I was listening to Marketplace on NPR via the internet. They had a segment with a guy that proposed a Jubilee, a massive worldwide forgiveness of all debts.
I owe the entire world about $5,000, so I do not see where it would help (nor hurt) me.
But the general idea is that every country, company city and community (if not person) owes more than he can pay, and so wiping the slate clean hurts everyone about equally. Roughly equally, not exactly so.
So presuming God came down to the UN and announced a worldwide debt forgiveness, what would likely happen?
Because any assets which are debts would be gone, and then any assets which are secured by debts would be gone, and the resulting economic crash would wipe out any value in any assets remaining.
Every debt is someone else’s asset. Your bank account is an asset to you, but a debt to the bank so that’s gone. Bonds in your retirement account, gone. You have a pension or annuity, that’s gone too.
Basically anyone retired (or near retired) is directly screwed. Anyone starting out is indirectly screwed by the economic chaos.
I agree that there’s no active destructive effort – at least, nothing in any way serious; crackpots always excepted – but at the same time, I have to …er… “lol” at your dismissive comment about this “stupid belief” when in the same post you express unawareness of a pretty freakin’ basic economic fact.
Do you seriously not understand how debt works, and why your bank can afford to pay you interest and provide you with services at no or little cost? Do you understand that your savings account is not like a safety deposit box, a little metal box with your name on it, but rather a debt owned to you by the bank?
Remember what happened when the real estate bubble collapsed? Now imagine that, but for all mortgages. Then all the banks go out of business, and all deposits in checking accounts and savings accounts are gone. All the stock markets collapse because no one pays on settlement dates.
None of the merchants that accept credit cards get paid. Essentially everyone’s cash flow drops to zero. All accounts receivable go away.
What do you suppose your checking account looks like from the point of view of your bank? Or your IRA from the point of view of your brokerage? Or your wages earned but not yet paid from the point of view of your employer?
Along with wiping out assets, there are consequences that will last - namely, loss of confidence that lending money in the future will be a worthwhile activity.
Since most financial transactions of any size involve at some point trusting someone to make payment at a future date, this uncertainty will add costs to all transactions.
Certainly lots of companies, countries and so on owe more than they can pay. However, they would be the vast minority (companies, at least; not sure how many nation-states have overwhelming debt).
Let’s say IffyCorp has revenues of $100 and owes $500, and pays interest of $50 on its debt. Assuming its other expenses are $49, it will take IffyCorp a hundred years to pay off its debt. So this would be great for IffyCorp.
The other side of the coin is SensibleCo. SensibleCo is the owner of IffyCorp’s debt. It has a short term loan of its own of $20. So, the super debt amnesty jubilee thingy will save it $20, plus interest - but it will cost it a shit ton more.
In terms of businesses, the net effect of this plan would be to bail out poorly run enterprises at the expenses of well-run ones.
Well, I don’t want to get too far off topic here, but given that the topic is silly and has been asked and answered, I don’t feel too bad about it.
First there is of course a very small contingent of people the WSJ aptly called “big government anarchists” who do indeed want to destroy he country. Witness their efforts last night in Oakland to “stop the flow of capital” by blocking the port.
Second, there is a much larger group who want to slow things down a great deal. Witness all the threads here where liberals rail against the production of “loud shiny crap” and want to forcibly take wealth from its creators. Oneof the main points of fiscal liberalism is to slow things down so that economic elites who got there in a way they can’t replicate (ie, “limosine liberals”) can stay there. You can see their handiwork in many European countries, with their high unemployment, brain drain, and general economic stagnation.
The main problem is that people don’t see how someone else defaulting on their debt has a personal effect on you and me.
Let’s say I have $1,000 in a bank savings account, for which the bank pays me (pitifully small) interest. In other words, I have leant the bank that money, and they promise to repay me with interest.
The bank then takes my $1,000, and bundles it up with the deposits of a couple dozen other people, and lends it to someone who wants to buy a new car.
The car dealer takes the money from the car sale and uses it to repay the debt owed when the dealer financed all those new cars on the lot. The dealer’s bank uses that money to pay the people who want to take money out of their savings account to buy presents for their kids this Christmas.
Actually, one of the best illustrations of this is the movie It’s a Wonderful Life, when James Stewart tries to explain to the good people of Bedford Falls why they can’t all have their money back that very minute.
I have learned something, thanks folks. No, I didn’t really think that they idea of Debt Forgiveness would mean that things like 401K’s and savings accounts would be wiped out. I guess I didn’t think of it as being THAT kind of all embracing.
Even if it only applied to formal loans and bonds, it would still be a disaster due to moral hazard. People and companies would rack up huge debts again in expectation of another debt forgiveness in another 10 years or so.
When you deposit $100 in the bank, they get to loan out some multiplier above $100 based on their reserve requirements. So, for example $100 can be turned into $500 by loaning out $400 and keeping the $100 in reserve to meet a 20% requirement.
So, debt expands the money supply - it’s not all 1 for 1 dollars. How you gonna unravel that?