(Scroll down for Sources including MoneyWeek, Boston Consultancy Group, Zero Hedge, Michael Hudson, John Mauldin, Steve Keen)
My near-future thriller screenplay The Crunch, based on a story/film treatment I wrote in 2011, centres on the global debt crisis.
Dump The Debt! and Ditch The Rich! are the slogans of the protestors massing on Britain’s streets in The Crunch. They want a huge write-off of debt, a ‘jubilee’, rather than the continuing austerity and privatisation being demanded by the world’s central bankers as the price for bailing out a bankrupt British economy. If Britain goes bust the world goes bust. The protest calls go global.
Debt ‘jubilee’ succeeded with Germany after WW2. And with Latin America in the 1980’s. So why not now?
DEBT NOIR BRITAIN:
The UK’s Total Debt (including household debt, business debt, financial sector debt, government/public sector debt, pension liabilities etc) amounts to over $15 trillion dollars (£9.5 trillion) – pretty close to the highest in the world at over $250,000 (over £150,000) for every man, woman and child. And it’s still rising.
The current Bank Of England interest rate is now at its lowest ever at 0.5%. So that’s keeping down the servicing costs of the debt – presently almost £50 billion a year and still rising.
It’s rising largely because, since the 2008 financial crisis, the UK authorities have been using new loans to pay off its old debt, thus postponing the repayment of the debt, using money created out of thin air (Quantitative Easing, bank bailouts) to buy the new replacement loans/debt. So, instead of actually paying off its old debt to leave room for the new loans/debt needed to cover the shortfalls in its spending requirements, the UK is accumulating its old debt on top of its needed new debt.
All this debt is held and traded in Treasury bonds (also known as ‘sovereign debt’) – the Government’s IOU’s to investors who have bought them and thus provided the loans to keep the UK’s economy and Titanic debt afloat.
The British Government claims that, to maintain the confidence of Treasury bond investors, they need to apply austerity measures to reduce the costs of the public sector and the amount of loans bonds – and interest costs – required to finance it because of shortfalls in tax receipts.
If global investors were to lose confidence in Britain’s ability to sustain its debt mountain – because of insufficient economic growth, persistent deficits (shortfalls between taxes received and borrowings required to maintain the government/public sector), or because of political and social strife – they would sell the pound and UK Treasury bonds.
Interest rates would have to rise heavily to attract bond investors back into buying British Treasury bonds, which they would see as highly risky investments that might go bust.
If interest rates were simply to return to the 2000-2012 average on UK Public Sector/Government Debt of 5.6% from their present 0.5% it would multiply interest rate costs by 11 times. What would that do to peoples’ mortgages and credit card debts and property values? And to heavily borrowed businesses, investment banks and hedge funds?
And to peoples’ faith in the capitalist money system?
During the Eurozone crises interest rates have shot a lot higher than that as fearful investors shunned the bonds of Greece, Spain, Portugal and Ireland. And threatened to cause an implosion in the global banking system.
And those countries don’t have the debt levels of the UK…
Is the debt crisis going to become the battleground for another form of class war between debtors and creditors, between those suffering from the servitude of debt and those who profit from it? That’s the backdrop to The Crunch.
These are some writings, writers and links that have caught my layman’s interest whilst developing The Crunch:
MoneyWeek is a very good lay person’s weekly investment magazine. Here’s a clear, informative piece it did on questions surrounding the issue of a Debt Jubilee. But, after all that we have learnt about the morality of the Big Banks and their ways, the article’s caveats – the ‘moral hazard’ of writing off debts (it could encourage future recklessness) – are somewhat underwhelming.
MoneyWeek Magazine, January 6th 2012
A DEBT JUBILEE
What’s a Jubilee?
In the Jewish and Christian traditions, a Jubilee is a special year marked by a forgiveness of sins, remission of debts and a universal pardon. In Mosaic Law (the Biblical law given to Moses and set out in the first five books of the Old Testament), a Jubilee was to be held every 50th year. During the Jubilee, each household should recover its absent members; foreclosed land be returned to its former owners; indentured slaves be set free, and debts written off. (Leviticus 25 contains most of the instructions on property rights and debt, as given by God.)
What is its purpose?
To maintain social order and political stability – and, ultimately, protect the long-term sustainability of economic life and commerce – by preventing credit systems from degenerating into the enslavement of debtors by their creditors. In his recent book Debt: The First 5,000 Years, David Graeber, an anthropologist who writes entertainingly of debt ceilings, subprime mortgages and credit default swaps as if they were the exotic practices of a decadent tribe on the edge of self-destruction, notes how the first act of many successful rebellions was to scrap debts and start again from zero. “Cancelling the debts, destroying the records, reallocating the land, was to become the standard list of peasant revolutionaries everywhere.” Jubilees were a way of pre-empting such social upheaval in a world where the collateral for debts was the very freedom of debtors and their dependants.
How did it work in practice?
Graeber describes how, in 2,400BC, the Sumerian king Enmetena declared “a general debt cancellation within his kingdom…the very first such declaration we have on record – and the first time the word ‘freedom’ [ie, the freedom of former debt slaves] appears in a political document”. Indeed, the first word for freedom known in any language is the Sumerian “amargi” – meaning “return to mother”, presumably because enslaved children in particular were allowed to return home. A debt Jubilee is in this sense a recognition that economic life must be socially rooted if it is to be sustainable: in this case a recognition that if debts can’t be paid off, they won’t be – and that it might be better for everyone for the issue to be addressed peacefully rather than violently.
Who wants a Jubilee now?
A surprisingly broad range of people in the US. Graeber is a staunch supporter of the Occupy Wall Street movement. But there are also plenty of more orthodox voices who support the idea of massive debt relief as the only route out of a financial crisis and economic depression caused by excessive debt. Chief among them is the Australian economist Steve Keen. Keen warned correctly in the mid-2000s that the huge build up of private debt would cause an economic crisis far greater than those of the mid-1970s and early 1990s.
What does he say now?
That the sovereign debt crisis is merely a symptom of the real cause of the West’s economic woes – a catastrophic increase in private debt as a proportion of national income. As a result, the “debt deflationary forces” unleashed today “are far larger than those that caused the Great Depression”. In the 1920s, for example, private debt in the US rose by 50%; in the decade to 2009 it rose by 140%, and the debt-to-GDP ratio is still far higher than when the Great Depression began. The key to averting a second Great Depression now is to slash private debt through a unilateral write-off of irresponsible loans made by banks. And Keen isn’t alone. Versions of a debt Jubilee have been called for by a variety of economists and pundits (including the influential Stephen Roach of Morgan Stanley) who argue that federal policymakers should broker what in effect would be a grand out-of-court settlement between bond investors, banks and consumer groups – a “great haircut” to fix the underlying problem of excessive debt and jump-start the economy.
What’s the case against a Jubilee?
First, the cure might be worse than the disease, and there’s no guarantee that writing off debts would increase economic growth. As Martin Hutchinson and Robert Cyran pointed out on Breakingviews, “every liability is also an asset, so while a dollar that is no longer required for debt repayment might add some cents to consumer spending, it is also a dollar cut out of a bank’s capital or an investor’s net worth – subtracting from resources and confidence”. In other words, any write-offs big enough to alter consumer behaviour would probably also be big enough to destabilise or even sink the banks.
Second is the moral hazard argument. Writing off debts encourages future recklessness.
Third, there’s the worry that international investors would see a Jubilee in America (or any other nation) as an attack on property rights in that country, prompting capital flight and doing more harm than good.
MoneyWeek Magazine, January 6th 2012
Back To Mesopotamia – The Looming Threat Of Debt Restructuring by The Boston Consulting Group (BCG) – September 2011 analysis of the global debt crisis by one of the world’s leading business consultancies. It posits that attempts to reduce the value of the debt by inducing inflation through Quantitative Easing etc have failed. All attempts to eliminate the debt have failed. A write-off of some $20 trillion dollars of “unsustainable” debt in the developed world and one-off wealth tax of a little under 30% on the upper strata’s financial assets could make the world economy viable again. A revelatory read from the belly of the beast.
The post-WW2 German debt ‘jubilee’ and more from the Jubilee Debt Campaign. They point to the debt deal made with Germany in 1953 which meant western Europe was reconstructed successfully and thrived. Today Europe has been forced into its worst crisis since the Second World War by the actions of Europe’s leaders. Their ‘strategy’ in Greece, Ireland, Portugal and Spain is to put the burden of adjustment solely on the debtor country to make its economy more competitive through mass unemployment and wage cuts. This austerity has shrunk economies and made countries less able to pay debts. Germany 60 years ago and the resolution of the Latin American debt crisis 30 years ago are positive examples of the success of debt ‘jubilees’.
European sovereign debt – everybody owes everybody, so what might happen if everybody agrees to write-off what they owe each other? A revealing easy-read infographic guide of how European sovereign (national) debt could be shrunk by over 50%. The UK would be left with by far the largest debt.
The Bubble And Beyond – Fictitious Capital, Debt Deflation And Global Crisis by Michael Hudson, a respected former Wall Street analyst and Professor of Economics. Hudson posits that since the early 1980’s industrial capitalism has turned to finance capitalism rooted in the non-productive financial, insurance and property sectors. Interest earned from debt creation has been very profitable for the centres of wealth – bondholders and bankers. Since the bursting of the debt bubble they’ve upheld their wealth by maintaining the debt mountain through bank bailouts, Quantitative Easing etc. The interest they extract from the debt mountain shrinks the economy as peoples’ spending power is reduced by the cost of servicing their debts. Imposing austerity adds to the shrinkage and increases polarisation between creditors and debtors – the richest 1% at the centre of the credit/debt creation hub get richer at the expense of the 99%. The Depression wiped out not just wealth but also debt. But today’s 1% are not prepared to accept their losses. Governments have the power to write off debt as has happened throughout history. Debt cancellation must be part of a restructuring the financial system. Otherwise debt servitude will come to a violent denouement.
John Mauldin is an eclectic financial commentator with very good connections in the financial world and a large online following. He articulates the two contradictory forces battling in the debt black hole we face: expanding debt and collapsing growth. The authorities’ policy problem is – how do you counteract the negative pull of a black hole of debt before it’s too late? How do you muster the “escape velocity” to get back to a growing economy and a falling deficit – or even a surplus to pay down the old debt? How do you reconcile the competing forces of insufficient growth and too much debt? If the bond market perceived that the US was clearly committed to a balanced budget, rates would remain low, the dollar would be stronger, and we would steam away from the debt black hole. If not it would have what Rogoff and Reinhart call the “Bang!” moment, when a country loses the confidence of the bond market. “For countries that have been trapped in the gravity well of debt, there is then only the pain that comes with restructuring (debt write-off)”.
Australian economist Steve Keen’s Manifesto posits that a punishing debt unwinding over many years would be politically and socially dangerous and that a classic Jubilee would also be ruinous for innocent citizens since so much of their asset wealth and income (eg pensions) is dependent on the value of property, shares, bonds etc. He proposes a ‘Modern’ Jubilee whereby a form of Quantative Easing For The Public is deployed – ‘printed’ money would be directed to the public’s bank accounts with the requirement that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injection would have their debt reduced but not eliminated, while at the other extreme, recipients with no debt would receive a cash injection into their deposit accounts. Keen’s unconventional views have raised critical hackles.