Wednesday, 17 August 2016

Steven Keen’s debt jubilee.

I’m sceptical about Keen’s debt jubilee idea.

His argument, far as I can see, is thus.

1. Private debts have risen sharply over the last two decades or so.

2. When debts in the aggregate are paid off, or even when their growth ceases, the effect is deflationary.

3. When that deflation comes, governments won’t provide enough stimulus, ergo we need a jubilee.

The weaknesses in that argument are thus.

First, the rise in debts is not surprising given the fall in interest rates over the last two decades. To that extent, paying interest is not a big problem.

Second, the latter theoretical “not a problem” point seems to be born out in practice. That is, the proportion of debts which are “non-performing” is currently not at any sort of danger level. At the height of the crisis, that danger level was arguably approached in the US where “non-performers” rose to near 10% of total debtors. But that US problem has since subsided. As for Keen’s native Australia, which he seems to be particularly concerned about, “non-performance” seems to be a “non-problem” according to this chart.

Third, I agree (as claimed by Keen) that when it comes to implementing the right amount of stimulus, governments and central banks are pretty incompetent. In the recent crisis, that was thanks to the “pro-consolidation, pro-austerity” ideas coming from the IMF, OECD, Kenneth Rogoff, George Osborne, etc.

However, a debt jubilee does not solve the latter problem. That is, it’s perfectly possible for a recession to be sparked off by factors other than excessive debt. I.e. the best solution is to get it into heads of the latter economic illiterates (Rogoff etc) that given a recession (caused by debts being paid off or anything else) there is no reason to hold back on stimulus.

Fourth, it’s impossible to forgive one person $X of debt without robbing someone else of $X of savings, and that’s politically risky. Those robbed are liable to riot, or resort to other violent or illegal counter measures.

Plus, once savers suspect their savings are likely to be confiscated, they’ll charge MUCH MORE for saving/lending for the next two or three decades. Thus it’s very debatable as to whether debtors / mortgagors would gain much in the long run.

However, Keen proposes getting round the latter problems by dishing out as much freshly created money to non-debtors as to debtors! In his words:

“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.”

Well the obvious problem there is the ENORMOUS amount of stimulus involved: that is, we’d get hyperinflation. Here are some figures.

According to the first two charts in Keen’s article, the private debt to GDP ratio in the US peaked at 300% in 2010, while in Australia, it peaked at 150%. So the “Keen” solution would involve printing and distributing an amount of money equal to 600% of GDP in the case of the US (that’s 300% for debtors and another 300% for creditors to make sure creditors are not unfairly discriminated against in this massive distribution of freshly printed money). And in the case of Australia, the figures would all be half that much.
Those figures are completely lunatic. It couldn’t be done even if the process was implemented over several years. Milton Friedman never had anything like that in mind when he suggested helicoptering.

Obviously the above figures are all halved if we take the Australian 150% figure rather than the US 300% figure. But the stimulus is still of unheard of proportions.


But that’s not the end of the problems. People who are happy going into debt would then find their debts much reduced, thus they’d go running along to their bank demanding far bigger mortgages with a view to buying much larger or more expensive houses.

Unless something was done to curtail that activity, the alleged debt problem would just reappear in a few years. Thus we’d have to implement much stricter rules about who can borrow how much: all thoroughly bureaucratic.

I suggest it’s easier to work WITH the grain of what people and lenders want to do that work against the grain. That is, I prefer a system under which people can borrow what they want, as long as their bank thinks they’re creditworthy: i.e. as long as the bank thinks they’re able to eventually pay off the debt and in the meantime, pay the interest.

The only slight reservation that needs making to the above “hyperinflation” points is that arguably Western economies are not at capacity, thus there is room for some more stimulus (done via the Keen jubilee method or in some other way). Well clearly there is SOME TRUTH in that point. But Western economies have largely recovered from the recession which started in 2007/8, thus there wouldn’t be room for the MEGA STIMULUS package which is inherent to Keen’s jubilee.


P.S. (22nd August 2016).  In the original version of the above article (published 19th Aug) I got in a muddle with the above 300% and 150% figures. I estimated the amount that needed to be printed and distributed at HALF the right figues. Correction made 22nd Aug.

1 comment:

  1. He is a mixed bag is Steve Keen,he talks a lot of sense about money and debt generally.Then he has this obsession with his jubilee.I think once you have committed an idea it takes a lot to let go of it without looking indecisive.

    Jubilees are well known throughout history,but the fact that we have used them is just an indication that we have never had a stable financial system.It is time we really banished the need to ever have this kind of discussion again.
    Jubilees are a temporary and unfair solution in my eyes, not a proper cure.


Post a comment.