Welcome to Finance and Fury, the Say What Wednesday edition.

Part 2 from last week with Ryan’s question – Starting to look at this – What is a debt jubilee – what are the chances of this occurring and how would this affect the economy –

  1. Dates back to biblical times – The official term ‘Jubilee’ comes from the Old Testament- in some parts of Mesopotamia -Jubilee Year of Leviticus 25 was based on Babylonian practice for over 2,000 years -the practice of debt cancellation, called “andurarum.”
    1. When any new ruler would take the throne, the first thing they would do would be to free the personal debts – was written into Babylonian law
    2. forgive the personal debts that had mounted up – among the small holders on the land – liberate the “bond-servants” -people who had been obliged to work off their debts in labour – essentially freeing of slaves
  1. Economic states are different between now and almost 4,500 years ago – back then – the main creditors were royal families and their close supporters – either the religious orders or wealthy nobles
    1. So the cancelling of debts really only meant removing debts owed to themselves
    2. But this wasn’t purely altruistic – What the king lost in immediate payment, he got back in encouraging a land holding peasantry, who could pay future taxes and provide the backbone of the army. Moreover, rivals to the Crown, foreign enemies or internal upstarts, could foment rebellion by threatening to cancel debts themselves, if the new Monarch did not do so first if there was a rebellion
    3. In times of social unrest – it is something to watch out for – a socialist politician coming in to promise the cancellation of debts
  2. In the modern economy – the fiat system – there is a lot of debt – it is a global phenomenon
  3. When money has nothing backing it –
    1. Hence why the chosen policy prescription for all financial ills is to throw more money at the problem – even if it means piling up the debt – especially when the problems are created by debt
    2. This can work when economies are growing and have very low debt levels – but when debt levels get too high and there is no growth – starts to strangle an economy  
  4. Regardless of the economic effect – there has been exploding global debt -back before the GFC in 2007 – was sitting at $116 trillion USD – current levels are around $250 trillion – about to accelerate due to the stimulus packages governments rolling out
    1. debt has increased by over $130 trillion, but GDP has only risen by $27 trillion
      1. countries have borrowed five times more than their economies managed to produce
      2. Global GDP is about $142trn – so $100trn more debt than output
    2. Puts the economy in a fragile position – the risk of deflation, which means prices are falling, across the entire economy
    3. Another policy response – central banks have been lowering interest rates to fight deflation – policy makers seen as the number one threat to global economic stability
  5. Three major sectors who have debt – Governments, Companies (large and small) and individuals
    1. Governments – Makes up around $70trn of the global debts – Lead by the USA and China
      1. Large debt levels – then Rising interest rates would compound the problem – interest repayments cost a lot to a nations budget – Example in 2008 – US annual interest on debt $253 billion and consumed 8.5% of the federal budget – projections that in 2026 the interest may be $762 billion and take up 12.9% of the budget – with lower interest rates
      2. Debt-to-GDP ratios are rising rapidly – Finland, Canada and Japan had the highest increases in a 1-year period – puts countries in a vulnerable position in the event of a downturn
  • According to the World Bank, countries whose debt-to-GDP ratios are above 77% for long periods experience significant slowdowns in economic growth – estimates that Every percentage point above 77% knocks 1.7% off GDP over the future
  1. Companies – Corporate debt is around Gov – $72trn – but almost $19 trillion dollars of debt is owed by companies that don’t earn enough to cover interest payments
    1. With potential of lowering demand for products – in a bad position – but through SPVs the Fed is buying up corporate debt with more newly created debt – debt on debt
  2. Individuals – Mortgages – credit cards, car loans, and student debts – for the individual side – the debt repayment and interest costs reduce consumption – also impacting economic growth
    1. Level of credit growth was over 10% p.a. whilst wage growth was at about 3.5% p.a.
  3. These levels of debt growth without the economic growth cannot go on forever.
    1. Previous policy responses proposed – trying to get economic growth through MMT
      1. when interest rates can’t go any lower and QE has already been tried – and rolling this out on steroids – a central bank’s last resort is to provide relief for the common people
      2. Economies are basically reaching this point – additional payments to people
    2. The theory is that debt cancellation is needed when debts go beyond the ability to be paid, and all personal debts, all non-business debts, tend to mount up beyond what they can be paid.
      1. debt-strapped individuals right now who lost their jobs, or their stores have closed down, or they work in restaurants and they’re unable to earn the money to pay.
      2. Remember – The debt jubilees in ancient societies weren’t egalitarians – cancelled out of self interest –
        1. Today – the politicians would cancel debts as a promise to get into office – or because it doesn’t want to make the economy fall into austerity – reason would be to preserve stability
      3. Options – Debt defaults eventually- or debt forgiveness through jubilees
        1. Either way – there is quite a cost to this – Will any lender ever lend another penny after this?
        2. Potentially – Lenders will always begin lending money as long as they see that there’s a normal ability to pay. The problem is that somebody has to lose when the debts can’t be paid. And the question is who should lose?
          1. The people through defaults? Businesses, governments, or the financial system of banks
        3. The people losing out would crash the economy worse – so economists and politicians who are proposing this is saying that the Governments can simply pay for this – under MMT – the governments would be able to print the money
          1. Ironic – there was a form of private jubilee in 2008 – the Fed printed $4 trillion to buy up the banks’ bad debt -but at the same time 10 million American homeowners were foreclosed
          2. main economic justification for a modern debt jubilee – debts forgiven, governments, households and individuals could spend the money currently devoted to interest and principal repayments on consumption which would – aim would be for an increase in economic demand and encourage economic growth, and eventually take the world economy out of constant crisis
        4. The benefits of a Debt Jubilee are also meant to go to governments – the proposals would mean Govs are no longer bound to interest or debt repayment – meaning they can turn around and increased social spending
          1. Governments – relieved of debts – similar to individuals could increase their own consumption – would be free to offer generous social programs without having to hike taxes
          2. Infrastructure spending could then be increased – restarting the debt cycle – as in the past with debt forgiveness – such as the 2000 cancellation of debts to developing countries – they are now back in debts – some larger than previously
  1. Of course, not everyone wins from a Debt Jubilee – The losers would include credit card companies, lenders and banks, all of which would lose the value of the debt which for them is an asset – and with it the income that they can generate –  the problem with a modern Debt Jubilee is the state would have to recapitalize the central banks
    1. These lenders are powerful – so it depends on how a jubilee would be implemented – devil is in the details – obviously the banks will resist – they would lose out on billions or dollars every year
    2. The lending system has to remain in place and will play an important role, once we get through this
      1. credit is important – when used correctly it can really help the economy grow –
        1. Business loans – loans that lead to economic output – can help get companies off the ground to employ more people
      2. personal debts and credit cards on the other hand – they help consumption now at the cost of future consumption – similar to a low of other loan structures
        1. Example – personal loan to buy a car now – $20k – but if you have to spend $4k of interest on it – $4k less in consumption that can be made – worse with mortgages due to the long lifetimes and higher interest costs
  • Difference between personal and business loans is that consumption with individuals is likely just being delayed – whilst the production and economic output from businesses that comes from loans would never occur without them
  1. In reality there is nothing preventing central bankers from doing a complete global reset, putting all debt back to zero – would likely come at the same time as a monetary reset

The end result – almost impossible to predict what a jubilee would look like – the form that it takes – from just some nations getting debt cancellations – to some people in countries – all the way to every person, gov and business debt on earth –

  1. At the current rate – doesn’t take much imagination to see that debts are getting out of control – they can keep going forever under fiat but at what cost? Shrinking economies and most countries becoming third world
  2. At the same time – inevitably the world’s reserve currency, the US dollar – would collapses under the weight of unmanageable debt
    1. A triggering event for this could be mass selling of US Treasuries by foreign countries – as they own about $6 trillion of US Govs current debt
    2. This would cause the dollar to crash – and then monetary response would require interest rates to go up – to increase demand – this would destroy those who had borrowings – Business confidence would plummet and mass unemployment would occur – growth would plummet – so to avoid this – could trigger the need to forgive debts
  3. We will look at other government policies that go into this and alternative assets as well in coming episode – but A lot of this debt has gone into asset prices – house prices – shares and the companies that back them – so if the debt is forgiven – then the asset prices may just go up – the debt would be what you wouldn’t want to own in this case
    1. If the debts are forgiven – don’t think this technically means that the money will be ripped out of the economy – would be a reset –
    2. Also could lead to massive levels of inflation – if wages can grow by more -not a problem but without that – would be

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