The deleveraging trap is a catch-22; while
debt remains excessive, economic activity remains subdued, and while
economic activity remains subdued, generating more production than
consumption to pay down debt is extremely difficult. As we have
seen in Japan — where the total debt load remains above where it was
1991 — fundamentals can remain depressed for years or even generations.
Certainly, the modern debt jubilee isn’t going to cure the
culture that led to the excessive debt. Certainly, it won’t wash away
the vampiristic TBTF megabanks who caused the GFC and live today on
bailouts and ZIRP. Certainly, it won’t fix our broken political or
financial systems where whistleblowers like Assange are locked away and
fraudsters like Corzine roam free to start hedge funds. And certainly
it won’t wash away the huge mountain of derivatives or shadow intermediation that interconnect the economy in a way that amplifies small shocks into greater crises.
The modern “debt jubilee” is characterised as “quantitative easing for the public”. It has been boiled down to a procedure where the central bank does not create new money by buying the sovereign debt of the government. Instead, it takes an arbitrary number, writes a check for that number, and deposits it in the bank account of every individual in the nation. Debtors must use the newly-created money to pay down or pay off debt. Those who are not in debt can use it as a free windfall to spend or “invest” as they see fit.
The major selling feature of this “method” is that it provides the only sure means out of what is called the global “deleveraging trap”. This is the trap which is said to have ensnared Japan more than two decades ago and which has now snapped shut on the whole world. And what is a “deleveraging trap”? It is simply the obligation assumed when one becomes a debtor. This is the necessity to repay the debt. There are only three ways in which a debt can be honestly repaid. It can be repaid with new wealth which the proceeds of the debt made it possible to create. It can be repaid by an excess of production over consumption on the part of the debtor. Or it can be repaid from already existing savings. If none of those methods are feasible, the debt cannot be repaid. It can be defaulted upon or the means of “payment” can be created out of thin air, but that does not “solve” the problem, it merely makes it worse.
The “deleveraging trap”, so called, is merely a rebellion against the fact that you can’t have your cake and eat it too. So is the genesis of the entire GFC. Debt can always be extinguished by means of an arbitrarily created means of payment. But calling that process QE or a Debt Jubilee doesn’t (or shouldn’t) mask its essence, which is simple and straightforward debt repudiation.
A “debt jubilee” is the latest attempt to make a silk purse out of a sow’s ear. It is the latest pretense that we CAN print our way to prosperity, but only if we do it in the “right” way.
Aziz: Well, he’s right — it is the latest attempt to make a silk purse out of a sow’s ear. But that’s the hand we’ve been dealt. I’ve always said I
would have preferred it if markets had been allowed to clear in 2008,
if prices had fallen of their own accord to a sustainable level, and if
all the junk and bad debt had been liquidated. Painful — but then there
would have been no deleveraging trap at all. In a truly free market
debts that can’t be repaid, aren’t.
Yet that’s not the world we have; we have a world where central
bankers are prepared to engage in unlimited liquidity injections,
quantitative easing, and twisting — pumping new money into the financial
system to keep the debt serviceable.
It’s like central banks’ efforts to stabilise markets and the
financial system put the wider economy into an induced coma following
2008 in order to prop up the financial sector and the huge and exotic
variety of credit assets created in the boom years. With the debt load
sustained by the efforts of central bankers, the wider economy is left
in a deleveraging trap paying down debt that in a free market would have
been repudiated long ago.
This process not only enriches the financial sector by propping up
bad debt that would otherwise be liquidated, but also transfers
purchasing power from the productive sectors to the financial
sector via the Cantillon effect. Meanwhile
unemployment remains elevated, industrial production remains subdued,
the West remains fragile to trade and resource shocks, wages and
salaries are at an all-time low, and total economic activity remains
depressed.
So this is a painful and unsustainable juncture — truly a sow’s ear
of a situation. The deleveraging trap is a catch-22; while debt remains
excessive, economic activity remains subdued, and while economic
activity remains subdued, generating more production than consumption to
pay down debt is extremely difficult. As we have seen in Japan —
where the total debt load remains above where it was 1991 —
fundamentals can remain depressed for years or even generations.
Certainly, the modern debt jubilee isn’t going to cure the
culture that led to the excessive debt. Certainly, it won’t wash away
the vampiristic TBTF megabanks which caused the GFC and live today on
bailouts and ZIRP. Certainly, it won’t fix our broken political or
financial systems where whistleblowers like Assange are locked away and
fraudsters like Corzine roam free to start hedge funds. And certainly it
won’t wash away the huge mountain of derivatives or shadow intermediation that interconnect the economy in a way that amplifies small shocks into greater crises.
We are, I think, passing through a strange phase of history where a
myriad of ill-designed and heavily-leveraged economic planning
experiments are failing.
The modern debt jubilee would at least provide some temporary relief
for the debt-ridden wider economy, instead of the financial sector.
Instead of pumping money solely to the megabanks — and the costs of
deleveraging such a huge debt bubble means that more easing is
inevitable, eventually — pumping to the public would also negate the
problem of transferring purchasing power to the banks via the Cantillon
effect.
It’s not going to save us from the wider problems — imperial
overstretch, bailout culture, deindustrialisation, job migration,
financial and political corruption, etc, etc, etc — but it would still
be much better than the status quo.
The biggest problem with the modern debt jubilee, though, is
that Wall Street and the financial sector are greedy and will likely
fiercely resist any such efforts. And the financial sector holds lots of political leverage.
The cost of the status quo is a perpetually depressed economy and global Japan. That will be painful.
But on a long enough timeline, the survival rate for everything — even reinflated debt bubbles — drops to zero.
Could be a long wait, though.
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