Home > Uncategorized > A debt jubilee is the only way to avoid a depression

A debt jubilee is the only way to avoid a depression

from Michael Hudson

Even before the novel coronavirus appeared, many American families were falling behind on student loans, auto loans, credit cards and other payments. America’s debt overhead was pricing its labor and industry out of world markets. A debt crisis was inevitable eventually, but covid-19 has made it immediate.

Massive social distancing, with its accompanying job losses, stock dives and huge bailouts to corporations, raises the threat of a depression. But it doesn’t have to be this way. History offers us another alternative in such situations: a debt jubilee. This slate-cleaning, balance-restoring step recognizes the fundamental truth that when debts grow too large to be paid without reducing debtors to poverty, the way to hold society together and restore balance is simply to cancel the bad debts.

The word “Jubilee” comes from the Hebrew word for “trumpet” — yobel. In Mosaic Law, it was blown every 50 years to signal the Year of the Lord, in which personal debts were to be canceled. The alternative, the prophet Isaiah warned, was for smallholders to forfeit their lands to creditors: “Woe to you who add house to house and join field to field till no space is left and you live alone in the land.” When Jesus delivered his first sermon, the Gospel of Luke describes him as unrolling the scroll of Isaiah and announcing that he had come to proclaim the Year of the Lord, the Jubilee Year.

. . . . .

The U.S. economy has polarized sharply since the 2008 crash. For far too many, their debts leave little income available for consumer spending or spending in the national interest. In a crashing economy, any demand that newly massive debts be paid to a financial class that has already absorbed most of the wealth gained since 2008 will only split our society further.

This has happened before in recent history — after World War I, the burden of war debts and reparations bankrupted Germany, contributing to the global financial collapse of 1929-1931. Most of Germany was insolvent, and its politics polarized between the Nazis and communists. We all know how that ended.

America’s 2008 bank crash offered a great opportunity to write down the often fraudulent junk mortgages that burdened many lower-income families, especially minorities. But this was not done, and millions of American families were evicted. The way to restore normalcy today is a debt write-down. The debts in deepest arrears and most likely to default are student debts, medical debts, general consumer debts and purely speculative debts. They block spending on goods and services, shrinking the “real” economy. A write-down would be pragmatic, not merely moral sympathy with the less affluent.

. . . . .

Critics warn of a creditor collapse and ruinous costs to government. But if the U.S. government can finance $4.5 trillion in quantitative easing, it can absorb the cost of forgoing student and other debt. And for private lenders, only bad loans need be wiped out. Much of what would be written off are accruals, late charges and penalties on loans gone bad. It actually subsidizes bad lending to leave them in place.

In the past, the politically powerful financial sector has blocked a write-down. Until now, the basic ethic of most of us has been that debts must be repaid. But it is time to recognize that most debts now cannot be paid — through no real fault of the debtors in the face of today’s economic disaster.

The coronavirus outbreak is serving as a mind-expansion exercise, making hitherto unthinkable solutions thinkable. Debts that can’t be paid won’t be. A debt jubilee may be the best way out.

The Washington Post

  1. Craig
    April 21, 2020 at 4:36 pm

    100% agree. Except we need to be smarter than the ancients. Monetary Gifting IS the answer, and Direct and Reciprocal Monetary Gifting with a 50% discount/rebate price and monetary policy at the point of retail utilizes one of mankind’s greatest tools which the ancients had only a relatively rudimentary knowledge of.

    Debt crises kept happening in ancient history and they’ll keep on happening now even if we have a debt jubilee now. Jubilees are palliative reforms. Direct and reciprocal monetary gifting is the policy and very expression of the new paradigm concept. Look at it. Don’t be an erudite dunce.

  2. Helge Nome
    April 21, 2020 at 8:31 pm

    Long live Social Credit!

    • Craig
      April 22, 2020 at 1:57 am

      It’s Wisdomics-Gracenomics which takes Social Credit from far better but mere theory to mega paradigm change. Douglas was way ahead of his time, but he was still influenced by the classical school of general equilibrium, and the concept of a paradigm was not general knowledge at his time. It’s also the result of studying the signatures of all imminent and accomplished historical paradigm changes.

  3. April 21, 2020 at 9:38 pm

    I suspect Michael Hudson does not understand that if one person’s debts are wiped out, then so too are someone else’s savings. He keeps very quiet on that point, as advocates of debt jubilees normally do.

    Second, I am not moved to tears by the size of the stock of debts. Reason is that interest rates are at record lows. In fact debt service costs as a proportion of household income are at a 40 year low. See:


    • charlie
      April 22, 2020 at 4:19 am

      really ? it is insulting to Mr. Hudson to imply that he does not understand . You fail to give adequate compassion for those whose debts have been imposed by greed, which has become more of the norm. Second you should be ashamed of not feeling empathy for those struggling with medical debt, Student debt … and other magical thinking debt creations of the 1%. The inequality is overwhelming the entire 3rd world.

    • Calgacus
      April 24, 2020 at 10:17 pm

      Debt jubilees historically were of debt owed to the state; ancient interest rates were fixed but very high by modern standards, and the financial system arranged that practically all debts would become ones owed to the state. So the state periodically forgave them and had to forgive them.

      That is what the modern proposals suggest. ” if one person’s debts are wiped out, then so too are someone else’s savings.” true – but not meaningful. Because the “someone else’s savings” which are wiped out are the state’s accumulation of debts owed by the private sector to it. For example, student loan forgiveness proposals suggest the US government taking over the debts which are not owed to it already – and erasing those along with the ones which it already is directly owed.

  4. April 21, 2020 at 9:41 pm

    Even the leading supporters of MMT have concerns as to just how much QE. Education Debt, Universal Basic Income, Medicare for All, Green New Deal

    The other issue is the fact that MMT works in a closed, not a global system where money flows internationally and unevenly between the bottom and the top. In fact, some advocates suggest that MMT needs State resources such as under employed workers and physical resources within the boundaries of the system

  5. Ikonocast
    April 22, 2020 at 12:07 am

    A number of points need to be made:

    (1) Debt write-offs will be necessary. Micheal Hudson is absolutely correct in this. There are numerous onerous, odious and simply unpayable debts in the system now which simply should be and have to be written off. The whole debt-credit system is unsustainable and riddled with inconsistencies and injustices. How is it just that corporations can get billion dollar loans at zero percent interest (or lower!) plus Quantitative Easing (QE) assistance whereas consumer credit cards can charge 20% interest of more? This is a rank injustice and distortion of the debt-credit system and should not be permitted or assisted by law. It is usurious profiteering on a very tilted (not level) playing field.

    (2) People and businesses who loaned out funds at usurious interest rates deserve absolutely no assistance with debt defaults. Debt defaults are the price they pay for their greed and exploitation.

    (3) Ordinary people with small funds in market linked pensions / superannuation /annuities etc could be in difficulties if the entire fund collapses but in most cases they will lose some, not all of their monies, if their fund is properly diversified. People who bought investments, geared their investments and borrowed at the higher interest rates (say 5%) available to small investors may also face a squeeze. Quite honestly, this is the risk they took in going into investing or business against the “big boys” who have the whole system rigged in their favor. Small investors need to be very canny and should know the game they are getting into. Do not doubt that dominant capital rigs the game in its favor. Need I mention the LIBOR scandal and all the big businesses which make campaign donations to get politicians to make laws in favor of big money? Need I mention the Koch brothers and their outrageous gaming of the system?

    (4) People with modest income and/or investments who go unemployed or broke will have to be assisted by government welfare. Furthermore, what is needed in the social welfare front are two new schemes via something like a Green New Deal. These schemes are Universal Basic Income (UBI) and a Job Guarantee. I leave people to research those.

    (5) QE is not the best way to give assistance to ordinary people. QE only benefits the super rich and the corporations by giving them super cheap money. Remember, these super rich and the corporations are the very ones who avoid taxes (tax havens, the “Paradise Papers” remember?)

    (6) Essentially, late stage, unfettered, neoliberal capitalism is at the end of its road. It is an entirely unsustainable system from its credit-debt structures to its unsustainable calls on natural resources, natural waste sinks (like the atmosphere for CO2) and bio-services. The sixth mass extinction, especially “insectageddon” forbodes serious trouble for us as ecological bio-services collapse.

    (7) The debt-credit system and its inexorable mathematical expansion is incompatible with a finite biosphere. Endless capitalization as endless expansion the debt-credit money system is of course incompatible finite stocks and flows of resources. (Some resources are stocks and some are flows.)

    “Capitalization has two meanings in accounting and finance. In accounting, capitalization is an accounting rule used to recognize a cash outlay (for an asset) as an asset on the balance sheet, rather than an expense on the income statement. In finance, capitalization is a quantitative assessment of a firm’s capital structure.” – Investopedia.

    More to the point, the capitalized value of a firm anticipates future earnings. If these future earnings do not eventuate, the firm’s value collapses and without cash assets and especially if it has large debts then the firm is bankrupt (without further lending or bail-outs from government) and will default.

    Our debt-credit capitalization system, by virtue of its axiomatic mathematical rules of endless expansion of capitalization via credit and thus the concomitant debt, presumes on average and over the whole of the economy that the whole economy will expand forever. This is patently absurd. The earth has limits. Even qualitative expansion alone (better culture, science and technology) without quantitative expansion (more material things in gross quantity) still presupposes ever greater complexity. For ever greater complexity to be generated and maintained against the effects of entropy (tendency to disorder), ever greater quantities of energy are required. There will eventually be limits to the energy we can harness without disrupting earth systems we vitally need for survival such as the CO2 / O2 cycle, the nitrogen cycle, the phosphorus cycle, insect bio-services and so on.

    These considerations indicate that the entire capitalist credit-debt capitalization edifice is in imminent fundamental conflict with the ecological and thermodynamic limits of the biosphere. The real laws of nature, from the laws of thermodynamics to the basic and extended laws of biology, ecology and evolution, mandate that the credit-debt capitalization procedues of financial capitalism must be discontinued. The first stroke to cut the Gordian know of the system is to abolish much debt, albeit in a selective fashion,. Then a new thermo-economics or bio-economics must be established. This form of economics will even need to be evolved beyond the concept, the very crude almost medieval concept of money, which we adhere to today.

  6. Ken Zimmerman
    May 3, 2020 at 2:20 pm

    The Federal Reserve is buying about $9 trillion worth of all manner of corporate and Wall Street securities in order to pump up the financial part of the corona economy. In the course of doing this, the Fed has bailed out trillions of dollars of bad financial bets, and is even creating
    new asset bubbles. The Dow is up about 6,000 points from its recent low. The Fed is also purchasing bonds, including city and state bonds. The Fed has not said what its plans are for the debt it is purchasing after the pandemic crisis is over. Assuming it is ever over.

    A major category of debt not included is the $1.65 trillion in student debt, which was likely to destroy the prospects of two generations of young adults even before the virus struck. A lot of this debt has been securitized, in the same manner that subprime loans were securitized in the run-up to the collapse of 2008. In the corona depression, a lot of student debt will go bad, as new graduates enter an empty job market. Before the pandemic struck, both Bernie Sanders and Elizabeth Warren had proposed canceling all or most student debt, and paying for that cancellation by raising taxes on the very wealthy. The benefits are macroeconomic as well as generational and social, as a study by Sanders’ economic adviser Stephanie Kelton and colleagues demonstrates.

    The Sanders plan is still a good idea; but if we are tax averse, here’s another one. As long as the Fed is going on a spree of asset purchases, why not have the Fed buy up all of this student debt, declare a jubilee, and just keep the debt on its own balance sheet indefinitely, as it is doing with so much Wall Street debt? Those saddled with crippling student debt are disproportionately lower-income and people of color. Some 69% of last year’s graduating class had to take out college loans. But the affluent had tuition covered by their families. As the economy keeps cratering, it’s inevitable that there will be more bailouts by the Fed. The question we should be asking is: Which bailouts and for whose benefit?

    ~American Prospect May 1, 2020

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