Friday, July 17, 2009

Debt Cancellation/Debt Jubilee: Would You Be For It?

So you know I have been on the doom and gloom kick lately and have been really diving into it lately. I have probably dove a little to deep as I have scared myself and am worried that we might not be able to make it through this with out a total collapse. I agree with most of these predictions and that one way or another its going to happen. Niall Ferguson, author of the new book, The Ascent of Money, when talking about the stimulus money back in January:
Well, it is better than nothing. I think we have to realize that nothing would be the Great Depression. So it will be a “success” if output only contracts by five or seven percent. It will be a “success” if unemployment only reaches 11 percent, because in the Great Depression output contracted 30 percent, and unemployment went to 25 percent.

The debt burden, as a proportion of G.D.P., is in the region of 355 percent. So, debt is three and a half times the output of the economy. That’s some kind of historic maximum, and those debts aren’t going away.
One of the ideas that some forward thinkers have on how we can save this crisis including Niall is to Cancel the Debt or Debt Jubilee. We have now reached the point of our government starting to talk about another bailout.

Gregor Macdonald thinks there are no good answers and I can agree that there really isn't. I think if in 2006 someone told us we were going to be in a crisis this bad we would have all laughed. (some warned us, but it wasn't our leaders)

Gregor says :
I would point people to the various articles and research that suggests no combination of tax increases, or growth, can possibly catch the debt now. The debt has reached escape velocity.
He goes on to explain his solution—for people to pay down debt, buy stuff to stimulate the economy, and put it in the bank.:
A 150K for every tax paying adult. Then combine it with new federal limits on credit creation, fractional reserve banking, and limits on personal credit extension. It would be like a mass, societal mea culpa. And then we move into a Slow Growth era. Those not in debt get 150K too. But again, restraints would be needed to discourage consumption. Under this type of plan, public policy would move down the spectrum towards Savings. That would be a huge change to American culture.
I am open-minded on this stuff, and largely neutral. Generally I advocate ideas that will work and reduce suffering. I'm not big on moral hectoring and making people pay too much for their mistakes. However, on the other side of that equation, I agree that chaos and hazard increase if people are trained that their mistakes will have few penalties.
It's a mess. All the solutions so far are a mess. I would at least like to see a discussion of a debt jubilee, with a 150K credit to all, and then new onerous credit creation restrictions, and balanced budget laws both at Federal and State levels.
Bottom line though is that I have few solutions.
Niall says:
Well I’ll tell you what you have to do—you actually have to cancel the debt. There are historical precedents for this.

In the past, when excessive debt burdens were accumulated by government, they tended to do one of two things: either they defaulted—this is the Argentine solution—where you say, “Ah, I’m sorry, I’m afraid we’re not going to be able to meet the interest payments this month, and never again will we make the interest payments.”

The other scenario is inflation, where the real debt burden is eroded because the money that it’s denominated in loses value.

I don’t think we’re really going to be out of the woods here until something of that sort happens to the huge debt burdens of the U.S. economy. Either these debts will have to be fundamentally written off in some way, or inflation will have to reduce the real burden.
So my question to you, would you be in favor for a debt jubilee or some other type of reset button? Would you take 150k for the next bailout? Like Gregor says it would turn public policy toward savings, Yay! What do you think we need to do, any solutions? I know what I would do, I would be purchasing a new house and paying off the remaining 12k I have in debt. I would probably use 100k to put down on a home and put the rest in savings.

Of course these are forward thinkers that are really trying to come up with solutions and not power hungry politicians that think they can truly get us out of this mess. So I don't think we would ever see something so radical. I am waiting for the market a little longer and I am pulling the majority out to site on the sidelines. Please leave a comment! And have a great weekend!

Related Articles:
Concerns about the Fed's New Balance Sheet
Niall Ferguson: Bring on the debt jubilee!


  1. Well, it would be nice if a magic wand could be waved and have my student loans disappear. But, I think at this point, it is our Federal government that needs the debt forgiveness more than anybody. If some people default on their debt, it sucks for them, but if the country defaults on its debt, it sucks for everybody - right?

  2. Ya I would think so, we would lose al credit with other countries right? I believe that we have good credit with everyone but if we just told them we were not going to pay them it would be a wrap.

    One the other hand...we would have to start from scratch and based everything off saving not consumption.