Podcast: Two Cents' Worth

The case for a modern debt jubilee

Central banks are printing trillions of dollars to lower interest rates and make asset owners feel richer so they will spend more, but that strategy hasn’t unleashed economic growth for over a decade because the rich are parking most of that new money in existing assets.

Instead, why don’t those same central banks hand that freshly printed money to the indebted to cut their overwhelming debts. Why don't we have a modern debt jubilee?

It’s a new idea that has its origins back in the age of the first wheat farmers, kings and prophets. There are sceptics who worry about hyper-inflation and creating the ‘moral hazard’ of borrowers knowing they’ll always be bailed out, but its proponents see it as necessary to avoid a return to a modern type of feudalism.

Debts are spiralling higher as governments, companies and households scramble to borrow in the aftermath of the Covid-19 shutdowns. Many fear those debts will become so large they overwhelm entire economies and grind the global financial system to a halt. 

It all seems like a new problem, but economists see a very long running pattern of debt booms and busts over history.

How society has historically dealt with unpayable debt is fascinating. It is mentioned repeatedly in the bible, and we know some of the most ancient societies were trying to work out how to sort the problem, going back to the birth of modern civilisation some 5000 years ago in Mesopotamia, which we’d recognise now as modern Iraq, Turkey and Syria and to some extent in the Byzantine Empire late in the first millennium. 

Natural disasters, crop failures, floods, droughts and wars were often the cause of a loss of income followed by a ramping up of debt that quickly became unpayable with high interest rates.

In many cases, debt was periodically cancelled - in what we would now describe as a debt jubilee.

Former Reserve Bank economist Michael Reddell said the debts cancelled were mostly those owed by peasants to the state."

“So this was an economy that had very little productivity growth and yet interest rates were very high. So somebody ran into a famine and the crop failed or they just messed things up quite badly. They end up owing taxes to the state,” he said.

Eventually the widespread indebtedness would become a societal problem. If locusts wiped out everyone’s crops, then everyone was indebted and unable to spend, forcing trade and the economy to grind to a halt.

“When a new king or emperor came to power, it seems to have been customary for some hundreds of years to have remitted those debts," said Reddell, "The motive for the rulers at the time was that they wanted a free peasantry. They wanted people who'd be available to serve in the army. They didn't want people going into what you might call debt slavery to private landowners or fleeing the country for a bit of territory somewhere else.” 

Economist Steve Keen has also studied the history of debt and he is the main proponent of a modern debt jubilee. He said many of the debts were run up by consumers drinking a local tipple.

“Often a lot of them run up in mead halls. People would be drinking, you’d borrow from the publican effectively and then if the harvest came through, that could pay the debt,” Keen said.

“If the harvest didn't come through, they couldn't pay the debt. They'd become debt slaves and literally have to go and work on the property of the publican or landlord.” 

Later, the Greek and Roman systems, which shaped our modern political economy, were geared much more towards protecting the creditors - the person lending the money - rather than the borrower. 

But Jewish tradition around the time when Jesus was alive, also had strict conditions around lending and interest rates which helped protect poor debtors. 

Debt relief was also an important moral principle to the point where the Apostle Matthew’s version of the Lord’s Prayer says ‘forgive us our debts, as we have also forgiven our debtors’, rather than forgive us our sins.

Covid-19 is a type of modern plague. Crops may still be standing, but our modern internationally connected economies driven by tourism and hospitality are decimated.

Keen acknowledges the differences and the difficulties of just ordering debts to be written off.

“Today, we have a very different world. We can't just, you know, eliminate the landlords. We can't wipe out the debts without causing a financial system to collapse. 

“We could do what I call the modern debt jubilee. We can use the state's capacity to create money to offset the fact that we've allowed far too much bank debt based money to be created and replace it with government created money.”

That’s what central banks are now doing, but not to wipe out the debts of the most indebted. Instead, it’s being used to buy bonds off banks and pension funds. It’s money printing to boost the values of existing assets.

It’s called Quantitative Easing.

Geoff Bertram is an economist at Victoria University and he’s been thinking a lot about these Reserve Bank actions, and who they help most: “The more important question, I guess, is the distributional impact of money creation and at the moment quantitative easing programs around the world basically amount to bailing out the rich and the creditors, whereas the problems that society and economies are facing lie with the debtors and the poor.”

“The Reserve Bank tells us it doesn't have statutory authority to do anything except race out and give money to the rich and the creditors because that's how its system is structured. Much better would be for the money to be created and dispersed by government, through Treasury, through fiscal injections aimed to relieve the pressure at the bottom end of the economy.” 

Keen says an alternative is for the central bank to give out equal and large dollops of money to everyone to pay off their debts, and even those with no debt, so it’s fairer.

“Those who are in debt reduce their debt levels. Those who didn't have debt in the first place, get a cash injection with which they can buy assets."

He suggests encouraging people to buy assets that actually have a cash flow to them such as company shares rather than an asset that depends upon further borrowing to drive the price up, which is what houses are all about. 

“So it would actually benefit all people and frankly, those who are more restrained about it would get more benefit because they'd actually get a dividend flow coming out of it from real production of real corporations rather than the notional increase in the value of their houses,” he said.

Reddell sees the risk of inflation, and also of moral hazard -- people borrowing heavily all the time knowing they’ll always get bailed out.

“I know what I would do if my household were being given one hundred fifty thousand dollars each. We'd be rushing for the exchange market or rushing to buy another house, because I would expect that inflation would take off and the real value of my money would go down.”

Inflation is one of the biggest fears about this sort of money creation. Yet the type of money creation done by central banks over the last decade hasn't created inflation. 

Keen points out the money handed over to bond owners is often used to buy other assets or they just stockpile it, rather than spending it on real goods and services. 

The US Federal Reserve is currently buying US$1 trillion a year of bonds, but it’s only trickling down into the real economy through bankers’ fees and a little bit of spending.

“You then spend that into the real economy, buying Mercedes Benz, Lamborghinis, people to clean them for you, et cetera, et cetera. And for that one trillion dollar input, you get about 100 billion dollars worth of stimulus in the real economy. But 90 percent of its driving and asset prices and only 10 percent is turning up on Main Street. It's a very ineffective way to use a limitless power to boost the domestic economy. What it mainly does is makes the rich richer,” said Keen. 

Asset prices are continuing to rise, like house prices, but prices of the goods and services that most of us buy are flat to falling. 

Bertram thinks a simpler and better way would be for the Reserve Bank to simply create the money and fund the Government so it can inject money straight to those who need it most.

“If you want to give relief, the relief needs to go where the pain is and at the moment, quantitative easing isn't going anywhere near that," he said, "The government would argue, I guess, that despite the rather disgraceful merry go round of bond sales and purchases going on at the high level, the fiscal deficit at least, is funding a large amount of stimulus, going out to wage subsidies, to supporting businesses. And that's a fair claim. But it's not clear to me that the program is, in fact, being aimed in a direction that will sustainably lift those in the lower parts of the economy out of the rut.”

The alternative is the return to something more ancient, said Bertram.

“You hit the point at which you are in a fully feudal state with an entrenched property-owning, rent-collecting, upper class preserving its position for generation after generation. Effectively, a domestic ruling class emerges while the rest of the population become essentially subservient. And that is a system that's a perfectly feasible outcome. We historically had feudalism for a thousand years of European history, for example.” 

Bertram says democracy is the solution to feudalism.

"Once the mass of the population does take matters into their own hands, does see an alternative way forward, and does demand that it be implemented, sustaining a feudal order, rather, requires you overturn democracy or it's unsustainable politically. And you know, I always like Thomas Picketty, hold the hope that democracy wins in the long run, that a new age of entrenched inequality won't be politically sustainable.”

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