With U.S. debt at record levels, enthusiasm is mounting for a debt jubilee, in which part of or all the mountain of debt would be written off, to the great relief of debtors and the despair and probable bankruptcy of creditors. The jubilee’s proponents point out that debt jubilees have Biblical sanction, being a standard feature of the ancient world originating in Sumer. However, while a full jubilee would very likely restore us to the joys of Sumerian living standards, there is another way we could take advantage of current crazed interest rates.
The most detailed recent case for a debt jubilee was academic Michael Hudson’s: “…and forgive them their Debts” published in 2018. Analyst David Rosenberg, who believes the world is on the edge of a steep recession, also believes a global debt jubilee is necessary (but nevertheless favors loading up on long-term bonds – don’t ask me why!) Furthermore Bernie Sanders, currently among the leaders for the Democrat Presidential nomination, favors a jubilee for most of the $1.7 trillion in U.S. student debt. So, the agitation for a debt jubilee is not overwhelming, but it is beginning to build substantially, from all sectors of the intellectual ecosphere and several points of the political spectrum.
As Hudson points out at length, debt jubilees have Biblical sanction, being recommended in Leviticus and practiced from time to time by the mediaeval Catholic Church. They were indeed a standard though not universal feature of the ancient world; they appear to have originated in Sumer in around 2300 BCE and are then mentioned in the Babylonian Code of Hammurabi from around 500 years later. They do not on the other hand appear to have been a feature of the Ancient Egyptian economy, to my mind an altogether sounder civilization, that indeed proved more long-lasting (and provided much of the intellectual impetus for the derivative civilizations of Minoan Create and through that Ancient Greece.)
Sumerian lending was carried out primarily by temples, which had the advantage of spiritual as well as terrestrial debt-collection methods, as well as great wealth. Hudson informs us that new rulers often proclaimed debt jubilees on ascending the throne, or on completion of a successful war. Given the relatively short Sumerian lifespans, you can thus imagine that Sumerian debt jubilees occurred at least every 20 years.
Before we join Hudson in rapturous admiration for the Sumerian civilization and its thoughtful way of dealing with otherwise over-wealthy creditors, you should remember two things. First, according to Sidney Homer’s “History of Interest Rates,” there was very little long-term debt in Sumer and interest rates were around 33%, most loans being made in barley. Hence as a Sumerian farmer your yearly crop loan had at most a 1 in 10 chance of being forgiven and meanwhile you paid a very high interest rate for it. Allowing for a fairly low level of bad debts (temples having the social power they did) the Sumerian temple’s return on its loan portfolio would have been at least 20%, before expenses. A perfectly decent business, in other words, and the risk of jubilee no doubt kept the temples safely in line behind the current King and opposed to wars that to them were ruinously expensive, win or lose.
The other thing you should remember is that, unless you were the legendary King Gilgamesh (who was in any case two thirds God), Sumerian living standards were extraordinarily low. Sumer was one of the first societies to switch from a hunter-gatherer lifestyle to settled agriculture, and as Yuval Noah Harari elaborated in his “Sapiens,” the short-term cost in living standards from doing this was very onerous indeed. In the Epic of Gilgamesh, we are told that Gilgamesh’s friend the wild man Enkidu is voluntarily still a hunter-gatherer, presumably finding that far more profitable and less time-consuming than agriculture because of his strength and speed. Naturally, Enkidu has no need of the temples’ lending facilities; only the poor downtrodden Sumerian farmers entered the credit market. Given that we cannot all be Gilgamesh, we are better off as Enkidu than borrowing from the Sumerian temples, debt jubilees or no debt jubilees.
British agricultural workers of the late 18th century, before mechanization, had real incomes around four times those of Sumerian farmers, according to Robert G. Allen’s “The British Industrial Revolution in Global Perspective.” They were also substantially richer than agricultural workers elsewhere in the world, a major reason why industrialization occurred in Britain. The reason for their relative wealth compared to Sumer or their foreign contemporaries was only partly the use of better equipment and techniques, but much more the established British legal structure, in particular the existence of rock-solid property rights.
Property rights, which were taken more seriously in 18th Century Britain than they are today (thank you, Maynard Keynes) included a debt system where jubilees were impossible and enforcement was rigorous, but in consequence interest rates were far lower than in Sumer, around 5-8% for secured farm borrowers, and no more than 3-5% for the government.
Solid property rights are essential for a modern economy to flourish. I demonstrated this myself in 2000, when I went to Macedonia as advisor and wrote a debt law that restored Macedonian savings, which had been stolen by Serbia in 1991. The result was an immediate surge in economic growth, after a decade of stagnation, which, revolutionized Macedonian prospects and living standards and lasted until 2016, when an combination of the EU, the Obama administration and George Soros’ operations disgracefully removed the democratically elected Macedonian government and replaced it with neo-Communists. With democracy, restored savings and newly established property rights, Macedonians were finally able to achieve their rightful prosperity, aided from 2006 by the very capable government of Nikola Gruevski, and hopefully only temporarily interrupted by foreign meddling.
While a system with regular debt jubilees can work at a low economic level, the moral hazard and high risk involved keeps interest rates very high. The property rights of the lenders are continually violated, so trust in the system is destroyed. Interest rates rise to approximately Sumerian levels, well into double digits and stay there – after all, why would anyone lend money if he knows there is a chance of the debt being annulled by government fiat? With interest rates so high, modern economic activity becomes impossible – there are few if any investments that can be financed through a Sumerian-style capital market. A full debt jubilee would thus give short-term relief to debtors, but cause the bankruptcy of an immense range of creditors, not just banks, but insurance companies, pension funds and the like, while reducing stock prices to a level commensurate with the scarcity of debt finance and the new level of interest rates.
Senator Sanders has suggested a partial debt jubilee, for student loans. This would not have such a wholly catastrophic effect. Around 90% of student loans are now owned by the Federal government, so the $1.5 trillion loss involved could just be added to the overall pile of Federal debt, adding a mere 8% to the debt to GDP ratio. Provided Sanders’ jubilee was not used as a precedent, its economic effect would thus be tolerable. It is however bad policy; it rewards the students with the largest debt at the expense of others whose families scraped to pay for their college educations directly. More important, it rewards a generally fairly wealthy segment of the population at the expense of poorer non-college-goers. In any case, it would not solve the problem of the excessive cost of college; next year’s students must still find a way to pay for this.
While debt jubilees are a bad idea, there is one useful way we can take advantage of the current period of artificially and excessively low interest rates, and that is to restructure government debt. The U.S. government currently issues no debt with a maturity of more than 30 years, and most of its debt is very much shorter than that. Consequently, when interest rates return to normal levels, the interest cost of public debt will quickly soar as debt is refinanced. The solution, in current markets where interest rates are artificially low and the market very receptive, is to issue debt of a longer maturity, ideally reverting to revert to Britain’s main financing method between 1751 and 1914, perpetual Consols.
As I write the 10-year U.S. Treasury yields 1.77%, the 30-year Treasury 2.24%. Perpetual Consols should yield a premium over 30-year bonds, but a modest one, less than a 100-year bond, for example. (Consols are generally issued at a discount, giving them the possibility of a capital gain if yields decline; this is not true for a 100-year bond issued at or near par.) Suppose a yield of 2.4% is necessary; this could be achieved either by issuing a 2% Consol at a price of 83.3% or by a 1.5% Consol at a price of 62.5%. In either case, the running yield of the bond would be 2.4%, but greedy investors who believed David Rosenberg’s thesis of a further rate decline would buy them for the capital gain. The only disadvantage from Treasury’s viewpoint is that they would be issuing $100 billion of debt to get $80 billion or $62.5 billion of cash. However, since the debt would never be repaid this is not in practice a problem.
By issuing Consols as described, Treasury would be getting a much better deal than the 18th and 19th Century British governments, who issued 3% Consols with a Gold Standard currency, thus paying a real rate of 3% on their money. In this case, with consumer price inflation currently 2.3% in the year to December 2019, the Treasury would be issuing perpetual debt with a real cost of 0.1% — in other words, practically free money, with inflation reducing the value of the outstanding debt each year by almost as much as the interest paid. By issuing as much as possible of this debt while real interest rates are at current levels, the U.S. Treasury would greatly reduce the burden of U.S. public debt on future generations.
A debt jubilee is a bad idea; it violates property rights, would wreck the capital markets and cause interest rates to soar well into double digits. A major move by the U.S. Treasury towards Consols issuance, however, would have many of the effects of a jubilee, and would be blessed by future generations for as long as the Consols were outstanding – 264 years if they matched the British Consols, which were redeemed in 2015.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)