A debt jubilee?

In the Western tradition, the idea of the year of jubilee comes to us from the Old Testament.    The idea was to avoid permanent alienation of people from their ancestral land –  in effect, land transfers were term-limited leases, and if by recklessness or bad luck or whatever people lost their land it was for no more than fifty years. In the fiftieth year –  the Year of Jubilee –  all would be restored: land to the original owners and hired workers could return to their land.   It wasn’t a recipe for absolute equality –  the income earned wasn’t returned etc –  but about secure long-term economic and social foundations.

For many –  for me –  it has an appeal, although one could argue that in many respects modern society already reflects some of the vision underlying the original near-eastern ideas: after all, we prohibit slavery, we allow personal bankruptcy (and discharge from bankruptcy without paying all the original debts), we provide education free at the point of use, and a welfare system for those who might otherwise fall through the cracks.

But this post isn’t about exploring those ideas, but about one very specific modern championing of the idea that we hear a bit more of again at present: the idea of some sort of debt jubilee in which, in a highly-indebted system, the outstanding debt is, in some form or another, simply written off.

One person who has been championing such a scheme for some time is Professor Steve Keen, an Australian economist now teaching at a university in London.   He has quite a following in some circles – I used to read his blog moderately regularly for a time, and perhaps 7 or 8 years ago The Treasury hosted a visit here (in the course of which his stocks sank among most officials).  However, he was interviewed a few weeks ago by Gareth Vaughan at interest.co.nz on his ideas for policy in the wake of the coronavirus.  He and I share the view that the biggest macroeconomic risks at present are deflationary rather than inflationary but, it would seem, we agree on little else.   You can read or listen to his other ideas for yourselves if you choose, but one strand of what he was championing was a “modern debt jubilee”.

I do not wish to be seen to be critiquing or attacking a straw man, but I have had difficulty finding anything online that sets out in very specific terms exactly what he has in mind.

Here is what he said in the interview

Firstly, Keen says, they should be implementing a modern debt jubilee now.

“It’s quite feasible to do it [but] I never thought it would happen. People asked me what chance I thought this had of happening. I said it’s less than a snowflake’s chance in hell. We are in hell now and the only way out of hell, as well as getting a vaccine for the virus, is to reduce this burden of private debt otherwise we’ll have a financial collapse after the coronavirus,” says Keen.

The alternative, he argues, is mass loan defaults.

“You simply have to accept that debt can’t be repaid when too much debt has been issued. So we have to reduce private debt and we have to do it now. [We] should do a debt jubilee now, not once we get through this crisis. Otherwise there’ll be many people who can’t pay their rent, as well as people who can’t pay their mortgages,” says Keen.

“If we do it now we’ll enable the payments system to continue functioning. If we don’t do it now then it’s quite possible the payments system will collapse. Small businesses won’t get any cash income, households won’t get wages. Everybody will end up having no money in their bank accounts because that money will be used to pay off debt.”

What Keen’s advocating for is governments’ capacity to create fiat money being utilised to distribute an equal amount of money per person across entire countries.

“And people who were in debt would get their debts reduced, either by an offset account or by actually paying their debts down. People who are not in debt get a cash injection. And that cash injection can also be used to buy newly issued corporate shares which are used to pay down private debt. So as well as reducing household debt, you reduce corporate debt and you also democratise the ownership of corporations,” says Keen.

And although I have found a couple of other references (including here and here)  there is still no sight of some critical parameters.

Nonetheless, it is worth bearing in mind that elsewhere in the interview he describes the large increase in household debt in recent decades as “unconscionable debt” and repeatedly highlights the very large increase in the ratio of household debt to GDP in New Zealand since about 1990 (about 30 per cent then, about 100 per cent now).   And although he talks about “reducing” household debt, “jubilees” have connotations of very substantial writedowns, so he clearly isn’t talking about something like dishing out, say, a mere $10000 per household/person.  The Reserve Bank tells us that as at the end of last year recorded household debt was about $310 billion.

Moreover, Keen also tells us (see extract above) that he thinks the same amount should be distributed to everyone.  I’m not sure whether he really means “everyone” or just adults, but since under-18s can’t contract binding debts there shouldn’t be any need for jubilees for them.  That still leaves 3.8 million residents (and here I’ll just ignore the fact that a significant number of them are temporary non-citizen residents; I just want to get a sense of the plausible scale of what Keen might be calling for, not tie down every detail).

As we all know, recent first home buyers in Auckland typically have to take on fearsome levels of debt.   They appear to be the sort of people Keen focuses on, since he blames the rise in house prices on banks and their over-aggressive (“unconscionable”) lending setting up a house of cards that might otherwise be about to tumble.  I presume a $500000 mortgage isn’t at all uncommon (last year the nationwide average first home buyer mortgage was about $400000) and many will be larger than that.

Now, of course the typical new buyers are a couple, but for those marginal Auckland purchasers that might still be $250000 each.

I presume Keen does not have in mind giving them –  and all the rest of us –  $250000 each, although doing so would certainly allow most (but not all) mortgage debt to be fully repaid.     But even if we wanted to make possible a 60 per cent writedown for those couples with the new unconscionable $500000 mortgage, he’d still have to be looking at $150000 each, as gift/grant from the Crown.  Across 3.8 million adults, that seems to come to $570 billion dollars.

All paid for, in his own words, through the Crown’s ability to create fiat money –  change the Reserve Bank Act and get for the Crown an (interest-free) overdraft of $570 billion.  Halve the payment and it is still serious money.

You’ll have noted that Keen is also concerned about corporate debt –  a big concern at present in some countries (where it has grown rapidly in recent years) but much less so in New Zealand.  For those –  most of us –  without mortgages (whether because we have paid them off, or never been able to get into the housing market in the first place), we get a rather large addition to our bank balances.   Keen notes that the proceeds could be used to buy “newly issued corporate shares which are used to pay down private debt”.

I don’t know about you but I know what I would be doing not just with my $150000 but with all my non-indexed financial wealth the minute I thought that anything like what Keen was proposing was likely to be implemented: I’d be looking to put it into real property (houses, gold, whatever) or getting it into the currency of a country not adopting such a policy.  Anyone with non-indexed debt at present would prudently be doing the same –  and locking in a long-term fixed interest rate – not using the proceeds to pay off debt.  It might be hard to generate inflation at present, under present –  largely self-imposed – constraints, but simply handing $570 billion will do it.

I hope all regular readers will recognise that I am not one of those looking for inflation under every stone.  I worry about deflationary risks at present –  as does the market – and I do not believe monetary policy is doing anything like enough to respond to those risks at present.  Much as I am sceptical of the idea of giving out some modest amount (say $2000) to everyone as some sort of stimulus, in the current climate – large negative output gap, little or no inflation –  such a payment, even funded directly by the Reserve Bank –  would be net stimulatory in the near-term.  There is a considerable amount that can be done to get us back towards full employment as soon as possible.

But not by simply handing out $570 billion, with no obligation to repay.

(Presumably Keen does not think his scheme would dissolve into very high inflation, but I’ve never seen him anywhere articulate the case for why not.)

When I think of debt writeoffs, I think of explicitly recognising that someone has to bear those costs –  on any very substantial scale there are few/no free lunches.  Banks will have to write off some debt –  perhaps quite a lot –  over the next few years, and their shareholders will bear that cost.  That is the business they went into.  Writing off mortgage debt more generally on the sort of scale Keen seems to envisage can only be done by imposing fearsome losses on others.  It is so utterly different from that Old Testament conception (which, in effect, limited the scale of liabilities anyone could run up in the first place).

I have some sympathy with the view that requiring young –  and now not so young –  people to take on multiple hundreds of thousands of dollars of debt to get into a basic house in our cities is pretty unconscionable and deeply unjust. But, frankly, that isn’t fault of the banks but of the central and governments that make land –  a resource we have in abundance – artificially scarce.  In fact, I’ve even gone so far as to argue that if ever we managed a government with the courage to fix the land market, it might be both opportune (building coalitions) and just to offer some compensation to the losers –  those more or less compelled to take on very high debt in recent years just to get a foot on the ladder.   But there would be an explicit, shared, cost to that.

And more generally I’m not persuaded that current debt levels –  public, private or total –  in New Zealand pose any vast threat of economic or financial collapse.  Keen likes to highlight how much debt has risen since, say, 1990, but it isn’t obvious why that is the most relevant benchmark.  In a speech I wrote with Alan Bollard a few years ago, I included a chart showing that mortgage debt (house and farm) was materially lower then  as a per cent of GDP than it had been in 1920s New Zealand,  I rechecked the numbers this morning and the picture today is the same as it was in 2011.  Contrary to Keen, our banking system looks pretty robust, not ricketty.

I also take the view that there is plenty that can and should be done to assist individuals and firms through the next few months.  There is a strong case for income support (broadly defined) or even income insurance (of the sort I’ve championed here) but that is very different proposition than somehow looking to wipe out debt without identifying whose claims to real resources will be wiped out to pay the economic cost of that (as distinct from the “which account to write the cheque on” issue that Keen deals with).

You might be wondering why I bothered with this post, or dealing this extensively with a pretty extreme idea.  The reason is that Radio New Zealand is recording tomorrow (for broadcast on Sunday morning) an interview with both me and Keen. I might have more to say about some of his other ideas –  some of which make Winston Peters championing New Zealand manufacturing seem moderate –  next week. In the meantime I wanted to understand as well as I could what Keen was actuallly championing on the debt front.  As I said, I don’t want to attack a straw man –  that never persuades anyone –  but I simply haven’t yet found an articulation of what he is proposing that looks economically feasible or sensible.


27 thoughts on “A debt jubilee?

  1. Thanks, Michael for the programme information.
    I think I will prefer to listen to the comments on RNZ before any judgement.
    Steve Keen may be a radical thinker. But at least he thinks.
    Unlike some sycophants and neoliberals.


  2. Here’s what I thought regarding that interview:

    I think he starts with the right premise: that debt will not be repaid…

    But I keep asking myself, why have a debt jubilee when personal and corporate bankruptcy (and subsequently bank failures) will sort it out for you? In the end, as long as the arms of government do not enforce mortgagee sales, those debts will be uncollectable anyway. And the creation of money as debt becomes the responsibility of sovereigns – i.e., that function becomes nationalised (for better or worse).

    He’s trying to find a way for society to return to some form of BAU, which leaves all the ills of our present system of financialization and monetization in place. I think we need something that snuffs out the FIRE economy in the process of transition.

    I’d rather see a form of Great Leveling (sort of likened to Schumpter’s creative destruction) – a sort of getting back to basics with communities coming together to collectively address the first rung on Maslow’s hierarchy of needs – and for a more enlightened society to grow from there;


    The question is of course whether we could transition without anarchy prevailing. And this is where a UBI, but not accompanied by a debt jubilee could be contemplated.

    I think his problem with leaving debt to sort itself out, is that he sees global conflict ‘to the end of sovereignty as we know it’ as being the result of BAU disruption.

    The economists view of a just transition would of course be quite different to an ecologists view of it.


    • My simplistic view

      The ecologists view. I had to look that up. Five disciplines. If a jubilee was ever to be applied to NZ in isolation there would need to be a defining of the society the whole desired, not just the nabobs listening to the elites and the effetes and the powerful and the academics. Probably require a total clean out of the government. When I was young we never had a car or fridge or washing machine and the toilet was an outside dunny. Loved school. Only missed one of school-attendance in my life. We lived in a 2 bedroom cold state house with condensation on the windows in winter. There were no state houses accommodating 23 Pacific Islanders as they do today in South Auckland.

      Steve Keen has long resonated with me. Mainly because the societal impacts were important. I listened to the Gareth Vaughan interview and re-read the transcript. I have changed my view a bit since. Using the example of two individuals, one owns a house costing $700,000 with a mortgage of $500,000, and the other a high net-worth individual, over say $2 million including a debt free property. Give them both $300,000 and not a lot changes. The relative societal positions of both remains the same. The high-net-worth individual has the same financial muscle power relative to the indebted individual. Nothing changes.

      What I see around me now is not pleasant. In my younger days NZ was close to an egalitarian society where the gap between the lower and higher levels wasw small. Over recent years NZ government has re-engineered or re-calibrated society allowing imbalances with mass-migration, re-arranged the banking system, sat back and watched as the foreign disease of property acquisitiveness invade the country. Encouraged low-skilled low-paid labour has invaded the place displacing own kin, consigning them to a life of welfare dependency. Not nice. Large segments of our society are living a life of servitude. Large swathes of our young are being psychologically destroyed

      Liked by 2 people

      • I am basically in total agreement. Similar upbringing.
        Not too sure of your definition of a HNWI.
        I seem to qualify.suffer
        Suffer from some Scottish heritage that makes it difficult to open the wallet.


      • Some of us work hard and smart and it is pure hard graft with long long hours to get from $50 in my pocket 30 years ago to a $9 million portfolio of property today. Not sure why communists believe the lazy people should just get a handout for zero effort.


      • Lazy people??
        I think most of the relief would go to householders but i am no expert in interpreting Keen


    • GGS just think what your legacy might have been if only you had devoted all those long, long hours and hard work to Be Great Stuff rather than to Get Great Stuff. Perhaps a Michelangelo, van Gogh, Mandela, Rutherford, Hillary, Marie Curie, Orwell, Artistotle, Bob Dillon, Tolstoy, Whina Cooper, William Booth ….

      Liked by 1 person

      • That clip was great, David. Very well explained justification for a UBI by JP… a UBI gives everyone the opportunity to innovate. And as long as everyone has that opportunity – will might avoid anarchy. Great food for thought.


        Liked by 1 person

      • Oh, and I meant to say, that’s virtue (Aristotelian) ethics – what is virtuous is the midpoint between excess and deficiency.

        Liked by 2 people

  3. At a tangent to the main thrust of the augument, but a real practical difficulty if we came anywhere near implementation of Keen’s idea: What of the financially incompetent? Not too much of a problem with those who have a court appointed financial guardian, but they are a small minority. Most, even of those with profound intellectual disability, are treated in Law as if they are competent (at least until something like receipt of a legacy triggers the need for Family Court appointment of a guardian – not practical for hundreds of thousands at once!)
    Nor is there a clear threshold between competent and not. An issue which would not have arisen in biblical times is an aging population with huge numbers somewhere on the trajectory between full mental capacity, age-related cognitive decline and finally an inescapable diagnosis of dementia.


  4. For reference, many off the “debt write-off” ideas have been canvassed in various versions of Irving Fisher’s “Chicago Plan” and discussions on alternatives to Fractional Reserve Banking of which the latest version seems to have been Benes and Kumhoff’s IMF paper “The Chicago Plan revisited” – See e.g. the wikipedia references here: https://en.wikipedia.org/wiki/The_Chicago_Plan_Revisited and a discussion of that paper here: https://sovereignmoney.site/on-kumhof-the-chicago-plan-revisited#_ftn1


      • That’s true. While the proposal may facilitate some debt write-off they tend to address (like the Positive Money writers https://positivemoney.org/2020/04/new-positive-money-report-launch-money-we-trust/ ) reforms to remove the right to create money (and the negative consequences of that) from banks, restore the role of interest rates in risk assessment of productive investment (which has ceased following monetary stimulation to provide cheap money and support banks), and removing the progressive and accepted intermingling of fiscal and monetary responsibilities…


  5. Michael Hudson wrote a history on the topic: “…and forgive them their debts”. Blurb on the back from Keen, amongst others. Very recently purchased, but haven’t read yet.


  6. I have never been keen on Ken. Like you i have trouble knowing exactly what he is saying.

    I very much doubt if Keen has ever read the Old Testament ( or the new) as well


  7. I recall reading somewhere that the principle behind debt jubilees was slightly different that you’ve outlined.
    Agrarian workers were taxed by the sovereign. In normal years, taxes were payable. In a poor year (which occurred unpredictably, but regularly), the small holder would need to borrow to pay their tax. When barely making ends meet in a normal year, to be repaying debt as well as tax etc in the current year meant that inevitably – over time – societies would stratify in favour of owners of capital. The debt jubilee reset that intrinsic “feature” of economies, and was practiced by a range of societies over time.

    In a related note (and Michael you may well have more information on this than I do), in earlier Christian and Muslim societies, the concept of compound interest did not exist – borrowers would agree to repay a fixed amount (ie original amount + premium), or (more common in Muslim societies) no interest at all.
    Compound interest is a relatively modern invention, and in present economies which are very heavily financialised, a debt jubilee may be as out of place as a three-legged duck

    Still, the issue of wealth stratification over time hasn’t gone away, only gotten more extreme. When i read the other day that the Bill and Melinda Gate Foundation was a larger donor to WHO than any individual country.. well that puts it in context!

    Liked by 2 people

  8. 100% agree Michael. Keen’s idea is just as ridiculous as QE quite frankly!
    Essentially QE is…debt forgiveness just dressed up differently and for a different client.

    Those that take on debt or run businesses (even banks) into the ground should be held to account and made responsible for their own financial decisions.

    Same goes for people who take on huge mortgages they can’t finance, hence i’m dead against artificially low interests rates to continually ‘inflate’ their debts away at the expense of everyone else!

    If there had of been no tolerance of the “too big too fail” mantra post 2008 GFC then we would of had a far better sound financial system right now. Yes…much pain at that time…but sometimes that is what it takes

    I will be listening in Sunday. You on with Wallace or Jim?


  9. Michael,
    Have you misunderstood Steve Keens idea of a debt jubilee..?
    I read about it a couple of yrs ago. My recollection of it is that it in the form of a Universal income (UBI).
    Paid equalling to all ( presumably to adults ). eg $500/wk
    If someone has debt , the weekly payment automatically goes to downpaying debt. For others , they are free to do what they like.
    Not a lump sum…. A modest UBI, paid out over a long period of time , that will slowly lead to a deleveraging of debt. Part of a beautiful deleveraging…. to use Ray Dalios expression.

    Rather than new money coming into our economy as debt ( endogenous nature of credit creation by the Private Banking system ) , why not have some of that created thru UBI payments. ie. RBNZ money .
    Gareth Morgan talked about doing away with a whole layer of GOVt. ( work and income). Maybe we could fund some of the UBI by making Govt even smaller..?

    As far as I can see, the only future for most western countries will be some form debt cancellation/forgiveness/destruction. and a “reset” of the Global Monetary system, as happened with Bretton Woods back in 1944
    Sure…NZ is ok at the moment. We still have a large capacity to take on debt. Having said that we are a chronic debtor Nation that relies on immigration and credit growth. At some point debt levels might become an issue. If we have a debt crisis with a contraction of credit thru business failures etc, a debt jubilee style UBI might be a better fiscal policy response than the GFC style responses to deflationary forces ( credit contraction ), back in 2009.

    I think you have been too dismissive of Keens idea of a debt Jubilee. It is the most equitable way of debt deleveraging that I have come across…. in my view ( the most equitable way of dealing with a deflationary depression, if NZ should ever face one )…. ( Rather than a trickle down theory, its a kind of like a trickle up theory )
    cheers Roelof


  10. You mentioned land use restrictions Michael, totally agree. Steve had great points on private household debt.
    The RBNZ banking “stress test” you mentioned has been found extremely flawed, hence Orr’s actions the past few weeks to prop them all up.
    All up i was disappointed with the way Jim asked for replies to a question from both then…..only took a reply from one of you and moved on to the next question!
    You guys needed a half hour I reckon.


    • Yes, it was a great discussion – far too short in length though. Interesting Steve Keen’s distinction between physical austerity and monetary austerity. Hope RNZ does get you both back in the not-too-distant future.


    • In fact, on stress tests the Governor and I appear to be at one (he made v similar comments in a recent appearance). RB actions recently have been about market liquidity, not individual institution (or systemwide) solvency (the latter is what the stress tests are about).


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