In a nutshell, Steve Keen's "debt jubilee" idea is that there is so much debt out there that it's holding everything back and the only way to get rid of it is to inflate the money supply. That's pretty much what all the indebted governments of the world have figured out already. What makes Keen's plan different is the method by which the inflation makes it's way into circulation. Rather than lending it to banks at zero percent interest and hoping that they lend it out to people to do productive things with, Keen says it should be given to individuals directly on the condition that they use it first to repay any debts they might have. Essentially, the money flows backwards to the way it does now. Do it this way, Keen argues, rewards people who have been responsible and have no debt. If the inflationary payment is, say, $10,000 and they have $1000 in the bank (and no debt), they'll end up with $11,000. If someone with a debt of $5000 receives the same payment they'll end up with a net balance of +$5000. If someone has a debt of $50,000, they'll still have a debt but only for $40,000. The second part of his idea is to regulate the lenders so they don't immediately offer to loan out all the money that has just been repaid. Creating loads of debt is what created the debt problem in the first place, so half the job of solving it is making sure the same mistakes aren't repeated all over again. It's a very neat solution but it's very outside-the-box, probably because it's a very simple solution (when you think about it) to a very complex problem.
My understanding of it is completely different to yours as in fact the complete opposite of inflating the money supply. In reality the money supply will not be inflated at all but in fact will be contracted under this plan. We know that 97% of the money supply starts as debt in the banking sector. By simply crediting the numbers to ones account and then immediately paying off debt (or more simply crediting the debt account straight away) the result will be the shrinking of the money supply. This will be partially offset by the crediting of accounts where a debt repayment is not required but it would not be nearly enough to make up for the amount of debt that was being written off. On thinking about this more, the net result i think would actually have a stimulus effect in that although the money supply has shrunk, that money was mostly not used in circulation as it was previously clogged up in speculative/ponzi assets. While this amount of speculative/ponzi debt will certainly shrink, the people that would now have credit sitting in their accounts (savers) would have full use of it to put it where they so chose and could come straight into circulation. If then the regulations were restricted to discourage the speculative/ponzi investing, that credit could also become the deposits to spur on hedge borrowers (this is Minsky's term for borrowers who use that money and create a return cash flow that pays down principle and interest).
Print money, make the money supply shrink and stimulate growth, all through the same process. Twisted, isn't it?
It's certainly a left field bandaid patch up that will most certainly come unstuck when the politicians are paid off by the banks to allow speculative lending to occur again and we would need another jubilee in the future. Over and over it would go. I still think the source of the problem is where it needs to be fixed and that is where the Austrian school has it all over Minsky and keen.
The way you put it, it is as if credit and debt are 2 seperate things rather than 2 sides of the same coin. ie, every time you create new credit you create an equivalent amount of new debt. When you extinguish debt, you extinguish credit at the same time. You can't just magically create a whole bunch of credit and use it to extinguish debt because you have created the same amount of debt at the same time. The concept doesn't make sense. Unless we are now saying that balance sheets are irrelevant. This is why all these QE type programs are essentially just shifting debt from private balance sheets to the public balance sheet and risking bankruptcy of the government of course. Messing with money and interest rates is of course the root of the problem. I remember seeing an article where the governor of the Bank of England said that essentially bankruptcies of individuals, businesses and even governments was the only solution to flush the system. I think he's right and once all this stupid playing around is over I believe that's what will happen. And it will be a good thing for at least a generation until it all gets forgotten and the human race does it all over again.
I am writing this to be hopefully useful to the discussion, not to be condescending at all, so please don't bash me. The part I have bolded is absolutely correct, in the current system. Because all credit comes from the creation of debt in the banking sector, and in the case of say the Fed, when they buy a treasury security the debt is owed to the Fed. But, what if the RBA was to credit their own account and do absolutely nothing with it. There would be no debt that directly corresponds with it. It is simply monetary inflation but still locked up in the RBA's computer so there would be no consumer price inflation as this could not circulate to goods and services. It would be exactly the same as if they physically printed 500billion AUD and locked it up in a dirty great big vault. So this is a clear case of credit without a corresponding debt. *Magic* They then go and deposit this into millions of Australian individual debt accounts paying down the debt (just had a penny drop) and at the same time depositing a portion of this to some peoples credit account as they had no or only portional debts to pay down. For arguments sake lets say it worked out to be 450b went to writing off debt and 50b went to the savers to cover the moral hazard. This is not transferring the debt from the private balance sheets to the public and certainly not risking a government bankruptcy. However, the big complex part is somehow hoping that a bunch of numb nuts at the RBA could ever hope to create some sort of regulation so that the banking sector was sufficiently restricted in ensuring that no ponzi and far less speculative debt was lent out in the future. There is no doubt that the gov of the BOE was 100% correct and the real solution to the above para is to get rid of central banking/interest rate manipulation and have hard money to begin with, but we know that ain't going to happen in the near future without a total collapse of the system through the bankruptcies and liquidation of debt. The penny drop I noted above, was relative to an earlier post to Big A.D. I was 100% incorrect when I said that the debt write down part was deflationary. Of course it would be deflationary if the dollars in circulation were being used to pay down the debt. But as those dollars that were created when the debt was issued in the first place are still in circulation, any credit/currency created by the RBA would be in addition to this and would hence be 100% inflationary.
Magically creating the money and using it to pay off private debts is actually similar to Rothbard's plan for returning to sound money (ie liquidate the central bank and transfer all the gold to the private banks to bring them to a 100% reserve ratio). As you said, unless the central bank and legal tender laws are also abolished, then both plans could still be inflationary as - in the case of the debt payment method - it extinguishes all debts against monetised assets, which can readily be remonetised. Under Rothbards plan the banking sector is still intact whereas under the debt payment method they are largely obliterated. Edit: link added
How are banks obliterated? Wouldn't they simply be reduced as far as the number of interest producing assets (loans they call assets) are concerned so their cash flow would be significantly hampered. But the pay off is that they are more solvent as they are now less geared to speculative assets and also the economy as a whole is now far better placed to actually service the albeit lower amount of debt?
"(ie liquidate the central bank and transfer all the gold to the private banks to bring them to a 100% reserve ratio)." Fascinating! Given that the value of all the gold in Fort Knox (IF it exists) is but a fraction of US Bank deposits I cannot see this happening. And is that transfer a gift or is it a loan? And if by magic all the banks suddenly did have 100% of their 'deposits' as 'reserves, what do they lend? Are they then simply creating 'money supply' that feeds into the customers pockets and eventually into inflation, just like the FED? I am confused. OC
See the thread. My recent calculations were that the gold held by the Federal Reserve (not the US Govt gold) would be valued at ~$10,000/oz and this would be used to allow a reset to a 100% reserve standard (the money equivalents are in the economy anyway so it's not inflationary, it simply means that the fractional reserve accounting is gone). At the same time obviously, abolition of the central bank (which happens through the liquidation process), free banking and true competition in currency would be needed to prevent banks simply shooting straight back to a 5% reserve ratio. In terms of "what do they lend" - well they simply lend like the banks of old (or like your standard super fund bond investment), namely they lend their own capital reserves. Opinions differ on the potential success of free banking, but the basic argument is that the threat of bank runs becomes a real and present danger again (like it used to be) and that should at least limit the amount of new FRB practices, but this is a substantial topic that deserves a whole separate thread. (As a previous bankster insider, I'd be interested in your views if we start such a thread. )
Maybe an exuberant adjective. If essentially all their debts are paid back then they have essentially lost all of their income and would mean they would face a rapid change in their business model that I'm guessing many will simply shut their doors or slash 70-80% (making numbers up here ) of their workforce related to the previous incomes streams. A lot of the same adjustments would happen under the Rothbard plan as well, but more gradually since they will still be receiving interest payments (but presumably new loans would be disrupted until everyone adjusted unless their was enough notice - which there would be for such a major event).
Sorry. Meant to put a smiley, winky face You're one of the good guys now Edit: And, to me, the whole banking system is offensive.
Next time you need a loan I suggest a money lender I know, his name is Shylock. his interest rates are very reasonable. His default fee is a bit higher. You seem to forget that a Bank is nothing more than a public company, owned by its shareholders, that borrows money at interest, and lends it out at interest+. The difference pays its running costs and profit. OC
I thought we already had it via money printing ... slow but the goal is the same ... debt is forgiven ... those who saved - are being punished.
The "modern" jubile Keen talks of isn't the complete abolishment of ALL debt within the system. Moreso the reduction of debt back to levels that he considers historically sustainable or if not sustainable where in the past private debt was at a level that saw lending to debtors where debt plus interest were repayable I guess.
That's what they want you to think because it's partially true. In reality they also magically conjure money equivalents out of thin air like a counterfeiter in his basement printing fake banknotes. To prevent anyone simply becoming a banker, there are a series of hurdles and barriers to entry that new entrants are required to overcome but just like the counterfeiter they are fraudulently getting their hands on money before others and stealing good and services from everyone else in the economy. Parasites with some purpose and real value but parasites nonetheless.
If a new bank opens its doors for the first time, and at close of business they have taken a million dollars in new account balances. They allocate $100,000 to 'reserves' leaving $900,000 available to borrowers, and the next day a customer comes in and wants to borrow $10,000,000. What does the banks balance sheet look like at close of business on Day 2? OC
