Reducing Debt Via A Modern Debt Jubilee

Figure 7: Rising velocity of money because of the Jubilee

A Modern Debt Jubilee thus reverses Fisher's Paradox. Private debt is reduced, but the stock of money remains constant, and as a bonus, it ends up in the hands of people who spend more rapidly. So private debt falls, and GDP rises as a result, reducing the private debt to GDP ratio even further. The increase in economic activity is so great that, over time, even the government debt to GDP ratio falls as a result of the Jubilee.

To those who ask, "Who's going to pay for it?", a lesson in accounting is in order. Figure 8 shows the basic operations of the MDJ, with the financing operations in the top five rows.

Firstly, the Treasury makes a per capita payment to every adult in the economy. Since most people are employees ("Workers") rather than employers ("Capitalists"), the vast preponderance - say 95% - of the money goes to workers, with the rest going to capitalists: that's shown in the first two rows of Figure 8. Note that this operation, like all actions in double-entry bookkeeping, has two components: the bank accounts of both workers and capitalists are credited; and simultaneously the Reserve accounts of the private banks at the Central Bank are credited. The Assets (Reserves) of the private banks rise precisely as much as their Liabilities (Deposits) rise.


Figure 8: The basic operations in a Modern Debt Jubilee

The increase in Reserves enables the next step on the 3rd row: the sale of Jubilee Bonds by Treasury to the private banks. The Jubilee has increased the Reserves of the banking sector; the sale of Jubilee Bonds lets the banks swap this non-income-earning, non-tradeable asset for Jubilee Bonds, which can be traded and can earn interest, just like standard Government Bonds.

This is the key truth to "Modern Monetary Theory": because the government is a money creator, government spending is self-financing. Financing, in other words, is not the problem: problems, if any, lie with the consequences of that spending, rather than its financing.

Here we have not spending but a "gift" to the private, non-bank public: the government gives the public money which must be used to pay down private debt (rows 6 and 7 in Figure 8). To do so, it also gifts the banking sector with additional reserves - an asset that earns no income. The sale of new government bonds ("Jubilee Bonds") to the banking sector is another gift, in that it enables the banking sector to swap a non-income-earning, non-tradeable asset for an income-earning, tradeable asset. Of course the banking sector will accept this gift - which is why every government bond issue in history has been oversubscribed. There are no "Bond Vigilantes", only "Bond Idiots" who would turn down not one gift but two.

How much this second gift costs - in terms of the interest payments made on the bonds - depends on how much of the bond issue remains with private banks. It is quite possible for the Central Bank to buy all of the Jubilee Bonds from the private banks if it wishes (row 4 of Figure 8): all it has to do is credit their Reserve balances (the Central Bank's Liability to private banks) and put the bonds on its balance sheet as an Asset of equivalent value. This would then mean that the Jubilee would cost the government nothing, because it would be financed by one part of the Government (the Treasury) going into debt with another part (the Central Bank).

But the biggest objectors to that happening would probably be the private banks themselves, because the reduction in private debt - by roughly 100% of GDP in the simulations here - would reduce their income dramatically. Here, row 5 of Figure 8 comes into play: the Treasury paying interest on the bonds to the banks. This is the "cost" of the Jubilee: it's the amount of interest needed to keep the banking sector happy, after it loses a large source of income from the repayment of private debt. It is quite possible for interest rate on Jubilee Bonds to be set at a level which fully compensates the banking sector for the loss of income from interest on private debt, as illustrated by Figure 9.

Figure 9: Bank income when Jubilee Bonds pay the same rate as interest on private debt

The interest itself can be raised by Treasury borrowing from the Central Bank - so if the Jubilee were of the order of 100% of GDP, as in these simulations, the annual "cost" of this would be an increase in the Treasury's debt to the Central Bank of 5% of GDP, or $1 trillion per year.

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