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The Keen Debt Jubilee : the ultimate "helicopter drop"

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The Keen Debt Jubilee : the ultimate "helicopter drop"

Is this a sensible alternative to a 10-20 year downturn ?

====================================================

 

Steve Keen : on Too Much Debt & his Jubillee idea:

 

I think I "get" Steve Keen's idea:

If we do not do a debt Jubilee, we will get "stuck" with 10-20 years of poor economic growth,

while the economy slowly works off the excessive debt.

 

bkeen.jpg

 

If we instead have a Debt Jubilee, we can get back to growth much more quickly.

And Keen wants to do it in the "most fair way",

 

+ By sending out a cheque to everyone, and:

+ Requiring those in debt to use it to repay, or pay down their debts,

+ Those without debts can just "put it in the bank", and increase their savings

 

In effect, this is a bailout going to the people, and not to the banks.

 

LET'S DISCUSS: how practical his idea is, and whether there is any sensible alternative.

== ==

 

For instance:

Mish Shedlock likes Steve Keen's economic theories, but not the Jubilee:

 

Steve Keen Goes Off the Deep End With a "Debt Jubilee" (Free Money to Consumers) Proposal

 

Position of Keen

 

"Debt does not just matter at zero-bound conditions, debt matters all the time. The change in debt adds to demand. ... It could take 15 years of deleveraging before it's all over. That's why Krugman is wrong. You can't just cure this with deficit spending, you have to abolish the private debt as well."

 

So far so good. However, I strongly disagree with Keen's proposal of a "private debt-jubilee" which he defines as quantitative easing for the public.

 

Essentially Keen wants to print money and give it to the public on the provision they must pay down debt first.

. . .

The idea was silly then and it is still silly now. I believe events have proven as such.

 

However, start giving money away as Keen proposes and I would change my tune about inflation in a hurry. Note that QE is essentially a loan but Keen's proposal is an outright gift.

. . .

Yes, it will take time. Attempting to short-circuit the time required with "free money" would be a monstrous mistake, solving zero structural problems.

 

http://globaleconomicanalysis.blogspot.co.uk/2012/07/steve-keen-goes-off-deep-end-with-debt.html

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THE MECHANICS of a Keen Debt Jubilee

 

If we instead have a Debt Jubilee, we can get back to growth much more quickly.

And Keen wants to do it in the "most fair way",

 

+ By sending out a cheque to everyone, and:

+ Requiring those in debt to use it to repay, or pay down their debts,

+ Those without debts can just "put it in the bank", and increase their savings

 

In effect, this is a bailout going to the people, and not to the banks.

 

Let's discuss here how practical his idea is, and whether there is any sensible alternative.

First, let's see how much Mortgage Debt is outstanding: About $10.1 Trillion

 

us-home-mortgage-amounts-outstanding.png

 

How many households in the US ? : 131.7 Million

Average Mortgage Loan O/S is--- : $76,689 per Household

How many persons in the US ?--- : 312 Million

Average Mortgage Loan O/S is--- : $32,371 per Person

 

Suppose the US Government, just sent out a cheque for $30,000 to each adult of 30 years and older.

For those under 30 years, they might send out $1,000 for each year of life.

 

That would put enough money in circulation to repay all the mortgage debt, but that would not happen. So households have far more debt outstanding than $76,700, and so those mortgages would not be fully repaid from these cheques.

 

To keep the mechanics consistent with what Keen has suggested, the money would go to the banks, who would use, say 90% of the funds to reduce the mortgage, and hand out only 10% to each person. In those cases where there was no mortgage, all the money would go to the individuals.

 

I think this is more-or-less what Keen has suggested.

 

QUESTIONS:

=========

How successful would this plan be ?

What problems might arise? (I can see many.)

Who would be the big loser in this scheme ?

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Better and fairer to just let it all reach its logical conclusion.

 

10-15 years? Pfhh! Come to Japan, Mr Keen.

 

Surely debt needs to be flushed out of the system and all the debtors (and banks) punished properly. Wouldn't handing out more cash simply be inflationary? Where does the magic money come from?

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Wouldn't handing out more cash simply be inflationary? Where does the magic money come from?

As I understand it, it is simply PRINTED into existence, and then handed out to everyone.

Here's how Mish Shedlock explains it:

Steve Keen Goes Off the Deep End With a "Debt Jubilee" (Free Money to Consumers) Proposal

 

Essentially Keen wants to print money and give it to the public on the provision they must pay down debt first.

...QE is essentially a loan but Keen's proposal is an outright gift.

 

The US Treasury could act like a company that pays a stock dividend - No new assets are created, but more shares are handed out to shareholders.

 

The Congress would agree to "gift" money to citizens. So instead of BORROWING money through the Federal Reserve, and paying interest on it, as it normally does in the budget - It could simply send out a gift of $30,000 (or whatever, as above) to each of its citizens.

 

This would likely have exactly the same impact as a stock dividend. Instead of dilluting the value of shares, it would dillute the value of the US dollar. With more money in everyone's hands, and less mortgage debt, people would go on a spending spree:

 

+ They would buy new homes, and pay more for the existing ones

+ They would buy more cars, more TV's and mobile phones, and take more holidays and buy more expensive meals

+ The prices of everything would surge

+ The dollar would lose value, and the price of imported oil would go up

+ People would ask for higher wages, to pay their increased costs, and there would be a round of serious inflation

 

The "good" thing is mortgage debts would get reduced, and the value of houses would be pushed higher, so the problem of many homeowners being "underwater" on their homes would tend to disappear.

 

But all those inevitable price rises may well INCREASE THE DISTORTIONS in the general economy

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MISES.Org Community Discusses "The Keen Jubilee"

=========

https://mises.org/Community/forums/t/27157.aspx

(1)

Steve Keen gave an interview on Hard Talk a few days ago in which he called for a "modern debt jubilee" where the government "gives money" to the citizenry who are required to use it to pay mortgage debt if they have any, and can spend it however they wish otherwise. He claims this is the way we can avoid the "grinding twenty years" and associated social unrest needed to unwind the current global mess.

- Shrugger

 

(2)

Where is the money coming from?

Inflation? Government Debt? Taxes? I don't recall him mentionining the origin of this "gift".

 

But let's assume it takes the form of freshly minted bills (ie inflation) and everybody (rich and poor, young and old) gets exactly the same amount. What's going to happen? The same thing that happened to Europe when Spanish silver started to pour in during the XVII century: massive price inflation. In this scheme there's nothing of the sophistication of modern inflationary schemes to reduce the impact of freshly minted money on prices: it's as blunt and brutal as a club.

 

This "gift" could generate a very-short term burst of economical activity (because most people have high time preferences and hence they would immediately go out and spend the money) but in a matter of days prices would automatically adjust themselves to reflect the drastically increased money supply without even the pretense of increased wealth creation and capital accumulation. Once the "gift" is gone people will be left with higher prices on everything.

 

This is nothing short of an "extreme" version of the low cost debt that has been fueling the world economy for the past decade or so.

- Kakugo

 

(3)

The Austrians on here are not going to concede that as a good idea.

 

Repudiation is the way to go. Hardcore austerity.

 

Inflation would be proportionate to the amount of money people earn that used to be spent on debt, but since there debt is being subsidized any money they spend elsewhere will create inflation. For the consupmtion preference junkies this is a better plan than baiing out the banks without forgiving or subsidizing the public's debt.

- Aristophanes

===========

 

Analyzing The Keen Jubilee:

keenjubilee.jpg

 

MY OWN REACTION to this comment:

 

"This is nothing short of an "extreme" version of the low cost debt that has been fueling the world economy for the past decade or so."- is :

 

Okay - But the big difference is:

The banks, the people, and the government are not left with Huge Wads of Debt to payoff.

= = =

 

However,

THE BIG LOSERS from the Keen Jubilee are:

Those who hold wealth in US Dollars,

ie: foreigners like: China, Japan, and Middle East oil producers

 

And pensioners, whose pensions are denominated in US dollars.

So those who can no longer earn an income, are going to find that they will have real problems "making ends meet", because of higher food price, higher energy prices, higher rents.

 

Then these people who find THEIR WEALTH STOLEN through the sudden linflation, are going to be very angry indeed about the change in price levels.

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(Other articles about Steve Keen ... and The Jubilee):

 

Keen to be heard

 

16 Feb 2012 .. Nick Gardner

 

Steve Keen, associate professor of economics at the University of Western Sydney, is becoming something of a superstar. He has been acknowledged as one of a handful of economists to have predicted the global financial crisis and now is a regular speaker at high-profile conventions around the world.

 

He is a consultant for the United Nations’ Economic and Social Commission for the Asia Pacific and in April he is speaking alongside George Soros and Nobel Prize-winning economists Joseph Stiglitz and Paul Krugman at the Institute for New Economic Thinking where he has been asked to give a speech on “taming financial market instability”.

 

The same organisation has given Keen almost $250,000 to develop software capable of predicting an economic crisis before it happens.

 

Last November he was interviewed on the BBC’s Hardtalk program*, which attracts a worldwide audience of almost 300 million, in which he “went public” about his idea for a “debt jubilee”, where private debts are written off “en masse” to avoid “two decades” of economic stagnation.

. . .

He says cutting interest rates will hardly help.

 

“A couple of years ago people were borrowing to invest in rising asset prices but that isn’t happening now,” Keen says. “Even the healthy borrowing by the resources sector may turn down and that means aggregate demand in Australia will turn negative.

 

“As that happens, we will fall into recession – a recession we should have had two or three years ago – and house prices will continue to fall for years to come.”

 

/more: http://www.brw.com.au/p/sections/features/keen_to_be_heard_ibhMdopX0E8Soh00ql3mPO

 

*BBC’s Hardtalk program : Video

 

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THE THREE BIG PROBLEMS associated with The Keen Jubilee

 

Analyzing The Keen Jubilee:

keenjubilee.jpg

 

The Jubilee...

1/ Could Kickstart Hyperinflation, if holders flee the Dollar

 

2/ Cures no structural problems, could increase "distortions" (more reckless spending)

 

3/ A poor example, may encourage Congress to use Jubilees to cure the next crisis

 

===

 

(Other Issues)

+ Those with larger mortgages get only minor help

+ An unfair windfall for poorer communities?

+ Where's the age cutoff? The young will want "their" share too

+ The market distortions will start before the plan is implemented, ie USD crash

+ Do Americans overseas get anything?

 

(Some Partial fixes?, from Steve Keen and from me)

+ Shrink the banks - to 1/3 the present size - so they won't ramp up debt again

+ Maximum Loan-to-Value of 70% on future Mortgage Loans from banks

+ Plan to be developed in secret, implemented quickly

+ For those under 30 years, they might send out $1,000 for each year of life.

: A 20-year-old, gets only $20,000 - but he has probably paid little tax hitherto

+ Existing USD Govt debt holders to be given "GDP growth warrants" to recover some losses

+ Infrastructure shift away from highway subsidies to discourage suburban overbuilding

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Steve Keen's Good and Bad ideas - per "brainbender"

 

Good:

Keen says that our current banking system generates profits off of debt. Consequently, banks set up to get people to accept as much debt as possible regardless of their ability to pay the loan back.

. . .

Local banks collect loan origination fees and then sell the loans to Fannie Mae. After the local bank has collected its 3% and sold the loan, they don't care what happens to the loan

 

Bad:

Keen thinks QE3 should be a Debt Jubilee or public sector bailout where the US Government creates $100,000 for each household to first pay off or reduce their debts.

. . .

I'm not sure how an Austrian Economists could call for a Debt Jubilee. I thought that according to Austrian "laissez-faire" principles, private contracts should be free from government intervention. Therefore, of the market is to work, we should let winners win and losers lose.

 

According to several economists I understood that the government stimulus checks were very inflationary. Consequently, I expect a debt Jubilee to be even more so. A very dangerous idea.

 

/more: http://brainbender.blogspot.hk/2012/06/debt-jubilee-very-bad-idea.html

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The Jubilee Idea- In Steve Keen's own words

 

"I am talking in favor of what I call a modern debt jubilee or quantitative easing for the public, where the central banks would create 'central bank money' (we cannot destroy or abolish the debt, which would also destroy the incomes of the people who own the bonds the banks have sold). We have to create the state money and give it to the public, but on condition that if you have any debt you have to pay your debt down -- no choice. Therefore, if you have debt, you can reduce the debt level, but if you do not have debt, you get a cash injection.

 

Of course, this would then feed into the financial sector would have to reduce the value of the debts that it currently owns, which means income from debt instruments would also fall. So, people who had bought bonds for their retirement and so on would find that their income would go down, but on the other hand, they would be compensated by a cash injection.

 

The one part of the system that would be reduced in size is the financial sector itself. That is the part we have to reduce and we have to make smaller. That is the one that I am putting forward and I think there is a very little chance of implementing it in America for the next few years not all my home country [Australia] because we still think we are doing brilliantly and all that. But, I think at some stage in Europe, and possibly in a very short time frame, that idea might be considered."

 

/source: http://www.zerohedge.com/news/steve-keen-why-2012-shaping-be-particularly-ugly-year

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It wouldn't be a fair solution because the debtors have bought assets with leverage. That has forced up the prices of those assets and put them more out of reach of those who have saved to buy an asset.

 

Also it encourages more debt which ultimately is inflationary. If people are told they cannot go wrong borrowing the problem just gets worse.

 

We need failure as an option.

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It wouldn't be a fair solution because the debtors have bought assets with leverage. That has forced up the prices of those assets and put them more out of reach of those who have saved to buy an asset.

 

Also it encourages more debt which ultimately is inflationary. If people are told they cannot go wrong borrowing the problem just gets worse.

 

We need failure as an option.

 

I listened to Chris Martenson interview Steve Keen in June here: https://s3.amazonaws...eed/podcast.xml (that's a link to Chris Martenson's featured voices podcast).

 

Like Mugged Saver, I'm not really convinced by the helicopter drop Steve Keen advocates. It almost seems like a moral hazard to me; money for nothing and no penalty for failure. Even if it worked in the short term, doesn't this 'no pain' option tempt us into playing the same game again long term, but with extra zeroes?

 

Bobman

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I listened to Chris Martenson interview Steve Keen in June here: https://s3.amazonaws...eed/podcast.xml (that's a link to Chris Martenson's featured voices podcast).

Bobman

Thanks, Bobman. Very useful.

I have recently listened to that too - and it informed some of my remarks posted above.

 

I collected THESE - also from the Link you provided:

 

Former Senator Bill Bradley: Lack of Long-Range Planning Is Putting Our Future At Risk

‎Sunday, ‎June ‎24, ‎2012, ‏‎2:07:31 PM

MP3 : https://s3.amazonaws.com/cm-us-standard/audio/bill-bradley-2012-06-22.mp3

bill-bradley-2012-06-22.mp3

 

Jorgen Randers: Our Species' Biggest Risk is Our Lack of Coherent Long-Term Decision Making

Monday, ‎May ‎28, ‎2012, ‏‎2:07:31 PM

MP3 : https://s3.amazonaws.com/cm-us-standard/audio/jorgen-randers-2012-05-28.mp3

jorgen-randers-2012-05-28.mp3

 

I especially want to listen to Prof Randers. He has a special place in history, since he was one of the editors to that old classic, Limits to Growth from the 1970's which I think they are planning to update.

 

He is also an old friend, since we were both involved as advisers to a cyclical fund once-upon-a-time.

 

I have thought about trying to do an interview with him. Maybe I could interest Dominic in such a project

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From Rebird, on K-Cast

Looks to me its just another way to bail out the banks , round here it aint debt that's screwing the economy it's lack of ready cash , poor pay and high prices are what is killing the economy , gas over a dollar a gallon eats up the " disposable income " three dollars a gallon means cutting spending somewhere else there is NO "disposable income" left .

 

The US economy is 70 % consumer driven , well round here there's no consumers left . Globalism is what is at fault turning everyone into a Chinese peon .

 

What would get things rolling to a point is stopping banks doing anything but high street banking , get them out of Wall Street with all the shenanigans happening there , FORCE them to do what they are supposed to do look after the people's and corporate money not act like a high roller at a Las Vegas casino , Close the derivative "market " just shut the bugger down and fire everyone involved in it , and do the same with everything else , interest rate swops , over the counter (and under the counter ) CDO's shut the freakin lot down and destroy the computers they are on , AND finally , remove Limited liability from banks , you go bust we auction everything you got !

Doing what Keen wants will not stop the excesses of " the market " it will just give them a new source of revenue

 

That makes sense.

Yes, the banks benefit too, because they get rid of many bad loans...

 

This would agree with the comment: "stopping banks doing anything but high street banking":

 

(Some Partial fixes?, from Steve Keen and from me)

+ Shrink the banks - to 1/3 the present size - so they won't ramp up debt again

+ Maximum Loan-to-Value of 70% on future Mortgage Loans from banks

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From Faraway, on K-Cast

A better en masse solution would be for people to walk away from their mortgage and let the bubble burst quickly. Then we can find a floor in real estate and start over. This is probably not going to happen, at least not in an organized way.

 

That action would wipe out the equity of the banks,

in a messy way, and thereby might endanger people's wealth,

and even savings held in bank deposits

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(First posted on K-Cast):

 

...There will never again be enough jobs in the USA , the American dream is over , pay has stagnated since the 1960's ,

US economic growth has been little more than inflation , take out the spurious numbers like burger flipping is manufacturing and the growth has been negative for decades .

 

There does need a jubilee , a jubilee of real thinking , property is somewhere to live not an ATM machine , the "value " Of a house is keeping the rain off your head , not the supposed value accrued by rampaging property inflation .

This piece kinda sums up my views

http://carolynbaker.net/2012/07/09/hope-is-for-the-lazy-the-challenge-of-our-dead-world-by-robert-jensen/

 

"Our world is not broken, it is dead. We are alive, if we choose to be, but the hierarchical systems of exploitation that structure the world in which we live — patriarchy, capitalism, nationalism, white supremacy, and the industrial model — all are dead. It’s not just that they cannot be reformed, but that they cannot, and should not, be revived. "

 

I agree with most of that - and I have a simple and clear prescription, which will get things back on track in the US, by stopping the cash outflows which are draining wealth away from US communities.

 

It is simple, but politically impossible until enough people get behind it - Let's get the word out:

 

dollars-drain.jpg : See LINKS to articles, below

 

PLUG THE FOUR "HUGE HOLES IN AMERICAN POCKETS"

 

1/ Cut military spending by one-half or more.

This would take US spending down to a per capita level which is near the top end of what our allies spend. Americans are no safer for that all that spending. It mainly benefits the Military Industrial Complex, and multinational corporation, who all say they want to pay less tax - why should American citizens subsidise these pirates corporations

 

2/ Cut healthcare spending by one-half or more.

This would bring US spending down to a percentage of GDP which is near many other countries like Britain. It would require a big reform of the way that insurance companies and pharmaceutical companies operation (thank God!), would reduce the pay of doctors (who are overpaid), and some other healthcare professionals. The focus of heathcare, and especially curable diseases like cancer, would have to be shifted away from very expensive "maintenance" towards disease prevent. This is a long overdue revolution, and would mean taking on the AMA, the FDA, and other big over-funded power groups. The best way to start would be to tax income on lobbyists at 110%, and killoff the corruption associated with it.

 

3/ Change American living arrangements away from car-dependence

The average American spends $8,000-10,000 on his car, with most of that money flowing overseas to foreign oil producing countries, impoverishing the US middle class. This "cure" has begun already, thanks to the real estate crash. Home prices in the outer rings suburbs are falling, whivh those in walkable communities bottom many months ago, and are headed higher. People are realising if they get rid of their car dependence, then they have quite a lot of money to spend on alternative housing arrangements. Instead of subsidising highways that benefit suburbanites, who are sending so much money overseas, infrastructure spending should go to transport that benefits denser living environments. If thre is a fair way of capturing the uplift in property values that comes from the new transport infrastructure, it can pay for itself. (That was the system that the US used to pay for its transcontinental railways - It works, and it is part of our history.)

 

4/ End the predatory behavior of banks

(As we discussed above), deposit-taking banks, with access to federal deposit insurance should only be allowed to participate in high street banking activities. At the same time, the ability of banks and esepecially investment banks to lobby in Washington should be sharply curtailed. Bankers that have committed crimes over the past decade should be jailed, and where lives were lost as a result or banking malfeasance, life sentences and capital punishment should be considered. A strong and clear example needs to be set. Bankers need to know that there wilkl be Zero tolerance for their criminality, and their industry is going to be shrunk back dramaitically.

 

=== ===

 

LINKS to "Huge Holes in American Pockets" articles:

====

1: http://www.financialsense.com/contributors/dr-bubb/2011/08/24/america-has-huge-holes-in-its-pockets

2: http://www.financialsense.com/contributors/dr-bubb/2011/08/31/america-has-huge-holes-in-its-pockets-part-2

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http://www.zerohedge.com/news/modern-debt-jubilee

The Modern Debt Jubilee

 

The modern “debt jubilee” ... 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.

 

...But calling that process ... 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.

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