Do We Need To Write Off Debts To Stave Off Two-Decade Long Depression?

December 1, 2011 By 6 Comments

Okay, I have no competence to discuss economics with any significant level of expertise. I found this video with economist Steve Keen interesting and I would be interested to see those of you who know something about economics discuss it:

Your Thoughts?

Filed Under: Uncategorized 6 Comments
  • The Vicar

    Actually, just the other day I was thinking “we really need to just forgive all debt everywhere, that would solve the problem.” Unfortunately, being a nit-picker and a problem-seeker, I immediately realized that this would not work.

    It’s like this: writing off all debt is great for you and me (the only people who would object are those with no debts, and they’re only conceptually harmed by not having had debt to forgive), and all homeowners with mortgages, most students, most businesses and national governments. But it would utterly destroy pretty nearly every bank in the world, unless at the same time we eliminated the banks’ debts to customers, which is to say: in exchange for losing your debts, you would also lose your savings.

    So what? I hear you cry. The banks — I certainly agree — have not been a good thing for the world, nor have they even attempted to be responsible institutions in the last several decades. Why not let them all fail spectacularly?

    Well, fine. But although our economic system doesn’t work very well, or efficiently, or even in our best interests, it does work in a sense — that is, it is rare for us to wake up and discover that we are suddenly destitute, or that there’s no food available for sale within 50 miles, or that the electric companies have all suddenly stopped delivering power to the county we’re in. If the banks all implode, then from that point onward the way the economy works will have to be fundamentally different from the way it has been. That implies all kinds of radical changes, not just to economics and politics but to day-to-day life for nearly everybody. And we have no reason to believe that whatever system might emerge would be any better than what we’ve got, or that it won’t lead to the kind of breakdowns which we currently don’t usually experience.

    To make a long story short: be careful what you wish for…

  • Paul Durrant

    If you watch the video, he doesn’t suggest just cancelling all debt, but that Governments should create money and give it to individuals on the condition that if they have any debt the money goes to pay it off.

  • Douglas Kirk

    Actually, that’s how I would have preferred the bailout and tarp money to have been spent. Rather than going to the financial institutions to cover their panzi-esche default swaps, use that trillions of dollars to pay off the actual debts of real homeowners, credit card holders and those with student loan debts. Preferably only for households making 100K or less per year. It would have caused a much bigger disruption in the banking industry, though. And that’s what we were trying to avoid.

  • The Vicar

    But that (using inflation/government debt to pay private debt) ends up causing its own unique problems — and doesn’t solve all our current debt-related woes either.

    Suppose (just as a start) that we gave everyone in the U.S. ten thousand dollars, on the condition that they pay off their debts first. That wouldn’t be enough to pay off most people’s mortgages, so it wouldn’t realistically be enough to solve even the residential debt crisis, but it’s a convenient starting point.

    It’s a little difficult to be certain exactly who would qualify for this, but in 2005 there were 135 million tax returns filed — there are almost certainly a lot more individuals who would be eligible because a lot of those were joint returns, and therefore represent two people. (And that’s assuming, of course, that children are exempt.) So we’re talking about more than 1.35 trillion dollars being created or borrowed immediately, to do something which would be an inadequate response to the problem. (There’s also a commercial real estate crisis, and the federal debt — which is almost entirely thanks to the overfunded U.S. military and therefore not going to get any better unless we stop spending money on the military, regardless of how healthy the civil economy may be.) That would either cause a lot of inflation very fast or make the U.S. credit rating fall pretty damn quick — either way, it would destabilize everything even more, and might end up destroying the whole economy completely.

    Admittedly, compared to the excesses of the American right wing ($1 trillion overall for the S&L crisis caused by Republican bankers in the ’80s, several trillion — no definite total yet, but definitely a minimum of $2 trillion — for our entirely optional war in Iraq brought to us by the right wing, similar numbers for Bush’s TARP and the Afghanistan invasion, etc. etc. etc. down the line) that doesn’t seem so bad, but those other things are cumulative amounts which took (or are taking) years to be spent, rather than a massive sudden payout as a disbursement to the population would be.

    If we’re going to jeopardize the system, why not think big? We ought to nationalize the banks and the oil companies, forgive all residential mortgage debt immediately, audit the rich and confiscate the entire assets of any who are found to have been cheating on their taxes or taking advantage of illegal alien labor (i.e. nearly all of them), forbid short-term stock manipulations (stabilize the markets), and shoot anyone in the media who objects to this plan. (That last one wouldn’t help the debt crisis, but it would weed out a lot of the people who helped sell us the mess in the first place.) :)

  • Richard Wein

    I saw this interview on TV. It’s a fascinating idea, but a scary step into the unknown

    The Vicar, I’m not sure it’s necessary to eliminate all the debt. I think the idea would be to reduce debt to traditional, sustainable levels. And this could be achieved partly by enabling people to pay off some debt, and partly by devaluing the remaining debt through inflation. I think serious inflation would be unavoidable with such a massive increase in the money supply, but I suspect that’s part of the plan. I think this isn’t just a plan for paying off debt. It’s also a plan for inflating out of debt. Inflation would also slash the sovereign (treasury) debt, as bond-holders would get their money back in dollars which can no longer buy as much. This would effectively be a partial sovereign debt default.

    Hopefully there would be a big increase in demand. People would have more money to spend. The dollar (or whatever currency we’re talking about) would probably fall faster than prices would rise, so this would encourage exports and discourage imports. But apart from extra consumption I’m not sure what would happen to all the extra money sloshing around the economy. Much of it would be looking for inflation-proof investments, and probably go overseas (assuming other countries aren’t engaging in the same policy).

    You can’t cancel debts without someone losing. I think the losers here would be holders of dollars and dollar-denominated investments.

    • Richard Wein

      P.S. Perhaps I should have made clear that, as I understood it, Keen is proposing to give money to everyone, whether they have debts to pay off or not, and that this money would be created, not borrowed. I don’t know whether he has in mind printing banknotes or having the central bank create credit (as with QE).