Saturday, 13 April 2019

Debt jubilees are caught between a rock and a hard place.



The “rock and hard place” conundrum that faces the whole debt jubilee idea is as follows.

If a law is passed saying that a selection of debts no longer exist, then relevant saver / creditors are robbed. To illustrate with a simple example, if the debts owed to a particular bank are wiped out, i.e. declared to be null and void, then the shareholders, bond holders and depositors at the relevant bank are wiped out. Or to be more exact, the stakes that the latter three groups of people had at the bank become worthless, assuming for the sake of simplicity that the bank has no other assets.

An alternative is to wipe out a selection of debts and reimburse saver / creditors with money freshly created by government / central bank. But assuming the economy is already at capacity, that cash injection into the private sector will be inflationary.

To be more exact, debtors who find they no longer have to dish out interest every month will have cash to spare, plus their net assets will have risen, so they’ll go on a spending spree. And as to saver / creditors, they will now be too liquid: that is, cash will now make up a larger proportion of their net assets than previously. So they too will go on a spending spree: they’ll tend to buy up assets like a larger house or stock exchange quoted shares.

The conclusion so far is that the whole debt jubilee idea is a non-starter. However, that is clearly not to say we should not be concerned about inequalities. That is, it is possible that some of the less well-off incur excessive debts because the latter inequalities are excessive.

But the solution to that is to deal with the above inequalities via the usual mechanisms: relatively high taxes on the rich and social security, minimum wage laws etc for the less well off.

Having done that, if some of the less well-off incur excessive debts, that’s entirely their fault. Same goes for the well-off.

Conclusion: there is no place for debt jubilees. 



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P.S. (22nd April, 2019)
 
Another big problem with debt jubilees is that they are unfair on those who have not incurred debt. To illustrate, take two people on the same income one of whom decides to buy a house on a mortgage totalling £X, with the other renting. The £X mortgage is then wiped out via a jubilee. That means the mortgagor makes a £X profit, while the renter gains nothing. 
 



3 comments:

  1. When I initially commented I clicked the "Notify me when new comments are added" checkbox and now each time a comment is added I get several e-mails with the same comment.
    Is there any way you can remove me from that service? Appreciate
    it!

    ReplyDelete
    Replies
    1. I'm baffled. First, I don't see your initial comment anywhere. Second, and as regards "each time a comment is added" I don't see those subsequent comments either.

      Third, that "several e-mails" problem seems to be a common one: I get repeat emails of that sort.

      Re "Is there any way you can remove me from that service?" my answer is "not that I know of".

      I actually need your help as much as you need mine because something has obviously gone wrong with the comment system hereabouts recently: I normally get about one comment per article, but I've had non for a month or two.

      I have a suggestion: do another comment and this time untick the "notify me when new comments are added". That MIGHT solve the "too many emails" problem. Plus it would help me identify the problem.

      Plus I'll get a friend to place a comment, and I'll see what happens.

      Delete
  2. I also agree that jubilees are unfair. There is past evidence that jubilees were held approximately every 50 years or so,to correct unsutainable accrual of debts. However this is inherently unfair on creditors in my view,better we deal with stopping unsustainable debt booms.

    ReplyDelete

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