Debt Jubilee – Richard Mills

2022.12.21

A cross-the-board ‘Debt Jubilee’ might sound radical, but a reading of history shows that retiring debt can actually make a country’s economy, and its indebted citizenry, all the better for it. There is even a relatively recent example. In 2000, U2 front man Bono launched a campaign to provide debt relief to developing countries. The Jubilee 2000 coalition managed to get the G8 to agree to write off $100 billion in debts that developing countries owed to developed nations.

The term ‘Jubilee’ comes from the Old Testament. The book of Deuteronomy refers to a sabbath year during which any slaves would be freed, and everyone would be allowed to return to their family farms and live off the land. During the Jubilee, all debt obligations would be forgiven — such as land or crops that debtors had pledged to creditors.

In those days, the main creditors were royal families and their close supporters — religious orders and wealthy nobles. Thus, canceling debts really only meant snuffing out debts owed to themselves. As explained by Vox, 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.

The main economic justification for a modern Debt Jubilee is simple. With debts forgiven, governments could spend the money currently devoted to interest and principal repayments on worthwhile programs; businesses would suddenly be freed from debt bondage and could expand/ hire more staff; and households would have more disposable income, all of which would, in turn, increase aggregate demand and encourage economic growth.

Billionaire investor and hedge fund manager Ray Dalio, in his book ‘Principles for Navigating Big Debt Crises’, argues that when interest rates can’t go any lower and QE has already been tried (ie. right now), a central bank’s last resort is to provide relief for the common people.

We have already reached this point and an outright cancelation of sovereign debt shouldn’t be ruled out.

During the Great Depression, France and Greece had about half of their national debts written off completely. In 1953, the London Debt Agreement between Germany and 20 creditors wrote off 46% of its pre-war debt and 52% of its post-war debt. The country only had to repay debt if it ran a trade surplus, thus encouraging Germany’s creditors to invest in its exports, which fueled its post-war boom. As we pointed out, in 2000, $100 billion worth of debts owed by developing countries were wiped off the books.

Again, this is not as far-fetched as it sounds. Because we live in a fiat monetary system, currencies are not backed by anything physical; the reserve currency, the US dollar, was de-coupled from the gold standard in the early 1970s. It’s not like a raid on vaults full of gold, which have an inherent, physical store of value.

In reality there is nothing preventing central bankers from doing a complete global reset, putting all debt back to zero.

The benefits of a Debt Jubilee would accrue to governments no longer bound to austerity programs; businesses that could invest in their operations instead of paying interest and principal to corporate bondholders; and taxpayers, who would benefit from increased social spending and higher household disposable income.

Garth Turner argues that erasing people’s debt is the same as cutting their taxes, the effect being the same — a marked increase in spending:

It actually means interest rates can go up to stem the tide of new borrowing because the economy gets a shot from the jubilee…. Indebted consumers spend money on loan payments, not on new Silverados or appliances. So, a debt holiday would actually boost the economy as a whole, helping employment, corporate profits, wages, markets and investors.

Of course, not everyone wins from a Debt Jubilee. The losers would include credit card companies, auto manufacturers and banks, all of which would lose the value of the debt which for them is an asset.

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