11 Jan 2012

Complete elimination of excessive debt - It can be done!!

Aditya Chakrabotty had a fascinating piece in the Guardian yesterday called "It's time to cancel unpayable old debts". He called for a debt jubilee for have-nots in which we just all decide to forget about all debts that cannot reasonably be paid.

It's a wonderful idea. Unfortunately, I think that the probability of the banks spontaneously deciding to write off debt is about as likely as pigs flying. But in a comment on his piece I said that there is a way. Here's my post.
I've arrived a bit late on this one... sorry.
Great idea, but since banks are not going to write off debt spontaneously, they need help. But it can be done.
For example, to write off the entire UK national debt (1,164 billion pounds, according to the latest figures in the Eurostat database), the following would work (see also here).
1) The Bank of England lends 1,164 billion pounds to the Royal Bank of Scotland (84% owned by the taxpayer)
2) RBS lends the money to the UK government
3) The UK government immediately pays off the entire national debt to the banks
4) The banks get all their money back - no more liquidity problems.
5) In theory, the UK government now owes the Bank of England 1,164 billion pounds, but since the BoE didn't have the money to lend (it just typed the numbers in a spreadsheet), there is no need to pay back the money at all.
This neatly gets round the usual objection - that Central Banks cannot lend directly to governments because the Lisbon Treaty prevents it. It's a myth. Paragraph 2 of article 123 specifically allows lending to "publicly-owned credit institutions" - like RBS.
Why does no-one consider this blindingly simple solution? Good question. I think that is simply because lending money to governments is precisely how the banks have managed to rake in such colossal amounts of tax-payers money over decades. For the period 1995-2010, interest charges on UK government debt cost the UK taxpayer 443.6 billion euros - that's 2.59% of UK GDP.
There are far too many people in power who have a vested interest in keeping the system going. But 99% of the population probably think that it is high time to put an end to this insanity.
But when I thought about this further, I realized that the same magic wand could be used for all sorts of debt. For example, take the millions of people in Britain currently paying interest rates of up to 4000% for "payday loans". This could literally be stopped overnight by a single one off jubilee debt cancellation.

  1. The Bank of England lends an initial £500 billion (say) to the Royal Bank of Scotland (84% owned by the tax-payer).
  2. Anyone facing excessive debt can go and ask RBS for a one off payment that would completely pay off their debt.
  3. If the demand fulfils certain key conditions, RBS pays off the debt. 
  4. If the initial £500 billion is insufficient, the Bank of England "prints" more money until all the excessive debt has been eliminated.
  5. Everyone is happy
Obviously, this mechanism should be restricted to paying off debt for people who have a serious problem, for example, people who can prove that they have been forced into using payday loans. It is not to pay off people's mortgages. Also, it needs to be clear that it is something that will only occur once and once only. There should be absolutely no suggestion that this will ever happen again because that would lead people to go out and buy flat screen TVs etc. Indeed, it is probably a good idea to say that the mechanism can only be used to pay off debts that were already there in the past - for example on 1st January 2011.

The critical point is that the amount of "real" money that is needed to do this is probably very small and the inflationary effect would be trivial - far less that with the Bank of Englands current £75 billion of Quantitative Easing which just involves throwing money at banks and praying that they might possibly do something intelligent with it.

No. Since the vast majority of the "money" that the banks have "lent" to people over the past couple of decades is money that the banks didn't actually have - it was simply created out of thin air by the magic of fractional reserve banking - that "money" simply disappears in a puff of smoke when the debts are paid back.

I am convinced that the government really could do this. Of course, the City will object, because it kills the amazingly profitable goose that has being laying golden eggs for them. But I think 99% of people think that it is time to put an end to this. It can be done. We have the technology.


  1. After reading your comments on the Guardian thread, I really recommend you check out Steve Keen's ideas on how a debt jubilee could work -- they're pretty close to yours! -- but from an internationally-recognised academic economist.

    His voluminous blog [
    http://www.debtdeflation.com/blogs/ ] is a nightmare to negotiate but I'd recommend you start with Guardian economics editor, Larry Elliot's article [
    http://www.guardian.co.uk/business/economics-blog/2011/nov/20/recession-sovereign-private-debt-recovery] and then Steve's BBC HardTalk interview [
    http://www.scpr.org/blogs/economy/2011/11/28/3891/debt-no-more-steve-keens-radical-proposal/ ].

    Hope you find them as inspiring as I did!

  2. Excellent suggestion Chris. Exactly the reason why I look forward to people adding comments.

     I had noticed the bit in the Guardian in November, but at the time, I was more obsessed with Financial Transaction Taxes ;-)

    But, it looks as if Steve Keen's proposals are pretty much what I'm arguing for.

    One new thing is that I think I have just removed the argument (continuously trotted out by Mario Draghi and Mervyn King) that they can only lend to banks and then pray that the banks to something sensible with the money. They clearly won't!