The Shape of the Debt Reset

I was asked recently by Max Keiser who benefits in the case of a debt reset, and when we should expect such an event to occur.

I don’t think I answered it as comprehensively as I should have. I talked a little about the fact that events leading up to such an event could be extremely messy and its impact unpredictable, and so it is hard to say who will benefit, although we can expect the powers-that-be  — and particularly the Wall Street TBTF banks — to try and leverage events for political and financial gain. And of course, all three kinds of debt reset — heavy inflation, liquidation or an orderly debt jubilee — would look very different.

Here’s the problem:

The crisis in 2008 was one fuelled by excessive total debt. As society became more and more indebted the costs of servicing debt became proportionally higher, which has made it harder for countries to grow. Instead of individuals and businesses investing their income or growing their business, a higher and higher proportion of income becomes taken up by the costs of paying down debt.

Historically in a free market system, these kinds of credit bubbles have ended in liquidation of the entire bubble and all the bad debt. However the Fed’s money printing since 2008 (much like the Bank of Japan’s money printing in the 90s) has done just enough to keep the debt load serviceable.

The worrying thing is that Japan — which experienced a very similar series of events in the 1990s — remains in a high-debt, low-growth deleveraging trap. While the USA has managed a small decrease in indebtedness since 2008, it could take a very, very long time — Steve Keen estimates up to 15 or 20 years — for the debt level to fall to a level where strong organic GDP and employment growth is possible again. In my view, it is more likely (especially considering the Japanese example) that (with continued central bank assistance) there may be no long-run deleveraging at all, and that we may have entered a zombie cycle of reinflationary QE followed by market decline and deflation, followed by more reinflationary QE, etc. 

The point that I didn’t really emphasise to Max Keiser is just how beneficial a debt reset — so long as society comes out of it in one piece — will be in the long run. As both Friedrich Hayek and Hyman Minsky saw it, with the weight of excessive debt and the costs of deleveraging either reduced or removed, long-depressed-economies would be able to grow organically again. Yet after years of stagnation, a disorderly liquidation or inflation would surely be accompanied by financial, social and political chaos. And the cost of kicking the can and remaining in a deleveraging trap — as Japan has done (and as the US is now doing) — can have serious social consequences, such as elevated long-term unemployment, a deterioration in skills, diminished innovation and decreased entrepreneurialism.

I think this underlines the importance of trying to achieve the effects of a debt reset in an orderly way before nature forces it upon us again, and before we have spent a long time stuck in the deleveraging trap with a huge debt load relative to GDP, elevated unemployment, and very low growth. The least unfair way of doing this would seem to be the modern debt jubilee advocated by Steve Keen — print money, and instead of pumping it into the financial system as per QE, use it to write down a portion (say, $6,000) of each person’s debt load, and send out cheques up to an equal amount to those who are not indebted. Unlike with quantitative easing, because everyone gets the same quantity of new money, nobody receives a disproportionate transfer of purchasing power via the Cantillon effect, as happens not only with quantitative easing but also with more traditional monetary policy operations such as interest rate cuts, which are strongly correlated with disproportionately strong growth in the financial sector and bank assets. And the inflationary impact of the new money would be shared equally by everyone — rather than screwing pensioners or savers — because everyone would receive the same amount.

This is obviously not ideal, but it is surely better than remaining in a Japanese-style deleveraging trap.

Yet while most of the economic establishment remain convinced that the real problem is one of aggregate demand, and not excessive total debt, such a prospect still remains distant. The most likely pathway continues to be one of stagnation, with central banks printing just enough money to keep the debt serviceable (and handing it to the financial sector, which will surely continue to enrich itself at the expense of everyone else). This is a painful and unsustainable status quo and the debt reset — and without an economic miracle, it will eventually arrive — will in the long run likely prove a welcome development for the vast majority of people and businesses.

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57 thoughts on “The Shape of the Debt Reset

  1. Pingback: The Shape of the Debt Reset | Heterodox economics | Scoop.it

  2. It’s a rock and a hard place at present. QE helps keep debts serviceable but through forcing changes in portfolio preferences it rewards the “financialisers” and leads to price inflation in the stuff us plebs need, i.e. it’s socially regressive.

    Steve Keen’s QE for the public is a cute idea but I’d need to hear a lot more about how it would affect inflation, price structures, is the money from new government debt or printed. What’s to stop politicians abusing the policy possibilities it’s precedent would set..etc.

    • QE is extremely regressive, but the same is true for all monetary policy in the post-Bretton Woods era. The transmission mechanism of pumping up M2 disproportionately benefits banks, financial sector, bank assets.

      QE for the public (i.e. QE without the Cantillon effect) may be “cute”, but it’s the only serious proposal (“growing our way out” of a deleveraging trap is saving a miracle not a serious proposal) I have seen that can significantly reduce the total debt burden without either huge inflation or full-blown liquidation.

      • You’re right to highlight “cute”, it was deliberate, I’m a big Steve keen fan, but the devil is in the detail.

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  4. While unlearned in macroeconomics, as grandparent, political activist, retired former businessman and investor, I recognize Aziz’s summary of the symptoms, etiology and devastating prognosis of our condition. His proposal — debt reset, sooner rather than later, via “orderly debt jubilee” — sounds like a promising treatment.

    In the United States there is a strong grass roots uprising (the “tea party”) with compatible concerns (outrage?) and objectives. If November voting matches 2010, “the people” — distinct from Wall Street and Pennsylvania Avenue — will have considerable power.

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  6. Don,

    Unfortunately the American people are being presented the same puppet in two forms (Obama and Romney). Republicans are being fed the lie that Romney (and his partner Ryan) are fiscal conservatives (they are not). Neither Romney nor Obama believes in obeying the Constitution. Unless the People wake up and vote for Ron Paul, the current course will continue.

    • Well, S.S., while he and Libertarianism made their debut, Ron Paul didn’t win this year. So what shall we do while waiting for the public to wise up? Let Obama’s Marxists (Socialists with bayonets) and Chicago mobsters finish taking-over so that we can whisper “I told you so!” ?

  7. Pingback: John Aziz: The Shape of the Debt Reset

  8. John writes:

    “However the Fed’s money printing since 2008 (much like the Bank of Japan’s money printing in the 90s) has done just enough to keep the debt load serviceable.”

    Although the primary purpose of what the central bankers have done is expand debt [money] enough to create enough [money] in the system to service existing debt [interest only], the mechanism has been through the temporary transfer of liability from the private to public sector, and in the same breath creating more debt in the bargain. Europe is a perfect example of this insanity.

    The underlying private debt [principal] still exists, so this exercise in kicking the can down the road has done little but delay the inevitable, albeit a bonus for the banks.

    The fact that debt is evil is something this species has understood since Orb loaned Grzk his arrowhead [at interest] 20,000 years ago.

  9. Only the last sentence of your article begins to contemplate the fact that social transformation is not just a matter of theories being put into practice but always stem from the grassroot of people’s actions and reactions. Debt jubilee could well be achieved after mobs have placed financiers heads on pikes,literally…

  10. @ Aziz “The least unfair way of doing this would seem to be the modern debt jubilee advocated by Steve Keen — print money, and instead of pumping it into the financial system as per QE, use it to write down a portion (say, $6,000) of each person’s debt load, and send out cheques up to an equal amount to those who are not indebted.”

    This is a start but does not address moral hazard. I proposed a similar idea to keen, but instead of writing off debts, TAXPAYERS through the “Tax Office/IRS etc” receive their Taxes back as lump sum payments of say Monthly or quarterly installments. This boost in GDP via Consumption will flow to the most utilised goods and services, and the various businesses on the receiving end will appropriately invest. As Government debt is quite high, capital rationing will occur and only the best “Shover Ready” projects will get the go ahead, and Contractor Tenders would be much more scrutnised. We would get the best value for our Tax Dollars. The psychological boost to getting “free Money” which it really is not will jolt Consumption.

    The increased availability of work and overtime will allow the Borrowers in Debt to pay down their debt based on “Contractual Honour” The people who were too stupid to plan ahead, bought too big a house or flash a car, will be tagged as “Bankrupted” accordingly. It will be a good lesson for society.

    When the economy is actually working again, Tax rates can be adjusted accordingly to “Harvest” dollars out of the system and reduce inflation pressures. Using Monetary policies does not work. It is too blunt a method to stimulate demand. I used to think the Central Banks had the best interests of society, but now I am not so sure. I think Monetary policy in its current form is ineffectual and downright dangerous. For example the Reserve Bank of Australia was raising raites during the GFC, and now the Australian Property market is collapsing. Hard. They wanted to take the heat out of the house market, but what they have done now is cause possible panic. Too many people are invested in Property in Australia. The Reserve Bank Governors knew what they are doing. I am sure their connected cronies will be buying up houses on the cheap.

    It seems a little too convenient for me.

    • “Too many people are invested in Property in Australia.”

      BR, tough sh*t. People invested [speculated] where there was no real value. They should lose their shirts.

      A debt jubilee should only be entertained if [and only if] the current system of debt-slavery is abolished. Otherwise, people [institutions and governments] must be made accountable so the next round is played with minimal moral hazard considered.

      The one thing that capitalism does quite well is dealing with failure. The system should be allowed to work accordingly, clear out all of the bad debt and move the @#*! on.

  11. Ideas about ‘public debt’ frequently involve a totally bankrupt system of thought in terms of both logic & morality, or in the esteemed words of Detlev Schlichter: ‘public debt’ is both “economically suicidal” & “deeply immoral and destructive to society”. But as Fyodor Dostoyevsky once said, actually understanding the human reasons behind observable stupidness can often be “far more difficult than just denouncing said stupidness”. So whilst we can all of us agree that this entire economic fiasco is absurd, allow me to please air my own thoughts, to try and explain why I think that a basic misunderstanding of the *below* has too frequently led people to just look around and assume that everyone else is evil and bad, whilst I myself happen to believe that about 95% of all people are in general pretty good, and that this economic fiasco is mainly the natural consequence of a basic but widespread misunderstanding of the *below*. First off, it should be noted that the *below* is simply a collection of thoughts from people who are far smarter than I. Mr Ford said it best! http://tinypic.com/r/28rlji8/6 I’m in no way suggesting I’ve got any particular type of special understanding. In fact, I’m actually pretty dumb. Just a regular guy serving you coffee!

    Now, here’s some reading music for *below*! http://www.youtube.com/watch?v=dh3bleXWaCk

    If not the only reason I’d then argue that one of the most important factors for all of this very poorly allocated commercial activity is: the persistent belief in the idea of “public property”. I’d further argue that this belief in the idea of “public property” is quite obviously intimately linked to the weird but quite common, almost religious-like belief in the idea of “public debt”, which I guess people like Mike Hudson & Paul Krugman subscribe to? In any case…I obviously can’t speak for other people…I last night commented upon a thread (http://gt2030.com/2012/08/13/will-the-long-peace-persist/) connected to Harvard Psychologist Steven Pinker and his most recent book, “The Better Angels of Our Nature”, wherein I once again derided the idea of “public property”, in which I here include the sub-idea of “public debt”, so I may as well recount my points, particularly in light of the fact that he moderator never even uploaded them!

    ~
    The grandest threat to a true outbreak of long-lasting Peace amongst humanity is the persistent, faithful belief in the idea of “public property”, which happened to produce 2 world wars (http://www.youtube.com/watch?v=YauM5dHLn1s) & nuclear weapons of “mass destruction” last century – far from a positive legacy anyone can be proud of! Indeed, the extreme wrong-headedness of believing in the false idea of “pubic property” (and thus “public debt) is best demonstrated by the example of someone communicating in favor of it, whilst not consciously appreciating the Undeniable Reality that it’s only thanks to the PRIVATE PROPERTY OF THEIR OWN BODY………………….(over which they always have exclusive control, if not always in terms of their own external actions in the outside world, then at least in terms of their own, personal spontaneous thoughts – FOR: if you & you alone do not own your own body, who does? Is it just another individual who happens to own you & thus control your thoughts & actions, or do a group of individuals own you?)………………….that they can even communicate their personal thoughts in the first place, much less any ideas associated with arguing in favor of things to do with ‘pubic property’! Quite clearly, the person arguing in favor of “pubic property” or “public debt” can only communicate their point of view thanks to their own “private property” which is enabling them to posses the exclusive control over what they themselves choose to communicate to us…in order to prove that “public property” and thus “public debt” are rational ideas, which they say can potentially even benefit society as a whole….maybe even to a utopian extent! Now, if that is not absurd…I simply do not know what “absurd” is! Can’t such “public property” debt peddlers understand that the reason why in modern times we refer to parents as being “guardians” and not people who “own” their children…with an according ability to sell them off into slavery…is precisely because we ARE civilized and easily sophisticated enough to respect the right of other people to live the way they choose, so long as they don’t trespass onto the private property of other people!?! I mean, after all, this is not rocket science! For example, just to reiterate the point, if someone applies force to your body without your personal consent, explicit or otherwise, their actions I would argue constitute trespassing (ie. rape and murder in the most vulgar of examples)…because you own you: YOUR BODY IS YOUR PRIVATE PROPERTY, no? Yet apparently this is a complicated idea

    ~

    So let me woffle on, then…Here’s a quote & a new song in exchange for your reading this:

    “Philosophy is a battle against the bewitchment of our intelligence by means of our language” ~ Ludwig Wittgenstein http://www.youtube.com/watch?v=aGY728qJEBw

    Back to it, then!

    Why is your body your private property?

    A “society” or “public” is composed of nothing but the irreplaceable uniqueness of individual people, each of whom owns a private property we English speakers commonly call “their body”. The pioneering John Locke understood this in 1689, for God’s sake, when writing on his death-bed about how, “every man has a property in his own person”, recorded in his brilliant ‘Two Treatises of Government’.

    This deceptively simple but quite profound idea, if one fairly considers what I would call its inherent logic, and begins to thus slowly accept its rough and naturally unpredictable but nevertheless enlightening & necessary implications…of an individual being private property, wherein each of us are the landlords of our own separate bodies, so to speak, so that nobody else can apply any force to our most important plots of physical being without our individual consent…lest they commit themselves to the illegal act of trespassing…is not particularly outrageous, or even difficult to understand! In fact, I would argue that it’s just the natural flow of the common sense stemming from a more enlightened humanity now slowly transitioning towards a more peaceful, free and advanced state of being, less prone to internal conflict and more focused on Universal exploration http://www.youtube.com/watch?v=ryIMsibvBlE

    Even The Hon Michael Kirby AC CMG, though distinctly reluctant to fully accept the philosophical implications of my proposition to him, that…‘If someone applies force to your body without your consent it’s trespassing, I submit, because you own you: your body is your private property’…replied to me in an email that, quote: “the [above] basic idea…[does provide the]… calculating reason why the English law (and by derivation that of Australia) has usually protected the body of the individual, both in criminal and tort law and by statute. It is a basic principle of the integrity of the human body that the individual who inhabits it should have control and choice over the extent to which other people can invade their physical space and dignity as a human being”. And for those of you who did not know: Mr Kirby as a Justice in the High Court of Australia, and has just retired from that position. Basically, he is the equivalent of God in secular Australia. The idea of private property, I should add, is not necessarily a “toxic Western construct”, as some supposed Australian “legal scholar” recently told me. Indeed, Aziz has already covered this http://azizonomics.com/2012/04/15/lao-tzu-on-liberty/ Likewise, Sandeep Jaitly (of @Bullionbasis fame) just drew my attention to the fact that the Indian Hindu’s have a long history of appreciating sentiments extremely similar to that which John Locke expressed in his 1689 quote.

    Finally…

    To accept ‘public debt’ is to say your body can force onto ‘their bodies’ debt which they did not consent to; it’s a financial (or uniquely social) version of rape on a disturbingly grand economic scale: the fact that most people don’t believe or understand this does not make it any more acceptable. It violates the principle of private property – which Mises correctly said is “inextricably linked with human civilization”.

    • Good post. Sovereign individuals create sovereign States. The Kollective does not own us!

      Alister, I have a lot of time for Michale Kirby. You are an Australian? We should talk more often. cvpages dot buddy at gmail dot com

    • Public debt, like all debt, is just another, “something for nothing,” scam that highly educated man simply can not resist foisting upon the masses.

      God forbid that people actually had to work for themselves, keeping only that which was created through their own labor.

  12. I watched the video in full. I also forwarded onto my contacts. A couple of the females friend said you are better looking than they imagined. hahaha you should have promoted yourself on Female sites. you would have to write less to convince them,

    Females is that all they think about! And I thought they would be livid about the immorality of Bankers.

    Keep up the good work. I enjoyed your video discourse.

  13. Good to see you on the Keiser Report, John, not least as a chance for your faithful “Azizites” to finally see and hear the man behind the interesting words.

    I agree Keen’s proposal is about the most sensible one out there for dealing with the debt colossus. But wasn’t it Winston Churchill who said of Americans (though it applies to most others too,) something along the lines of “they always do the sensible thing – after they have exhausted all the other alternatives…”

    But, to change the subject slightly, isn’t it amazing that stuff like your interview, and much else, is out there for the masses to see on RT? Do the Powers That Be tolerate RT because hardly anyone watches it? When I was a kid in America during the Cold War I would listen to the wavering signal coming from Radio Moscow over shortwave radio. Partly, it was exciting just because it came from so far away, and sounded far away. The people you heard on it were not native English speakers, and certainly not the kind of babes who populate much of RT. But there was quite often stuff on it that you would hear nowhere else, sides of stories that were simply not heard on American media.

    Now we have RT, way flashier (often too flashy visually for my taste,) slicker and light years ahead of the old Radio Moscow, and just like it, funded by the Kremlin. And with all kinds of hard hitting stuff, and reporting on the financial “masters of the world” that you seldom see anywhere else. Of course you won’t see anything like the same kind of reporting on the darker side of Russia (and Vladimir Putin,) on it, but oh well. And it’s all free, turning up even on my low budget cable TV here.

    Back during the Cold War, you’d sometimes hear people comment on how Russian jamming of Western shortwave broadcasts contrasted unfavorably with the U.S.making no attempts to jam Radio Moscow or anyone else. Proof that we were free, and they weren’t. Of course, no one listened to Radio Moscow except for a few weird kids like me, but Voice of America was widely listened to in the U.S.S.R. Are we seeing a similar situation today?

    I rather doubt the Kremlin of today would tolerate an American version of RT going out in the Russian language in Russia. So is RT’s presence in America some sort of evidence that there is still a degree of freedom here that you won’t find in Russia? Or is it just further evidence of the zombification of the American population, with the Powers That Be having no fear of it because they know hardly anyone watches it, let alone understands anything on it?

    Maybe a bit of both. In any case, I enjoy watching RT, I hope TPTB don’t shut it down, I hope Putin doesn’t tire of funding it, and good to see you on it, Aziz. Keep it up!

    • Hey good to hear from you, Spruce.

      I’ll say that with all the negative stuff we get about Putin from the Western media, it’s nice to have some balance. If a lot of the Western media is to be believed, he’s a blood-sucking dictator who is widely reviled in Russia. Yeah, right — I’m sure there are many negative aspects to him, as there are with anyone who becomes powerful, but a lot of this “Putin is evil” stuff is agitprop. Of course, the fact that I can still post anti-Obama and anti-establishment diatribes proves that we are still somewhat free here in the West. But it’s not the simplistic dichotomy the establishment here portrays it to be.

      As I’ve said before, one Western strategy that has grown in prominence has been to overthrow the Russian and Chinese regimes — and any regime that resists American interests — via colour revolutions. It disgusts me how the West pretends to be in favour of democracy and human rights and yet defends the Saudis and Bahrainis who have been every bit as brutal to their people in recent years as Assad who America have abandoned because of his links with Iran. And now America are backing al-Qaeda to replace him? Vile.

      Anything that gives dissent a voice is wonderful, in my honest opinion.

      • Yes, right on. Say what they will about Putin, and there is no lack of vitriol for him in the West as you point out, but the reality seems to be that he took power in a country that was down on its luck, ruled by a drunken embarrassment, and did much to turn things around and restore a sense of pride for Russians. Russia was looted by the west in the 1990′s, and while there is still looting at least it is done by Russians.

        Is Putin in power through “free and fair” means? Probably not, but is it “free and fair” that two near identical parties in the U.S. control who gets on the ballot? Putin’s reign has been more good than bad, and we get the added benefit that he funds RT for us Western malcontents.

    • “Do the Powers That Be tolerate RT because hardly anyone watches it?”

      An interesting thing about the United States is that it holds freedom of speech above all other freedoms. Therefore, ideas are ALWAYS out there.

      Control is manifest not through overt censorship/physical impediments, etc., but instead through allowing the individual to become consumed with themselves and the various distractions employed to this end.

      When confronted by fast food, unlimited internet porn, sports 24/7 x 1000, alcohol, drugs, you name it, the average Joe can not be so concerned with political corruption, economic fraud, and the rest, until it is too late to do much about it.

      But, this is not to say that the problems have not been elucidated for decades. Look at the battle [anti- Fed] that Ron Paul has carried forward in the House for the past 30 years. People could care less because they were too busy stuffing themselves with hot dogs and beer and aunt Millie’s barbecue.

      Despite the plethora of information available, most people are still in denial. But this is human nature, as most people simply wish to be left alone to go about their lives. The Elite well-understand this tendency and exploit it at every turn.

      This is why all of the distractions are subsidized/low cost/free.

      • Imp.: You certainly well-understand and describe what’s wrong with many (most?) Americans!

        I never seen R (Russian?) T(V?), and don’t think it’s available on my cable. But a nation of people who have NEVER known anything but one version or another of tyranny/exploitation, currently dominated by a former KGB thug whose elections are suspect, seems unlikely to broadcast truth, whole truth, and nothing but truth. But neither does most U.S. TV.

        • RT is pretty good — they broadcast Max Keiser, so that means they broadcast me!

          Also Lauren Lyster who is one of the smartest finance/economics broadcasters.

          And Julian Assange.

  14. Pingback: Daily Reading on the Financial Markets: 8/15/12 « Playing the Ponzi

    • Who gets negative real rates?

      The banks and large financial institutions. Small businesses and consumers don’t. The banks are getting a stealth jubilee. We’re not.

      • John, there is always one institution that controls the system. In a system where labor-value is immediately transferred into its money-form, who else could it be that holds sway other than the people who control money?

        Controlling labor-value IS controlling people in this system. Bankers are de facto slave-holders, but without the responsibility of dealing with human maintenance.

        And although most people can not fill in the missing pieces to make this connection [between labor preformed, its value, and the conversion to its money-form], intuitively, they get it.

        It’s all about controlling labor [value]. Its conversion to its money-form is what allowed all the fun and games of this era [banking] to ensue. Moving on will entail a mechanism that will allow the individual to retain full control over their labor-value produced.

        When this occurs, the Elite will be more than ready to employ their most accomplished geniuses to discover newer and more creative methods of fleecing the masses.

        After all, it is what the avaunt-garde [thought leaders] of the professional class does best.

        • Are you implying Communism? The other day I exchanged an old chainsaw, for a 12 volt TV with my farmer neighbour. If a system of IOU credits could “lubricate” transactions on a trading hub exchange (Bitcoins perhaps) then we would have no need for a reserve currency. But at the end of the day FIAT CURRENCY is backed by the Government’s order (Army).

          So I don’t think your solution will see the light of day.

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  16. The debt jubilee idea has several logic flaws in it.

    1. A person receiving a government check to pay off their debt is most likely to deposit it in the bank prior to making the payment to their creditor. The banks will be the first beneficiary, as always, of the new money flooding the system. Even if it’s a mere few days waiting for the money to clear and transfer, the banks will be able to make many huge transactions that will begin to drive demand and prices up.

    2. People never behave as expected. Despite the logic of paying down a debt, some people, likely many, will buy goodies with a portion and possibly all their check.

    3. A 70 year old pensioner who has spent a portion of their lifetime saving for old age will always be hit in a more disproportional way than a younger person with little savings and a full lifetime of earnings potential in front of them. The older person will most likely lack the earning power and time to to cancel out the damage done to their savings.

    4. If the government does not raise welfare, Medicare and Social Security in proportion to the inflation, those highly dependent on those will be disproportionately hit by inflation. If the government does match the resulting inflation in COLA increases, there will be yet more inflation due to demand. In addition, the COLA will have to be paid for with more taxes and/or more debt.

    5. People will pay down their debts, either a portion or all. The financial system is dependent on a certain amount of debt in play to run as it does currently. The drop in debt load will act like a drop in demand. Consumer credit interest rates will fall and the financial system will give huge incentives for people to take on new debt. Without a change in behavior, many people will opt to take on new debt.

    6. Assuming a consumer model of driving economic expansion, this would likely result in stagflation. Regardless of what order the system gets the money, eventually it will all be driving demand. People who paid off a $6000 consumer loan would find that they had new found spending power not having to service the debt. How much of that spending power will be nullified by inflation?

    The Jubilee idea is a well intended idea to try to help out the little guy rather than the banks, for a change.

    Consumer debt is a symptom. The disease is a credit system that has been warped by government demand and Federal Reserve facilitation of that demand.

    Without a change in government policy, the consumer debt issue won’t be resolved. Nothing Obama or Romney are proposing will improve middle class standard of living in relation to this issue.

    • 1. A person receiving a government check to pay off their debt is most likely to deposit it in the bank prior to making the payment to their creditor. The banks will be the first beneficiary, as always, of the new money flooding the system. Even if it’s a mere few days waiting for the money to clear and transfer, the banks will be able to make many huge transactions that will begin to drive demand and prices up.

      2. People never behave as expected. Despite the logic of paying down a debt, some people, likely many, will buy goodies with a portion and possibly all their check.

      You don’t send the debtor the cheque. You send it directly to the creditor. People get a cheque if they are debt free.

      3. A 70 year old pensioner who has spent a portion of their lifetime saving for old age will always be hit in a more disproportional way than a younger person with little savings and a full lifetime of earnings potential in front of them. The older person will most likely lack the earning power and time to to cancel out the damage done to their savings.

      The older people benefited disproportionately from years of credit-driven housing and equities growth. Young people didn’t. Now you expect young people to sit through years of deleveraging and weak growth so that boomers’ retirement cheques are worth more? Most boomers never had a problem with debasing the currency when they were younger… Frankly, returning the economy to strong growth will benefit everyone, including retirees.

      5. People will pay down their debts, either a portion or all. The financial system is dependent on a certain amount of debt in play to run as it does currently. The drop in debt load will act like a drop in demand. Consumer credit interest rates will fall and the financial system will give huge incentives for people to take on new debt. Without a change in behavior, many people will opt to take on new debt.

      That’s the point — lower debt load means more people will be able to expand businesses, take on new staff, produce more, consume more. Obviously I would like to see a tighter monetary policy once we get back to the boom times, to prevent excessive debt growth as we saw in the 80s, 90s and early 00s.

      Consumer debt is a symptom. The disease is a credit system that has been warped by government demand and Federal Reserve facilitation of that demand.

      Without a change in government policy, the consumer debt issue won’t be resolved. Nothing Obama or Romney are proposing will improve middle class standard of living in relation to this issue.

      Can you elaborate on this, and substantiate it with some empirical evidence?

      • Someday I’ll learn not to post multiple points!

        Aziz:“You don’t send the debtor the cheque. You send it directly to the creditor. People get a cheque if they are debt free.”

        Jtgelt: I guess that would be a fairly small subset. I didn’t notice in the description of the Debt Jubilee a provision to do a direct deposit to the creditor.
        But wouldn’t the effect be the same or perhaps worse than my scenario? The debtor gets no real goods from the transaction. The debtor is now $6000
        closer to being able to own the goods and services they already bought on credit. The credit card companies, student loan holders and mortgage holders
        get to make the first choice on what goods they buy with the new money. They get the money for the first wave of demand. They will be beneficiaries.

        Aziz: “The older people benefited disproportionately from years of credit-driven housing and equities growth. Young people didn’t. Now you expect young people to sit through years of deleveraging and weak growth so that boomers’ retirement cheques are worth more? Most boomers never had a problem with debasing the currency when they were younger… Frankly, returning the economy to strong growth will benefit everyone, including retirees.

        JTGelt: I didn’t realize that the Jubilee was meant to exact economic karma on the Boomers, you’ve almost sold me on the idea!
        However, 70 year olds aren’t Boomers, at least as far as the U.S. government is concerned. The pensioners I am concerned about are the ones who owned
        their home, didn’t remortgage; and the bulk of their income is Social Security, pensions and various savings. In general these
        are the people who get hit hardest by inflation, as I mentioned before, they don’t have the earnings power or time to recover from it.
        They did nothing to “deserve” a disproportional hit. So I stand by my original assertion that the Jubilee will not be “fair” to everyone.

        Aziz: “That’s the point — lower debt load means more people will be able to expand businesses, take on new staff, produce more, consume more. Obviously I would like to see a tighter monetary policy once we get back to the boom times, to prevent excessive debt growth as we saw in the 80s, 90s and early 00s.”

        JTGelt: If the underlying factors that caused people to go into debt in the first place still remain, we will be right back where we started in a few years.
        Increased spending is not always the recipe to sustainable growth. Inflation in the 70’s gave us stagflation. Inflation in 00’s gave us malinvestment.

        Aziz: Can you elaborate on this, and substantiate it with some empirical evidence?

        JTGelt: The Fed over-reacted to the Dotcom bubble bursting. Malinvestment followed. The 9/11 event would have caused what was likely a needed correction.
        The Fed intervened again. The resulting malinvestment led to the housing bubble and caused the derivatives market to expand exponentially.
        In 2008 the market attempted to shake off the mainvestments and the Fed intervened yet again and that time congress joined them. Money is tied
        up in a combination of harmful, useless or at least inefficient pursuits. Without Fed and government intervention these malinvestments would
        have most likely collapsed and gone away. However they are all still there. People would definitely benefit from a Jubilee. I know I would. But, how many?
        A majority? I question that. Would a $6000 Jubilee undo an underwater mortgage? Would it allow people to buy up the 5-10 year house ghost inventory? Would it allow them to clear the commercial property glut that likely dwarfs the housing glut?
        How many people ran up debt buying basic necessities, if they still can’t make ends meet they will be back where they started. Does the Jubilee make the derivatives
        bubble disappear? What decisions will financial institutions make with 1-2 trillion dollars? With government and Fed backing, I’ll bet more of the same.

    • I agree with your points. Most retirees do have the benefit of higher equity due to asset inflation in their home, but I guess it is relative. Do they sell their home and rent thereby using the inflated equity to offset their new daily living costs?

      In line with my principles of personal responsibility instead of “Nanny State Knows Best” I think the best solution is giving Tax Payers the money directly from the Treasury via tax receipts (Not borrowed from OS Bond Markets) and allowing consumers to make a rational decision between paying down debt or spending it on consumer goods and services. The ones who fail in fiscal prudence are “Tagged” as Bankrupts/Poor Credit etc an live with their decisions through the cruel reality of “Credit Austerity”.

      You can’t have a fit financial system based on appropriately priced credit without weeding out the idiots. People should take responsibility for their credit decisions. Or do you put the onus back on the credit provider to assume people are idiots? How insulting to most intelligent people to be spoken down to by a Bank Clerk.

  17. Pingback: Prosecute the fraud, de-leverage and move on » Why Aren't You Outraged?

  18. If you hand $6,000 out where will it go, a lot will end up at Wal Mart buying Chinese manufactured goods. To fix this free trade, which is really slave labour trade, has to go. Tariffs need to be put in and manufacturing re-built here to give people jobs. Government doesn’t create wealth, they tax wealth, pretty soon (if not already) there will be no wealth to tax .

    • You’re (correctly) identifying another significant factor. I would agree that there is some room for tariffs to level the playing field (although the best “tariff” would surely be a reduction in military spending to force China to spend more money policing its shipping arrangements).

      But debt, and debt-level reduction is another issue, and perhaps even more significant in the short and medium term than trade policies.

    • I agree that with the influx of cheap chinese goods and mega marts most of the stimulus money will go to China. We do need t rebuild our manufacturing base to retain key engineering skills and employ the migrants without skills or education (And English)

      I have argued for 20 years with people who say reducing tariffs drives innovation. It is bulldust and lies! I have seen the decline in Australian Manufacturing and Textiles because of it. These jobs employed refugees with poor English skills and women especially. Now the refugees for Somalia and Sudan etc can’t get an honest days work if they tried. This is causing frustration among the young. Gangs are forming. Good Christian Sudanese boys are now associating with Gang Rap culture. It is sad. These kids had a new life and now it is squandered.

      They argued it would drive innovation and competition. Give Consumers more choice and lower prices. Fine if you are living off your capital. Terrible if you rely on a job to build capital raise a family. The same economists who espouse this philosophy still get article space in leading Australian newspapers. It is almost as if the Newspapers are deliberately ruining the Western economies. Do they have some Socialist agenda to “prove” that Communism works, i,e, look at China’s growing strength. It is built on the back of the destruction of the West’s manufacturing and textile industry. It is Treason.

      • Buddy, your “Fine if living off your capital. Terrible if you rely on a job…” is my first encounter with this critique of free trade/globalism. It seems to make sense, i.e., qualify as science’s “elegance” — explaining the most observed phenomena with the least theory. However, most of the U.S. anti-globalization mob-protest seems to come from those who don’t want a job.

        Important — isn’t China’s robust growth enabled by the 1970s(?) edict to switch to economic CAPITALISM (while continuing Communist top-down authoritarianism)?

        • From my studies of Nazi Germany, China is technically Fascist state. Its rampant Han ethnic Nationalism is eerily similar to the hubris of Nazi Germany. Hitler Directed Business to produce certain products. The Chinese Government does not have the charismatic leadership of Hitler, but the principles are he same. They have a slave class ( Nazis had Eastern Europeans migrants) and the elite. (Nazi SS)

  19. Pingback: The Shape of the Debt Reset [Azizonomics] « Mktgeist blog

  20. Better late than never to post another Brit who was pretty good at expressing ideas: “Neither a borrower, nor a lender be; for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.”

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