Could giving the banks more money fix the global economy?
By Chris Bellew on April 19 2015

Well, not exactly. But that is part of what happens when you implement an idea known as a debt jubilee. A one-time cash gift from a government to its people, with the sole purpose of reducing their debts.

Such an idea polarises economists. The money would have to come from the government creating more of its own debt, in order to have some money to give out. This would balloon an already hefty government debt figure, and isn’t that the biggest problem at the moment?

According to a leading unconventional economist Professor Steve Keen, the government debt is a problem but it’s not the most pressing and it’s not what caused the global financial crisis. The real elephant in the room is private debt, the debt owed by households and businesses.

“The real elephant in the room is private debt, the debt owed by households and businesses.”

The exponential increase in private debt has fuelled demand in the economy over recent decades but has reached a maximum where individuals are not prepared to take on more debt. At these levels consumers are not interested in buying anything and the entire world is suffering. This is a serious issue that needs to be solved if we are to see a path to prosperity.

The impulse response is that these individuals should have known better, and they must pay their debts back slowly and learn their lessons for next time. Keen argues that this would escalate the recessions we are seeing now into a prolonged economic depression where everyone would suffer, even the sensible folk. He advocates the swift repayment of debt, assisted by the government, until it is down to safe levels.

Let’s explore some questions that have arisen during debates about this idea.

Isn’t this ultimately giving money to the same banks that got us into this mess by lending too much?

Not really. Although the banks would see a massive influx of cash, they would also see their assets decrease by the same amount. Also their cash flow would take a massive hit and may even need support from the government until they can make enough loans to sustain themselves. Remember that a bank wants to make as many loans as possible, and enacting a debt jubilee would put them back at square one.

What about the people with lots of debt, aren’t they being forgiven for their carelessness?

Maybe, but remember that the careful people will be rewarded with a lump sum of cash, since they have no debts to repay.

Isn’t increasing the government’s debt a bad idea? It’s already at record levels.

Yes, and obviously this is a contentious point. The scale of the jubilee would have to strike a balance with the ability of the government to service the debt it creates. However, since this money is created out of nowhere it will increase the money supply, leading to inflation and the total debt will be worth less. Also remember that the US will never default on its debt, it merely has to suffer with repaying interest. Ultimately, is it better to have a healthy economy or a healthy government?

“The US will never default on its debt, it merely has to suffer with repaying interest.”

Haven’t we tried economic stimuli like this before?

We have, but this is subtly different. The $700bn bank bailout of 2008 was money given directly to banks in the hope that this would stabilise their books, and allow them to lend again. The problem here was that no one wanted to borrow because they were already indebted up to their eyeballs. This did nothing to help households, but the debt jubilee would.

Won’t the cycle just start over again and we’ll end up in the same mess in ten years’ time?

Quite possibly, which is why the issue of asset speculation has to be addressed as well. The debt jubilee is a rescue measure to pull us back from the brink, not a silver bullet.

If money is created to pay back this debt, won’t the inflation it leads to cause people’s savings to be eroded?

If it leads to inflation then yes, the savings of hard working people would become diminished as the currency loses value. There won’t be an alternative solution that pleases everybody, but a depression would hurt everybody, even the frugal.

What do you think about this idea? Have I missed some arguments? Leave your thoughts in the comments. I was inspired to write this article by watching this video and this video.

Private Debt to GDP (%)

Private Debt to GDP (%)

Private Debt to GDP (%)