Friday, 25 May 2012

Steve Keen’s debt jubilee idea.

Summary: I have plenty of respect for Steve Keen, but don’t agree with his debt jubilee idea. He argues that the process of paying off debts is deflationary, and that if we want to get the debt reduction process over quickly and return to normal levels of aggregate demand, we need stimulus, with debtors being made to use the stimulus money they receive to pay down their debts.

Strikes me the bureaucracy involved there is a problem. But more fundamentally, it’s the PROCESS OF PAYING OFF DEBTS that is deflationary. Thus if debtors who seriously want to remain indebted are allowed to do so, there is no deflationary effect. As to debtors who WANT TO reduce their debts, they will do so AUTOMATICALLY given stimulus. Thus there is no need for any sort of special “debt forgiveness” scheme.


There has been a big rise in private sector debt over the last decade or so. Paying off this debt will have a similarly big and long lasting deflationary effect. So Keen wants the “paying off” to be speeded up with a “debt forgiveness” program or “debt jubilee”.

The essence of his argument is under the heading “A Modern Jubilee”. In contrast, the paragraphs PRIOR to that heading contain the technicalities and evidence to back his argument. His argument, as I understand it, is essentially as follows.

The accumulation of private debts is an important contributor to aggregate demand (AD), and in particular the ACCELERATION in the growth of this debt is the vital factor.

I have no quarrel with that.

He then claims that the LEVEL of private debt accumulation over the last ten years or is unprecedented, and that paying it off will involve such a degree of AD reduction that the only solution is a debt jubilee.

Now that argument would be valid if the only source of AD or potential AD was debt accumulation. But it’s not: government and central bank can perfectly well make up for any lack of AD by boosting private and/or public spending.

Indeed, Keen’s proposal is to do EXACTLY the latter, but channel a portion of the extra money towards debt reduction. He says:

“A Modern Jubilee would create fiat money in the same way as with Quantitative Easing, but would direct that money to the bank accounts of the public 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.”

First, I’m not sure that QE alone would have the required stimulatory effect, because QE has a negligible effect on private sector net financial assets. But that is a minor quibble: it’s not of crucial relevance to the basic argument here.

So let’s just assume that stimulus is implemented, and the net effect is to channel money into everyone’s pockets (debtors, creditors, you name it).


The first problem with requiring debtors to use their newly acquired stock of money (stimulus money) to pay off their debts is the ENORMOUS amount of bureaucracy involved.

For example, just assuming debtors are induced to write out checks to their creditors, what’s to stop those debtors (where they want to maintain their level of debt) quietly incurring a similar amount of debt from other creditors (or even re-financing via the SAME ORIGINAL CREDITOR/S a few months later)?

Stimulus plus jubilee equals stimulus.

The second problem is this. As far as ultimate effects go, there is very little difference between Keen’s idea and a straightforward dose of stimulus (SDS) WITHOUT any specific attempts to have debtors pay off their debts.

To illustrate this point, I’ve listed below the six changes that Keen claims would result from his jubilee idea. Plus I’ve put comments in orange below after each.

1. Debtors would have their debt level reduced;

Same applies to SDS to the extent that debtors think the best use they can make of a cash windfall is to pay off their debts. In contrast, to the extent that they see fit to MAINTAIN their level of debts (and assuming their creditors are happy with that) I see no good reason to pay off the debts.) Moreover, simply MAINTAINING a debt at a constant level does not have a deflationary effect: it’s the PAYING OFF of debts that has the deflationary effect. So if a set of debtors want to maintain their indebtedness, where is the harm?

2. Non-debtors would receive a cash injection.

Same goes for SDS.

3. The value of bank assets would remain constant, but the distribution would alter with debt-instruments declining in value and cash assets rising;

To the extent that debtors see fit to pay off their debts, exactly the same applies to SDS.

4. Bank income would fall, since debt is an income-earning asset for a bank while cash reserves are not;

Same again: to the extent that debtors see fit to pay off their debts, exactly the same applies to SDS.

5. The income flows to asset-backed securities would fall, since a substantial proportion of the debt backing such securities would be paid off;

Same again: to the extent that debtors see fit to pay off their debts, exactly the same applies to SDS.

6. Members of the public (both individuals and corporations) who owned asset-backed-securities would have increased cash holdings out of which they could spend in lieu of the income stream from ABS’s on which they were previously dependent.

Same again: to the extent that debtors see fit to pay off their debts, exactly the same applies to SDS.



  1. You stop refinancing by limiting the banks.

    Neither the Debt Jubilee nor the Job Guarantee can exist in isolation. They all require a re-regulation of the banking system.

    That re-regulation is what prevents us from travelling down the same road again.

    Debt jubilee is really a reset of the system - similar to a mass bankruptcy.

    The operational issues are straightforward to work around. A voucher mailed to addresses associated with national insurance numbers that can only be redeemed by banks for example - similar to the approach used with Child Trust Funds.

    The difference is really timing and direction. Jubilees happens in a large chunk over a short period of time and is directed exclusively at private debt.

    The Jubilee is largely a one off redistribution from the banks to the individuals, with the downside that the banks end up with a lot of equity and an 'interest on reserves' income stream from the central bank.

    Other forms of government spending are over a longer period of time and hit different areas of the economy, with a reduced impact on private debt.

    So as ever its all down to what you believe is the most important problem: jobs, private debt, or not enough roads.

  2. Isn't the payment of interest deflationary, especially when creditors become reluctant to extend more credit and so interest rates rise?

    1. Obviously the conventional view is that an interest rate increase is deflationary. But Warren Mosler claims the effect is the opposite, i.e. stimulatory and because the government / central bank machine has to print and spew out more money to debt holders – i.e. to the private sector.

      However, it strikes me that none of that really matters because the government / central bank machine can always give aggregate demand a boost if interest payments really are deflationary.

      Saving (in the sense of saving money) is deflationary (Keynes’s paradox of thrift). But that’s not an argument against saving: i.e. if the private sector wants a bigger stock of money, that shouldn’t be a problem for a government with its head screwed on.

  3. 2. Non-debtors would receive a cash injection.

    Same goes for SDS.

    Huh, please explain, I've received no money from a cash injection

  4. I have been studying your blog posts during my break, and I need to admit your complete article has been very useful and very well composed.

  5. What about some kind of a debt-to-equity conversion across the entire economy? It could be done without printing money.

    1. I favour turning all monies in deposit accounts or “term accounts” into equity of a sort, and for reasons I set out here:

      But the objective there is to give us a more logical and robust banking system. It doesn’t solve the alleged problem (which Keen thinks is a big problem and I think is a non-problem) namely that the paying down of debts has a deflationary effect.

  6. "Fractional reserve banking promotes instability."

    There's no such thing as fractional reserve banking. Loans create deposits. Banks are not reserve constrained.

    1. I’m actually aware of Keen’s point, and I agree with him.

      Unfortunately the phrase “fractional reserve” has more than one meaning. You can use it (as you seem to) to refer to a system where reserves actually control the volume of commercial bank lending.

      Alternatively the phrase can be used to refer to a system in which not all money is backed by reserves / central bank created money. I’m using it in the latter sense.

      Same problem applies to the phrase “full reserve”. In fact I saw recently that Positive Money are thinking of abandoning the phrase because of its ambiguity.


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