
Meanwhile most of our sharemarket is owned offshore so even those punishing losses have not been felt at home.
NZ basically lives off of tourism, the cow's udder and other parts of natures bounty - agricultural exports. At present the one thing which is (so far) surviving the credit crisis intact is commodity prices. NZ in-bound tourism is also holding up remarkably well - so far.
However if we in NZ believe that because everybody needs to eat then they will always want to pay good $$$ for our meat and dairy we may find ourselves mistaken.
In the end it depends how bad things get and prices of food can fall a lot further. And with a catastrophic collapse in global trade, lending and falls in asset values of an order not seen since 1929 we would be very foolish to rest on our laurels.
Ultimately NZ prosperity is dependent on global prosperity and global prosperity is not looking too rosy.
The Global Perspective - This Would Need To Be Global
The idea of halving the debt is not a domestic policy. Clearly the banking system is now global and the solution of halving the debt is one which also - by definition - would have to be global.
It is unlikely however that a solution like this will be embraced by the global financial institutions who are controlled and run by bankers. While this idea is arguably in their interests they may not see it that way.
Rather this is a political solution and if it is to fly then it will need wide dissemination.
So get emailing your friends in foreign places. Twitter the idea. Talk about it around the canteen.
Note also that this article is not copyright and is free to be taken, rehashed, translated, misused and abused in any manner anyone likes anywhere they choose.
And Finally… A Developing World Perspective On Jubilee
The developing world has been calling out for debt forgiveness for decades. The cry of the poor has fallen on deaf ears in the banks of the West and the North.
An obscene proportion of the world's people live on less than one US Dollar a day and that number is now climbing rapidly.
While we in the developed world fear for our jobs and watch our paychecks being cut we at least still have some hope.
Our children may not be able to get jobs, but they can go to school while we all wait for things to get better. For many of us a worst case scenario means fewer fancy electronics, no foreign holidays s and more time in the garden.
And so for us halving the debt may seem a step too far.
But inevitably in an economic crisis of the kind that is currently hitting the world - those who are most affected are those at the bottom of the heap.
Aid agencies are already talking of donations drying up. Government aid budgets are being cut or redirected towards domestic demands - and what is already a catastrophe for half of the world's population is rapidly getting worse.
And ultimately a combination of hungry starving people and climate change will have very unpleasant consequences for us all, deteriorating security, environmental degradation, plague, war.
As the crisis deepens the sense of powerlessness we have begun to feel will take a hold of what remains of our ability to determine our own destiny.
And so for the sake of the weakest among us - as well as for ourselves - we need to find a solution to this crisis, and we need to do so fast.
Alastair Thompson
Scoop Publisher
Alastair Thompson is the co-founder of Scoop. He is of Scottish and Irish extraction and from Wellington, New Zealand. Alastair has 24 years experience in the media, at the Dominion, National Business Review, North & South magazine, Straight Furrow newspaper and online since 1997. He is the winner of several journalism awards for business and investigative work.
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