Reducing Debt Via A Modern Debt Jubilee

There is also a social bonus to paying interest on the Jubilee Bonds: as well as compensating the banks for lost income on private debt, it also creates money: it increases the Reserves (Assets) of the banking sector and its Equity at the same time. So the "cost" of the Jubilee would be a $1 trillion injection of new money into the banking sector every year.

A Modern Debt Jubilee would thus overcome the problem of an excessive ratio of debt to GDP by affecting the denominator - GDP - more than the numerator - debt, both public and private. It main effects occur because of its effects on the money supply - both who has it, and how it grows. This reallocation of existing money - see Figure 10 - reverses the historic mistake Central Banks have made via Quantitative Easing, which was undertaken ostensibly to stimulate the economy, and did by making the wealthy wealthier, via higher share prices.

Figure 10: Distribution of money under a Jubilee. more money for Firms, Workers and Capitalists and less for Banks

The model still abstracts from much of the detail of the real world, but it is realistic about money creation, in stark contrast to mainstream Neoclassical economic models, which ignore money creation completely. It implies that there is a way out of our current impasse, and the main impediment to it happening is the ignorance about money creation that mainstream economics itself has caused.

More policies would be needed to support a Jubilee: you wouldn't want to reduce the private debt burden, and then have banks recreate it via the irresponsible lending practices they have followed in the last 40 years. This would include curbs on bank lending for asset purchases, and encouragement to banks to lend to firms and entrepreneurs, rather than to speculators, as they have been predominantly doing since the 1970s.

Government policy after the Jubilee should be expanded from targeting only unemployment and inflation to include targeting private debt as well. It needs to be kept at sustainable levels - of the order of the 50% of GDP that it was in capitalism's Golden Age after WWII.

It's possible to see this last time we escaped from a private debt trap - the 1930s and 1940s - as a crude version of what I'm proposing here. Increased government spending, firstly for the New Deal and then for World War II, enabled the private sector to drastically reduce its debt level - see Figure 11.

Figure 11: How we escaped from the last private debt bubble

We just need to avoid the mistakes made back then, of reducing private sector debt by a War rather than a Jubilee, and of allowing the private banking genie to get out of the bottle again afterwards. A well-functioning economy needs a balance of fiat and credit money, and once this is restored by a Modern Debt Jubilee, it needs to be maintained by a government that is well aware of the dangers of surrendering control over the money supply to those whom Marx so aptly characterized as "the Roving Cavaliers of Credit" (Marx 1894, Chapter 33).

Figure 12: The full Minsky model of a Modern Debt Jubilee


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This article appeared on Patreon May 7, 2021.

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