The world owes USD 300 trillion. To whom?
To the world.
Governments, corporates, and individuals are heavily indebted. Some say corona virus has instituted a global monetary reset whilst some say it is a cover-up for a system reset of the financial system. Both these arguments don’t make sense. The debt does not go away. In any case, it increases.
After the battle against corona virus is won, we will still face the problem of debt. Maybe it’s time to implement a radical solution to the problem of debt.
Declare the year 2025 to be the first Global Debt Jubilee Year in the modern era, followed by a series of debt cancellation years every 7 years thereafter. A debt jubilee is a year in which all debts are cancelled, forgiven forever, no need to repay.
This solution sounds stupid at first glance, but stay with me, as I explain why this is a brilliant idea and way better than the current dispensation.
A debt jubilee is needed, not now in 2020 , but soon (in 2025) and every 7 years thereafter. A global financial system forced reset and rebuild with a built-in set of controls that limit excessive debt accumulation is needed.
The solution is right in front of our eyes. A debt jubilee is an ancient solution to a modern problem. It is plucked straight out of the Bible in the book of Leviticus and the book of Deuteronomy.
The Remission of Debts on the Jubilee Year
8 Count off seven sabbath years — seven times seven years — so that the seven sabbath years amount to a period of forty-nine years.
10 Consecrate the fiftieth year and proclaim liberty throughout the land and all its inhabitants.
The Remission of Debts every 7 years
Deuteronomy Chapter 15 verses 1 and 2.
1 At the end of every seven years you must cancel debts. 2 This is the manner of remission: Every creditor shall cancel what he has loaned to his neighbor. He is not to collect anything from his neighbor or brother, because the LORD’s time of release has been proclaimed.
Does Debt Matter that Much?
Yes, debt matters a lot. Our entire economic apparatus is centered around debt. The entire monetary system is a premised-on debt. Extremists would go on to say the only real money is gold. The notes, coins, and digital bits we circulate is all debt. It is a debt-based monetary system.
Here is a bulleted summary of why debt matters:
- Money is created from debt via the Fractional Reserve Banking System
- Thus, Money Supply growth is umbilically linked to Debt growth via banking sector lending
- Excessive build-up of debt and the sudden retracements are the major cause of financial crises and business cycles.
- Financial crises result in a reduction of debt, but not a total reset, most debts are carried over into the next boom cycle. The level of indebtedness is ever-increasing.
- Recessions are now more common than ever before. We are now experiencing severe recessions every 10 or so years. Because debt levels are always rising, recessions could become more frequent and more severe than they currently are.
Why is debt an urgent matter now?
- The world is drowning in debt, at all levels. At the national level, countries have been running budget deficits after deficits, all funded by debt. At private levels, companies are leveraged to the hilt. Consumers are also laden with debt.
- Debt-to-GDP levels are at an all-time high. See graph below
- Debt that can never be repaid because it is too large will never be repaid. So, something must be done now.
- Corona virus has initiated a system crush and exposed how fragile the economies of the world are. Debt overhangs on corporates and consumers will stifle recovery if not addressed
What would a debt jubilee achieve?
- Forced System Reset — the first big one, then small ones every other 7 years and big ones every other 50 years.
- Known Business Cycles
- Smoother (Less Extremely Volatile) Business Cycles
- Avoidance of Depressions
- Forced Balance Sheet Clean-ups
- Forced Capping of Private Debt
- Panacea to reckless lending
- Controlled Money Supply Growth — a balancing check on the debt-based monetary system
- Eliminates market crashes, economic trajectory is mapped and known
- Reducing the size of the financial sector, to stay in touch with reality (the real economy)
- It would limit the coming two decades of stagnant growth to a couple of years
- It will be a partial cure to the cancer of excessive Budget Deficits — governments need to learn to live within their means.
- Reduction of The Economy’s Interest-rate-sensitivity. The economy is very sensitive to interest rates because the bond market far outweighs equity markets. A debt jubilee will correct this anomaly we ignorantly perceive as normal.
To cover all areas, I will skip the detailed explanations of how a debt jubilee achieves the above. I might write a whole article on the how part later.
How to go about it?
It’s simple. Declare the jubilee and the markets will be guided accordingly.
Most Debt to be parametered by the 7-year Cycle
Credit card debt, vehicle finance debt, and other forms of consumer debt can be parametered by the 7-year cycle. Corporate debt, short-and-medium-term government debt can be parametered by the 7-year cycle as well.
Mortgage Debt — Parametered by the 50-year Cycle
Mortgage debt is the largest debt owed by any household. This should not follow the 7-year cycle but instead should follow the 50-year cycle with a built-in price adjustment mechanism indexed to the number of years to the next jubilee. The tenure of the mortgage will be parametered by the 50-year cycle, ranging from 1 to 49 years.
Again, we pluck this from the book of Leviticus
14 If you sell land to any of your own people or buy land from them, do not take advantage of each other. 15 You are to buy from your own people on the basis of the number of years since the Jubilee. And they are to sell to you on the basis of the number of years left for harvesting crops. 16 When the years are many, you are to increase the price, and when the years are few, you are to decrease the price, because what is really being sold to you is the number of crops. 17 Do not take advantage of each other, but fear your God. I am the Lord your God.
Mortgage Lending defining the 50-year Super Business Cycle
- Mortgage should not be governed by the medium term 7-year cycles of debt accumulation and eventual cancellation. It should be governed by the 50-year cycle.
- The big jubilee will enforce a built-in downscaling on lending activity after a heating up period. From Year 1 after the jubilee to say Year 30, mortgage lending will be high. After year 30, it will start to decline as the repayment period gets smaller as we approach the jubilee year. This forces mortgage lending to rise, peak and drop systematically and predictably, thus establishing a known super business cycle inside of the 7-year business cycles that are relatively smooth
The Fairness Question
Is it fair to forgive debts by law? What about the lender who stands to lose out?
Who is the lender? These are the biggest lenders, holders of debt instruments:
- Insurance Companies
- Pension Funds
- Sovereign Wealth Funds
These entities stand to lose out if a debt jubilee is announced. They will not be able to recover most of the funds they invested in debt markets. Basically, your bank will have huge portfolio impairments such that it might collapse, insurance companies will become heavily underfunded and not be able to make payouts, your pension money won’t be there when you need it.
The fairness question is raised in this regard. The question puts the blame on the debt jubilee as a punishment for the “good” lenders and a reward for the “bad” borrowers.
There is a double-barreled faulty connection in this line of reasoning. The first faulty connection is in identifying the debt jubilee, (a realization event) as the problem. Unrealized losses must be realized at some point in time. The sooner the better, so we can all move on with our lives. The jubilee is just a manifestation of the obvious. It is an unveiling of the tombstone. The debt is already dead. It will never be repaid. Rolling it over is a time-wasting exercise.
The second faulty connection is in the use of “good” and “bad” moral dichotomies and juxtaposing them. The fairness question has subtle implication that lenders are good, and borrowers are bad. However, when we look that the transaction, we see that both parties are in it for benefits. Lenders are in it for interest and borrowers want access to resources.
Lenders are not victims in this equation. They are part of the problem. Borrowers are like kids; they want to eat a whole packet of candy. Left alone, they can finish an entire cake in one go. It is only natural that borrowers want to borrow as much as they can. Lenders are like parents. It is their role to put limits and controls.
Who is bad and who is good? The kid that eats a bucket of ice-cream in one go or the parent that gives the kid a bucket of ice-cream to eat in one go.
As an example, it is totally imprudent for China to keep piling up US Treasuries. There must be a limit on the US TB’s and hard USD currencies that China should take. If the US defaults or prints its way out of the TB's debt, China should not cry foul.
It is only fair that lenders occasionally (every 7 years) face their day of reckoning. The debt jubilee point in time will hold them accountable for their lending actions.
Pension funds have been pouring funds into all sorts of debt securities as long as Fitch and friends have rated it. This is silly and imprudent. In countries that have state-run and state-guardianed pension funds, we have witnessed the most illogical investment actions. Pension funds for government employees invest in Treasury Bills and debt securities issued by state-owned enterprises.
Tesla is a great company. It is transforming the world. People are willing to lend an unlimited supply of debt to Tesla. These lending actions should have a day of reckoning, sooner rather than later, because the world is suffering from excessive leveraging.
The Moral Hazard Question
There is, of course a counter-argument that a debt jubilee will create a moral hazard. Once forgiven, people will borrow excessively knowing that they will be forgiven again, or at least waiting for the 7th year to arrive and debt cancellation to be triggered.
This argument fails to consider the other side of the transaction, the lender. If a lender knows of the dangers of the moral hazard, he will lend accordingly. The tenure will be shorter than the debt cancellation year. If defaults are prevalent, repossessions and recourse around the 6th year will be massive, and lenders do not totally lose out.
The other question relates to the morality of debt cancellation. I believe this is a very moral thing to do. It is right. This addresses reckless lending and avoids irresponsible borrowing.
Another question to ponder is the size of the debt market. It can be argued that if many lenders are discouraged from lending because of the built-in ability of borrowers to get away with it, the size of the debt market will be small. Very few people will be willing to lend.
Again, this line of thought ignores the ability to limit tenure to under 7 years. Moreover, it assumes that size matters and a big debt market is preferable. the line of thought assumes the bigger the debt market, the better it is for the economy.
The opposite is true. Size does not matter on this one. It’s the efficiency, robustness and stability of the debt market that matters. A big debt market, that is inefficient in the allocation of resources is the reason why the world is in this mess. It is part of the problem. The debt market is currently too large, outsized and larger-than-life. Some funds need to exit debt markets and enter equity markets.
Why Should the Jubilee Start in 2025 instead of Now?
It is practically impossible for a jubilee to start now. It will be disastrous and chaotic. 2025 will give everybody enough time to act in anticipation of a system reset.
Announcing a debt jubilee year to come into effect 5 years from now gives markets time to react. Lenders will get time to unwind their positions. Borrowers will be forced to de-leverage by the lenders.
The mere act of announcing an intended debt jubilee on a specific debt will result in a total clean of toxic assets from the system. The time between announcing the jubilee and the jubilee coming into effect is a reflection and action time.
Steve Keen, a thought leader in this area, thinks the time for invoking a debt jubilee is now because of corona virus. He also has an interesting take on how the debt jubilee should be fused with Helicopter Money.
I think a realistic time frame for implementing a debt jubilee is a 5–7 years.