By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “and forgive them their debts”: Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year.
Debts that can’t be paid, won’t be. That point inevitably arrives on the liabilities side of the economy’s balance sheet.
But what of the asset side? One person’s debt is a creditor’s claim for payment. This is defined as “savings,” even though banks simply create credit endogenously on their own computers without needing any prior savings. When debts can’t be paid and debtors default, what happens to these creditors?
As President Obama showed, banks and bondholders can be bailed out by new Federal Reserve money creation. That is what the $4.6 trillion in Quantitative Easing since 2008 was all about. The Fed has spent the last few years supporting stock market prices (and holding down gold prices) by manipulating the forward option markets.
But this artificial life support to keep the debt overhead afloat is nearing the reality of the debt wall. The European Central Bank has almost run out of available euro-bonds to buy. The new fallback position to keep the increasingly zombified U.S. and Eurozone financial markets afloat is to experiment with negative interest rates.
Writing down savings by a few percentage points helps bring the glut of creditor claims marginally back towards balancing bank deposits with the ability of debtors to pay. But such marginal moves are rarely sufficient. A quantum leap is needed.
Governments have long followed a basic guideline when faced with a need to devalue their currencies (for instance, as the dollar was devalued against gold in 1933). Nothing is worse for a politician or central banker than to be overly shy when it comes to devaluation. The motto is, “Always depreciate to access.” That means at least 25 percent, often a third when a basic structural adjustment is needed.
The recent experiment in negative interest rates writing down savings as a necessary compliment to the inevitable debt writedowns means that financial policy makes are beginning to fact the hitherto unthinkable fact that many zombie companies and debtors have no foreseeable means of paying the amounts that they owe on paper.
The tendency of debts to grow exponentially at rates in excess of the economy’s ability to create an economic surplus to pay creditors has been known for nearly 5,000 years. My book “… and forgive them their debts” describes how ancient Near Eastern rulers recognized the inherent tendency of financial dynamics to cause instability, leading to debt bondage and forfeiture of land to creditors.
To prevent this rising indebtedness from tearing their realms apart, rulers started their first full year on the throne by clearing away the overhang of arrears that had been accruing on personal and agrarian debts. The aim was to restore an idealized “mother condition” in which bondservants were liberated, able to start with a Clean Slate with their self-support land returned to them, in balance with regard to their income and outgo.
An analogy would be the idyllic condition that the U.S. economy would achieve if we could restore the financial situation that existed in 1945. The end of World War II left an economy in which most families were almost debt-free. Families and businesses and were rife with cash, as there had not been much opportunity to spend during the wartime years, and the Great Depression had wiped out substantial debts. Returning soldiers were able to start families and buy homes by committing to pay only 25 percent of their income for 30 years. This era was as close as the United States came to a Clean Slate. Today it seems an unrecoverable golden age – as the ancient Near East seemed to be to debt-wracked imperial Rome.
Germany’s Economic Miracle consisted of its Allied Monetary Reform of 1948 – a Clean Slate erasing most personal and business. That debt cancellation was fairly easy because most debts were owed to Nazis, and the Allies were glad to see their savings claims for payment wiped out.
Fast forward to today: Indebted students graduate with an obligation to pay so much education debt that they cannot qualify for mortgages to buy homes of their own. Marriage rates are down, U.S. home ownership is plunging, and rents are rising. Automobile debt also has soared, leading to rising default rates second only to student debt defaults. The overhang of junk-mortgage debts that crashed the economy in 2008 remains on the books of families who managed to survive the ten million foreclosures under the Obama bailout of Wall Street. (His constituency turned out to be his Donor Class, not the junk-mortgage victims among his voters. He characterized them as “the mob with pitchforks” to the banksters he invited to the White House to celebrate his bailout.)
By driving down interest rates, the Fed’s policy of Quantitative Easing has subsidized an enormous debt buildup without increasing the interest burden proportionally. This has enabled corporations to carry much higher debt and even indulge in leveraged buyouts and stock buyback programs.
This QE policy has made financial engineering much more enriching than industrial engineering. But it has painted the U.S. and European economies into a corner. At some points interest rates will inevitably begin to rise back up. Some countries will have to increase rates in order to borrow to stabilize their exchange rates when their balance of trade and payments falls into deficit. Other countries will simply see that the game is over and will give up the pretense that the personal, corporate and public-sector debt overhead can be paid.
It is to prepare for this inevitable eventuality that Europe is experimenting with its trial run of negative interest rates. Once the technique is established, it will prepare the way for the inevitable step of writing down national savings in line with the economy’s ability to pay.
That ability is shrinking much more than at any time since the 1920’s, which gave way to the Great Depression despite the many debt writedowns of 1931-32. The exponential mathematics of compound interest have created more and more claims on personal income and corporate cash flow, leaving less and less to be spent on goods and services.
Until a debt writedown occurs, storefronts will continue to close, arrears will mount, students will continue to postpone marriage and family formation, high-risk bonds will begin to give way and default.
That should be what economic theory is all about. But for the past generation, economic models have pretended that banks and creditors act responsibly enough not to make bad loans. Pension fund managers pretend that they can provide for future retirement by corporate or public employees by earning 8 percent annually ad infinitum, doubling every 7 years, as if this is really possible in an economy not really growing outside of the Finance, Insurance and Real Estate (FIRE) sector (and even so, growing at only 1 or 2 percent). How then can the economy pay its debts without imposing financial austerity much like Third World countries subjected to IMF austerity programs?
Today’s economic orthodoxy denies that this debt problem can exist. Debt dynamics and the exponential growth curve of compound interest does not exist in the parallel academic universe that somehow has been situated in the social science department instead of the literature department as science fiction.
Perhaps someday a revamped economics curriculum will include the study of history to see how earlier societies have coped with the inherent tendency of debts to increase faster than the ability to be paid. It is a long history with many examples. Western civilization has failed to solve the financial problem that Near Eastern societies were able to cope with by intervening from “outside” the economy.
But these formative debt experiences are as repressed today as sexual drives repressed academically before the work of Freud. Academic economists are financial prudes. Debt cancellation is historically the solution. Quantitative Easing and bailouts of the One Percent can only be a temporary substitute. We should think of them as “abstinence” from recognizing the need to write down bad loans (“savings”) along with the bad debts.
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HUDSON 2024!
CANCEL ALL DEBTS!
PS I bought my working class dad your book for his Birthday and cant wait to discuss it with him when he finishes!!!
— right after I get my money out….
Since I have said this in other forums for the last few years or so and since seeing that the only way out is debt cancelation worldwide I removed my funds from the bank and only deposit what is needed to pay a bill.
So what’s the solution? Stuffing cash under the mattress? I’m not snarking or asking “for a friend;” I really am wondering what to do with what savings I have.
Cancel all debt means cancel all savings. It’s in line with the punish success and reward failure philosophy of society.
“Always depreciate to access.”–do you mean “excess”?
Depreciation: Bug or feature?
Misapprehension by the steno.
Must be ‘excess’ – its a typo
Doubling time for 8 percent interest is 9 years, not 7. But the point stands.
Professor Michael Hudson is the man, his mind and financial and historical knowledge are unbelievable. Been reading his work for a fair while and still I can’t get enough of him. I’m reading both his Super Imperialism and the And Forgive Their debts books. Everything makes sense that didn’t make sense to me before about the financial world (IMF, World Bank, Third World debts, Balance of Payments).
“The tendency of debts to grow exponentially at rates in excess of the economy’s ability to create an economic surplus to pay creditors has been known for nearly 5,000 years.” RIght there is the elephant in the room that I never got taught in my B. Bus uni days. That is message that has to be got across and understood.
It’s amazing how all my accounting mates here in Australia just don’t see the growing debt problem and think it will resolve itself just like all previous little recession/bumps/problems resolved themselves that they have experienced in the last 30 years since they left uni, even though their now uni age kids are looking at big bucks for uni, houses, cars high medical insurance, ridiculous kindergarten costs and everything else that we never had to deal with (which of course the parents are now partly or mostly funding and all other not so lucky kids have to go into big debt for) – but then I guess they are the 20% managerial class and it’s very hard for someone to understand something when their job is based on them not understanding it.
And Michael Hudson explains it all so well on his videos as well – there’s a great one with Jimmy Dore that someone linked to other day. Here it is again… https://www.youtube.com/watch?v=PSvcB55R8jM . And he still manages to say it all with a smile somehow which is even more impressive.
Michael Hudson and Yves Smith… I would still be a babe in the woods without their guiding lights…
+1!
Great Video!
“Always depreciate to access.” That means at least 25 percent.??
Should that be ‘excess’? If not, what the hell does that sentence mean? How does 25 percent mean access? Access to what?
I interpret it to be a spell-check inspired error around the near homophones “access” and “excess” — kind of like how “compliment” appears later when it ought to be “complement”
It may also be that the entry is being created from “speech to text” software that likewise handles homophones poorly.
They could both be correct.
Access – what you can get away with in the market.
Excess – more than you immediately need on the assumption you are too optimistic anyway.
Brilliantly and succinctly stated!
And this is priceless: Debt dynamics and the exponential growth curve of compound interest does not exist in the parallel academic universe that somehow has been situated in the social science department instead of the literature department as science fiction.
Thanks for the useful history lesson. However, I am wary of this bit:
Considering that central bankers, seldom friends of those who aren’t creditors, came up with this idea, I very much doubt it will lead to them writing down debts. More likely, it will further help creditors squeeze workers or lead to the hoarding of cash outside the banking system to avoid the negative interest rates.
I don’t think Hudson is suggesting that negative interest rates will lead to debt write downs. To the contrary, negative interest rates are a way to socialize the inability to repay, by having the cost spread among all savers (esp regular people who are less able to game the system) instead of just the (un)deserving creditors.
More squeezing of the working class is likely to lead to rebellion and revolution. There is a breaking point and its fast approaching.
Hang on, whose debts now?
Consumer debts… jubilee totally makes ethical and justice-based sense. And that’s the argument I’ve understood Hudson to be making previously.
But this post is about corporate debts – aren’t these the same debts that have been run up to enable stock buy backs? Writing off those debts but leaving the cash in the pockets of the executives and shareholders just makes the transfer from poor to rich permanent and irreversible (mostly irreversible, the guillotine cuts paper and plastic nicely).
I’m not sold on the idea of a jubilee for corporate and executive relief at all.
Corporate and executive players already have bankruptcy, strategic and tactical, to cancel their debts. They don’t need extra help. Consider PE antics at Sears lately.
Your point seems to be a sound one, Greg. I wonder if Professor Hudson could comment upon it. One thought I had was that the jubilee for corporate/banking overlords did occur when the banks were bailed out by Obama, and then again with the QE stuff going to them. They have had their jubilee lo these several electoral seasons. Enough is enough!
I do see this qualification that may address our concerns:
“… rulers started their first full year on the throne by clearing away the overhang of arrears that had been accruing on personal and agrarian debts…”
Personal and agrarian – I can live with that, so long as it is individual farmers and not corporate big Ag.
The debts that should be written off are unproductive consumer and public debts. Obviously not real estate debts, or landlords (with little equity) would be the overwhelming beneficiaries.
So a debt cancellation has to go together with an economic rent tax to prevent rentiers from getting a windfall and becoming the new wealth-lords.
All this was Sumerian and Babylonian policy, cancelling personal agrarian “barley” debts but not commercial “silver” debts among merchants and the well-to-do.
Modern-day land barons would try to push a new Magna Carta to bury such notions. The King John role would be portrayed to take on various projections, forms and incarnations whether in person or as Mr. Market, all to obfuscate the issues. All the more reason to continue taking a close, objective and well-publicized look at all aspects of debt, credit and the parties involved. Thank you!
What of this QE portfolio? The $4.7 trillion taxpayer financed purchase? Where can we go to see what the contents of this portfolio is, what was paid for each asset, what each was valued at in the marketplace at the time of purchase, and how they are valued today?
Until we have this knowledge we will never know the true extent of looting that took place under Obama.
The concept of eliminating student debt faces significant resistance, even though every dollar spent in our economy going to this debt would instead be circulated in our broader economy almost instantly. For less than half of what was spent on QE?
Shouldn’t we be able to weigh which action will be better for our economy, people, and nation?
How can a sovereign monopoly currency issuer run out of their own currency?
Follow Zimbabwe’s example
1. Collapse your largest industry and Kill exports
2. Continue to import goods
Watch your currency value become worthless, because no one wants your currency.
One alternative is to have the US place sanctions on your Country, for example Venezuela, it is a different way to collapse export revenue.
Another is to follow Argentina’s example, where the elites open up the trade, than crash their currency by fleeing to the US Dollar, and after the crash bring their money home, and proceed with the looting.
“…many zombie companies and debtors have no foreseeable means of paying the amounts that they owe on paper.” You will probably find that uranium will decay down to lead before some of these debts will ever be repaid. Maybe in the old days inflation could be used to decrease debt levels. The Weimar government used this mechanism to ease some of the burden of the Versailles debt after WW1. But I do not believe that this is possible any longer. With wages in the US flat-lining for the past forty years and the cost of living (education, health care, rents, etc) skyrocketing, there is no longer any pressure for inflation to occur through wage increase.
Last year world debt hit $250 trillion but I am willing to bet that there was only a sliver of assets to act as collateral. It has become a big Ponzi scheme countenanced by all the major governments so my guess is that this debt will never be written down. To do so risks the whole economic structure undergoing a massive contraction with that terrible “d” word coming into play – deflation. I know that it sounds weird but I do believe that faced with trying to keep all their wealth or going from billionaires down to millionaires, that the world’s elite will go for the former. It was John Kenneth Galbraith that wrote after all-
“People of privilege will always risk their complete destruction rather than surrender any material part of their advantage. Intellectual myopia, often called stupidity, is no doubt a reason. But the privileged also feel that their privileges, however egregious they may seem to others, are a solemn, basic, God-given right. The sensitivity of the poor to injustice is a trivial thing compared with that of the rich.”
So, this being the case, we may as well enjoy some music to watch our economy mutate with-
https://www.youtube.com/watch?v=5BmEGm-mraE
I don’t know if you realize that you’re making a striking pun. Frederick Soddy, who emphasized the mathematics of compound interest, wrote his first major book (and won the Noble Prize for physics) on isotopes and their degeneration.
This comment by Michael was worth looking into and, indeed, the relationship of isotopes degenerating and money’s deterioration into indebtedness is a great comparison:
This is why I read NC. The people who read and comment on this blog know so much interesting and specific stuff to whatever topic is at hand. I never stop learning. Cheers JEHR and Rev Kev (and Michael Hudson who knew the historial context of the degeneration of uranium to lead analogy…of course!). I need to go read Soddy as well.
Soddy’s and Hudson’s work have a great deal in common, particularly their emphasis on debt as a tool of ruling class exploitation. Where they diverge, it seems to me, is on one of Soddy’s key insights:
p. 102*
Hudson apparently doesn’t think it possible to define wealth except in terms of money. Soddy doesn’t try to nail down a definition of wealth that would cover the work of artistic genius. But with his “
(p. 61)*”, he does a pretty good job of summarizing what matters to most of us – and to US foreign policy makers. As Hudson has repeatedly written US foreign policy is all about controlling the world’s access above all to “natural energy” (i.e. fossil fuels).
*From Soddy’s Wealth, Virtual Wealth & Debt.
** Soddy’s Nobel Prize was in chemistry, not physics. See JEHR’s “worth looking into
The recent experiment in negative interest rates writing down savings as a necessary compliment to the inevitable debt writedowns means that financial policy makes are beginning to fact the hitherto unthinkable fact that
That doesn’t read too well …
should be policy MAKERS
And …”beginning to fact” should be “beginning to face”. But you probably figured that out.
If you copy the post and place it into Libre OpenOffice Writer, some of the mysteries are revealed. (But not all.) Thanks for the post Michael Hudson.
“Financial analysts are prudes” is the perfect comparison. Turning denial into the high road. For purposes of securing their own positions in a system that is crashing all around them.
“Germany’s Economic Miracle consisted of its Allied Monetary Reform of 1948 – a Clean Slate erasing most personal and business. That debt cancellation was fairly easy because most debts were owed to Nazis, and the Allies were glad to see their savings claims for payment wiped out.”
But Germany made its last reparations payment for World War I on Oct. 3 2010!
(However reparations payments were different from the debts of average Germans and German corporations. Reparations were due to Britain and France in their currencies and not German Marks. Britain and France were then required to pay off loans made by the U.S. German hyper-inflation was a direct result of having to pay off reparations debt in foreign currencies – just like in Zimbabwe more recently.
The reparations were paid to Wall Street and that was why they couldn’t be forgiven.
Hopefully not a Pollyanna and I appreciate Dr. Hudson’s work, including this article,, but I question whether there might be possibilities besides the writedown presented here.
Thinking MMT, I ask whether federal government funding directed into major infrastructure projects, a green new deal, repayment of student loans, and other domestic spending initiatives could enable us to minimize this dilemma without forced writedowns in Moms’ & Pops’ retirement savings – including negative interest rates – being required or the nation’s payments system being placed at risk?
Besides “Foaming the Runway” for the banks, the central banks’ QE-ZIRP/NIRP programs have served to push up prices of financial assets and real estate, and to fund corporate stock buybacks and leveraged buyouts that have enriched CEOs and principals of private equity firms while increasing the debt leverage of many corporations. The policy has enriched speculators who have engaged in speculations on both sides of the balance sheet, as well as in off-balance-sheet speculations in derivatives. In my opinion (and unlike what occurred in the wake of the 2008 GFC), stockholders and bondholders need to be required to take write-offs on their speculations before bank savers are penalized for the policy and regulatory errors that enabled this situation to develop. Further, the Glass-Steagall Act should be reinstated to legally require the gamblers play with their own capital going forward rather than that of the banks’ depositors.
In addition to the observations in this post and comments, given our nation’s history and existing institutions, We the People face a political challenge in preventing the War Party, Wall Street and the One Percent from implementing more destructive and highly counterproductive “solutions”.
Finally, what are the alternatives to a debt-based monetary system?