Everything Accomplished During the Great Depression to Make Capitalism Workable Has Been Taken Away Resulting in Economic Crisis that Only Debt Forgiveness Can Mitigate
Paul Craig Roberts
Below are an interview I gave to the Herland Report prior to the coronavirus explaining our precarious economic situation and Michael Hudson’s article today explaining that the way out of the economic crisis is a debt jubilee. As the debts cannot be paid, it makes far more sense to forgive them than for all of us to sink with them. Debt cancellation is not an expression of idealistic egalitarianism. It is a practical alternative to prolonged depression and worse economic polarization with all of its social and political implications.
The central point of my interview is that deregulation and concentration of the economy and its financialization has made another severe depression unavoidable—unless possibly there is a debt jubilee as Michael Hudson recommends. See: https://www.nakedcapitalism.com/2020/03/michael-hudson-a-debt-jubilee-is-the-only-way-to-avoid-a-depression.html
The question we face is whether our leadership can understand that more debt is not the answer. So far “solutions” seem to be to make more loans, thereby continuing to build up debt. As existing debts—mortgage, student, car, credit card—are so overwhelming that they cannot be paid, adding more loans is like throwing fuel on a fire.
Debts have to be cancelled as they are smothering individuals, businesses, and the economy. Our economic culture is accustomed to thinking that debt must be paid. The belief is that to reward those who did not live frugally and avoid debt subsidizes and encourages bad behavior. But in this case, unless debts are forgiven the frugal and responsible go down with everyone else. As I have emphasized for 20 or more years, globalism stopped real family income growth by offshoring high-value added jobs. Under Alan Greenspan, the Federal Reserve used debt expansion to take the place of income growth in order to continue to fuel aggregate consumer demand.
Debt forgiveness has a long history of success. The ancients used it repeatedly, and in 1948 in Germany, the replacement of the Reichsmark with the Deutsche mark wiped out 90 percent of government and private debt, resulting in “the German miracle.”
Government debt is not the problem that private debt is. Government can pay off its debt by printing money, but individuals and businesses cannot. As Hudson says, “if the U.S. government can finance $4.5 trillion in quantitative easing for the banks, 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.”
Debt forgiveness for banks and large corporations implies some nationalization so that the public sees some fairness in the bailouts of debt. Essentially, quantitative easing was debt forgiveness for too-big-to-fail financial institutions. The Federal Reserve purchased the banks’ bad loans and put them on the Federal Reserve’s balance sheet. Unlike a bank, the Federal Reserve cannot go broke. Our economic culture also sees nationalization as socialism and an awful terrible thing. I addressed that issue on March 14: https://www.paulcraigroberts.org/2020/03/14/economic-effect-of-coronavirus-could-be-revolutionary/
Our ingrained ways of thinking can easily prevent a solution to the current crisis, which is building as I write.
Here is Hudson’s article:
Michael Hudson: A Debt Jubilee is the Only Way to Avoid a Depression
Posted on March 22, 2020 by Jerri-Lynn Scofield
Originally published by the Washington Post, reproduced with permission of the author. https://www.nakedcapitalism.com/2020/03/michael-hudson-a-debt-jubilee-is-the-only-way-to-avoid-a-depression.html
Michael Hudson, is a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “and forgive them their debts”: Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year.
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.
Until recently, historians doubted that a debt jubilee would have been possible in practice, or that such proclamations could have been enforced. But Assyriologists have found that from the beginning of recorded history in the Near East, it was normal for new rulers to proclaim a debt amnesty upon taking the throne. Instead of blowing a trumpet, the ruler “raised the sacred torch” to signal the amnesty.
It is now understood that these rulers were not being utopian or idealistic in forgiving debts. The alternative would have been for debtors to fall into bondage. Kingdoms would have lost their labor force, since so many would be working off debts to their creditors. Many debtors would have run away (much as Greeks emigrated en masse after their recent debt crisis), and communities would have been prone to attack from without.
The parallels to the current moment are notable. 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.
In fact, it could create what the Germans called an “Economic Miracle” — their own modern debt jubilee in 1948, the currency reform administered by the Allied Powers. When the Deutsche Mark was introduced, replacing the Reichsmark, 90 percent of government and private debt was wiped out. Germany emerged as an almost debt-free country, with low costs of production that jump-started its modern economy.
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 cannotbe 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.
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