With increasing world debt and personal debt loads, what would happen to the global economy if everyone agreed to an economic amnesty/ reset, forgiving all loans and debt?
Immediate and catastrophic collapse of the banking system. So much depends on regular income from interest payments that if the slate were wiped clean the whole thing would crash.
Banks would collapse. It’d be a bad scene.
Everybody would lose everything they have. You do realize that your checking account is a debt, right? It is money the bank owes you. Your next paycheck is a debt. It is money your employer owes you.
It’s a house of cards built on trust in a system. What you are proposing is taking out the foundation cards of the system. If you were to change the rules of Monopoly in the middle of the game everyone would walk away; same thing would happen with the world economy because there would be no incentive for the counties winning to even play the game.
Not only would such an act completely discombobulate existing financial structure, but it would create a “moral hazard” that future obligations could be canceled. A simple approach that, in effect, cancels all existing obligations denominated in a currency is to hyperinflate that currency. This experiment has been performed in Weimar Germany, Zimbabwe and elsewhere, with unsatisfactory results.
However, selective debt cancellation is often the best workaround for specific problems. The Greek government has had €100 billion of debt cancelled. Cancellation of Germany’s war debts after WWI might have averted WWII. I think reductions of some U.S. homeowner debts should have been pursued in the recent crisis.
There are some points about that raised here:
“NASA Study Concludes When Civilization Will End, And It’s Not Looking Good for Us”
If you can get “everyone” to agree, you have god-like powers.
Well, we’ve got the debtors on board, so it’s just a matter of the creditors…
Total collapse of everything.
Are you talking about personal debt, corporate debt, or government debt, or all of the above?
Keep in mind that a lot of pension funds, savings funds, people’s 401K’s or other retirement savings, etc - are in bonds, which is essentially long term debt. So basically, everyone would start from scratch in their pension and savings.
People who have cash to store longer to medium term usually buy savings bonds of some sort.
Even a hint of this would destroy the credit market. Who’s going to lend you money to buy a car or a house if the debt will be cancelled next month?
This is sort of like what would happen in 2008 - none of the banks trusted the others to pay back their obligations -like cheques cashed in one bank to be sent to anonther - so the banking system almost froze when they worried other banks had bad mortgage bonds and might be broke. So then businesses started grinding to a halt. Detroit relied on loans to sell cars, nobody wanted to loan money if there was a chance it would not be paid back… so that industry started to crash. There’s a cascade effect - car dealers, small businesses, etc.
Banks keep a lot of their assets in bonds and loans - if those all disappear, then basically the bank goes under. All your savings disappear.
What you have to do is look at what you owe, what you own, and decide if this would be good or bad for you. Good for the fools who are overextended, bad for the careful spenders who lose everything. The strategy if you see this coming is to run out and borrow and max your credit cards, get physical stuff that you wn’t have to pay for when the government cancels debt.
This is why the government rescued the banks, but avoided giving houses to people in over their heads in mortgages. We need the banking system. We don’t need to reward a lot of people who simply bought more than they could handle. (Yes, some were simply hard up, got laid off. But how do you separate “honest but bad luck, go laid off” from “stupid, bought way more than they could pay for”?
Baiscally it would create chaos and destroy the financial world. Ain’t gonna happen.
What the OP meant, I think is this.
Forgive the debt of all the little guys, while keeping the debt obligations for all the big guys. After all the big guys certainly have enough to forgive all the little guys debts.
I’ve struggled a few minutes trying to come up with other terms for “little guys” and “big guys” but a brain freeze at the moment.
However this concept just won’t work for the reasons listed above.
There’d be no more money, anywhere. As others have mentioned, deposits at banks are debts to bank customers, which in turn are supported by debts to the banks: mortgages, credit cards, student loans, etc. Even if you designed it so that so that only mortgages and student loans were forgiven, that would still wipe out the banks: they’d be bankrupt.
Even the cash in your wallet is debt: it’s debt of the Federal Reserve, which in turn is supported by other debt - mostly the debt of the US government. In the modern economic system, for one person to have money, someone else has to have debt. If you wipe out the debt, you wipe out the money.
In any case, after a short intermission, all the “little guys” would again owe staggering debts to all the “big guys”
Similar to the phenomenon of criminals being given amnesty and let out of prison, the same guys would all be back in prison in a few years.
But where would you draw the line between big and little? And how would you deal with the complaints of those who fall just short of that line?
Basically, what would happen, is that we would all renegotiate back to where we are now. My employer would still want my labor, and I would still want his money. I would still want my apartment, and my landlord would still want my money. My company would still want investors (e.g. banks), and investors would still want their proceeds. I would want the interest on the money I keep with my bank, and they would want to keep that money so they could invest it.
We are where we are today because we all chose to be here, signing these contracts, and receiving the goods that we are receiving. Someone could tell us we don’t have to abide by our contracts all they want, but that’s not very meaningful when contracts are the embodiment of mutually beneficial exchanges. Voiding that all out just means that we have to fend for ourselves, and no one would go for that, so we’d all just thumb our nose at the person telling us that we’re free.
So really the closest thing to a shift in the world that might happen is, via the process of renegotiating everything, to restore our contracts, some slightly different numbers would be written down based on today’s reality instead of on the reality of 5 or 10 or however many years ago the contract was originally written. A few would get burned, but theoretically, the world could turn out better for it and that it’s something which should be done regularly.
I doubt this. If society decided to wipe out all debts once, why should anyone assume it couldn’t happen a second time? And why would anyone want to lend money under those circumstances? At best, you might have a few people willing to lend out money but only at usurious rates. But for all practical purposes, we’d become a no-credit economy.
My employer would not want me once they were forced out of business. They sell stuff to the top 10% income earners and those are the people just paid off the debts of the imaginary deserving poor. There is no magic going to happen when our suppliers stop shipping us parts because we didn’t pay them for the last shipment. Everything will grind to a halt while wars get fought to straighten this mess out.
Let’s just all go to pretend land and forgive all debts.
After that, we shall ride our unicorns down a rainbow into a bouncy house.
In my vision there were voices, and thunders, and lightnings; and there was a great earthquake, such as was not since men were upon the earth, so mighty an earthquake, and so great. And then a bunch of other bad stuff happened. And then I woke up and went to work.
Poverty.
The people you are asking to write off their investments are your neighbours. Decades of saving through banks and superannuation plans - 401k etc. They would be wiped out.
There are no “big” rich investors who can cock a snook. Granted, there will be wealthy individuals who survive such a cataclysm but in a world of 7 billion, only a few. Farmers hopefully would survive or else the rest of us would starve to death.