Debt Jubilee or Global Deleveraging?

by Barry Finger on February 22, 2012

Fifty years ago, another ambitious examination of historical development was published. This too drew abundantly from “economists, economic historians, ethnologists, anthropologists, sociologists and psychologists” in order to elucidate patterns of social existence and institutional evolution. This too promised to locate in the remote past of humanity, experiences that have “penetrated into unconsciousness of individuals, there to encounter the echoes from the primitive-communist past, which have never been completely buried by the effects of 7000 years of exploitation of man by man.” This too argued, in effect, that a lost social consciousness would be key to the reassertion of a future freed from economic oppression. David Graeber asserts that communism is in fact one of the basis for all human societies. But, while Ernest Mandel’s Marxist Economic Theory was written in the context of a cold war in which the fundamental question of social organization was ever present, David begins his quest 2000 years beyond the mist (and myth) enveloped origins of ancient communalism to the beginnings of society already differentiated by class and social function. The current social context is one permeated by a crushing global financial collapse, where – unlike Mandel’s time—the fundamental questions of the class organization of society no longer present themselves as urgent political propositions.

David’s purpose, as might be expected, is therefore a bit different. Where Mandel sought ostensibly to resurrect empirical data to validate his interpretation of Marxism, his real goal was to demonstrate how humanity could liberate itself by transforming its conditions of existence, of revolutionizing the actual relations that people enter into by democratically regulating material reproduction and distribution. Debt: the First 5000 Years rests on an alternative investigative platform and begins with a most remarkable counterintuitive assertion. “Why debt? What makes the concept so strangely powerful? Consumer debt is the lifeblood of our economy. All modern nation-states are built on deficit spending. Debt has come to be the central issue of international politics. But nobody seems to know exactly what it is, or how to think about it” (emphasis added). That is, a trans-historical meaning of debt cannot be nailed down, and this is what largely occupies the book’s exposition, because the definition of debt is fundamentally mercurial. Each age and each class has its understanding of debt. The power of history’s dominant social forces resides precisely in their ability to reframe power prerogatives in terms of ever malleable and self-serving notions of debt and, when needed, to violently foist these ever shifting understandings on their victims in every variant of known social contexts. Ultimately the “pernicious morality of debt” – its transformative impact—is that it “reduce(s) us all, despite ourselves, to the equivalent of pillagers, eyeing the world simply for what can be turned into money —and then telling us that it’s only those who are willing to see the world as pillagers who deserve access to the resources required to pursue everything in life other than money. It introduces moral perversions on almost every level.”

“Debt” in this sense occupies a very similar functional space once occupied by Marxist discussions of ideology. An ideology, in the Marxist sense, is a set of beliefs organically developed by ruling groups, which interprets and rationalizes the facts of mind, nature and society in ways that stabilize their rule by systematically obscuring the real conditions of society. This is not fundamentally a question of conscious distortion, invention or denial of facts themselves, although there may always be an element of this commensurate with degree to which a ruling group is socially cloistered. It is much rather a question of how elite needs, preferences and interests motivate the contextual understanding and causal arrangement of actual, known or provisionally known, truths in the service of power. The success of any ruling ideology can be assessed against its ability to misdirect and suppress awareness of conflicting social interests, a consciousness otherwise necessary if subaltern members of society are to evaluate social programs and policies that involve such conflicting interests on an independent basis. If “we” all buy into the pernicious morality of debt, aren’t we actually acquiescing to a comprehensive ruling ideology that submits, as an incontrovertible and self-evident proposition, that capitalism is forged in a moral universe of mutually reciprocal obligations freely entered into? But hasn’t the acceptance of a universal commonweal always been the accepted social myth, and one of capitalism’s chief propagandistic strengths and selling points?

It is perhaps not coincidental that American socialists at the turn of the 20th Century, when they could still be described as a mass struggle movement, framed the social question along lines that anticipated the thesis of Debt. “…(T)he billions of watered stock and bonds crying for dividends and interest are a perpetual mortgage upon the work and lives of the people of all generations to come.”

The question then is on what basis and with what justification can that ubiquitous social mortgage—that debt owed in perpetuity—be abrogated? Do we need to reset the clock as did our ancient forebears and call for a universal debt jubilee, as David proposes? Or do we need to call into question by means of social struggle the fundamental class arrangements upon which debt and the ideology of debt is at present so firmly implanted in the unexamined preconsciousness of society’s rank and file?

While David’s proposal in the abstract is imaginative and sweeping, it nevertheless dovetails with the spirit of the times, most strikingly with the preoccupations of the business press and Washington, as well as international, policy makers. For it is precisely the question of deleveraging, of writing down if not repudiating elite debt on a massive scale, that remains the precondition for a thorough going system shakeout and restructuring needed to relaunch capitalism on a more efficient and profitable basis. TARP, the auto industry bail out, the anemic mortgage relief now being proposed – not to mention mass bankruptcy—are all, in effect, forms of debt repudiation or contain within them elements of such. Scaling back both “entitlements” as well as public and private pensions are similarly vehicles for repudiating debts incurred to workers in the form of deferred compensation. Mass unemployment is a dead weight on labor markets that allows corporations to leverage down and rewrite existing contracts, thereby abrogating the promissory notes that would otherwise accrue to labor and which were previously negotiated in “good faith”. It is a means of freeing capital for investment that otherwise had been designated to pay wages. Internationally, the write down of public debt comes at the cost of working class living standards, in the manifold ways discussed above, and with the added indignity of transferring public property to the private sphere at bargain basement prices.
Of course, all this fall short of universal debt repudiation, of a true clean slate for society. But then that’s the point. No debt jubilee that David unearthed, if I read him correctly, was ever proposed as a permanent framework for the root and branch reconstruction of society on more democratic and egalitarian foundations. They were stopgaps needed to forestall a plunge into a social abyss, breathing spells to facilitate social retrenchment. It is in that historical spirit alone that capitalism is in fact undergoing a limited debt jubilee, a debt jubilee from the top down. It has little choice.

So the question presents itself. Is it possible to build a movement of resistance based on our shared, cross class experiences as cogs in the machinery of debt or is it more fruitful to locate sources of liberation where the opposition of needs and interests most sharply diverge? A debt jubilee? Yes, but from the bottom up.

{ 30 comments }

1

Gaspard 02.22.12 at 4:06 pm

Hopefully someone can correct me here, but isn’t the discussion about raising inflation targets and NGDP targeting a way to provide a bottom up jubilee? This is effectively what anyone who bought a house in the early 70s got – a rapid erosion of their real outstanding debts as nominal prices?

2

Alan Peakall 02.22.12 at 5:58 pm

OK Gaspard, I’ll bite on that one by suggesting that (at least in Western Europe, as opposed to North America) the difference in the prevalence of exchange controls makes quite a difference to both the distributional and political results of the equivalence that you are asserting.

3

rootless_e 02.22.12 at 6:11 pm

It is perhaps not coincidental that American socialists at the turn of the 20th Century, when they could still be described as a mass struggle movement, framed the social question along lines that anticipated the thesis of Debt

Thomas Jefferson made similar remarks.

But the child, the legatee, or creditor takes it, not by any natural right, but by a law of the society of which they are members, and to which they are subject. Then no man can, by natural right, oblige the lands he occupied, or the persons who succeed him in that occupation, to the paiment of debts contracted by him. For if he could, he might, during his own life, eat up the usufruct of the lands for several generations to come, and then the lands would belong to the dead, and not to the living, which would be the reverse of our principle.

4

Brett 02.22.12 at 7:43 pm

I don’t like the idea of a Global Jubilee, and I didn’t like the way they did the bail-outs of the financial system. Like it or not, the financial system is interwoven with our economy and livelihoods, and a mass debt repudiation would cause economic chaos and pain in ways you can barely imagine.

5

Substance McGravitas 02.23.12 at 3:52 am

Like it or not, the financial system is interwoven with our economy and livelihoods, and a mass debt repudiation would cause economic chaos and pain in ways you can barely imagine.

Such as a whole lotta foreclosures?

6

Peter T 02.23.12 at 10:45 am

Hard to see that the history of large debt jubilees is relevant today. Modern capitalist societies are built on debt in a way that earlier ones were not. They had no expectation of near-continuous growth, so the politics of mismatches between debt and income/assets pointed to debt write-offs. A large part of the current argument is about how to get growth that will allow the debt to be repaid, or even grow, so write-offs become more problematic.

7

ajay 02.23.12 at 10:50 am

Modern capitalist societies are built on debt in a way that earlier ones were not. They had no expectation of near-continuous growth, so the politics of mismatches between debt and income/assets pointed to debt write-offs.

Exactly like the massive debt writeoff that has just been agreed for Greece, you mean?

8

Peter T 02.24.12 at 5:03 am

Ajay

Not talking inter-institution debt (corporate bankruptcies and writedowns, state defaults etc), but debt jubilees. Hammurabi decreed several times that all non-trade debts were cancelled, Solon likewise. Could a modern system likewise decree that all mortgage debt, or all student loans, were immediately cancelled?

9

ajay 02.24.12 at 10:00 am

Could a modern system likewise decree that all mortgage debt, or all student loans, were immediately cancelled?

Well, it could declare whatever it wanted. But I really think you should give some thoughts to what would happen in that case. It starts with “we have just destroyed $11.3 trillion in US financial assets” and kind of goes on from there, taking in the collapse of most if not all banks and building societies and the loss of everyone’s savings. (Good luck getting the FDIC to cover everyone simultaneously.) Move on from that to the collapse of pretty well every private pension scheme.

In simple terms, a building society works by taking A’s money and lending it to B so B can buy a house. What happens to A if suddenly B and all the other Bs stop repaying?

10

Peter T 02.24.12 at 10:36 am

Ajay

My point exactly. What made this possible for Hammurabi, and not for the US?

11

Henri Vieuxtemps 02.24.12 at 10:53 am

taking in the collapse of most if not all banks and building societies and the loss of everyone’s savings.

Well, one possibility would be that of a very radical change, rendering all these concepts irrelevant.

Incidentally, I’m surprised the book doesn’t mention the first (as far as I’m aware) relatively complex communist society created by Zoroastrian priest Mazdak in 5th/6th century Persia.

12

reason 02.24.12 at 11:24 am

Brett,
that is why increasing inflation is the better solution.

13

ajay 02.24.12 at 12:14 pm

My point exactly. What made this possible for Hammurabi, and not for the US?

At a guess? Hammurabi was ruling a tiny and grindingly poor Bronze Age slave empire with a small and simple financial sector, and the US is an immense and wealthy industrialised nation.

Note, too, that Hammurabi was ruling a system where the preferred solution to unpaid debts was to enslave the debtor and his family. The debt-forgiveness rules of Hammurabi and Exodus set an upper limit for how long this debt slavery could last: however much a man owed, he couldn’t be enslaved by his creditors for more than three (or seven) years. (I use “man” deliberately. Female debt slaves are slaves for life, under Exodus at least.) This is separate from the debt jubilees and sabbath years that ancient kings declared.

And, most crucially, Hammurabi’s debt jubilees weren’t utterly destructive because they happened in a society where everyone knew that kings were going to declare jubilees every so often, and acted accordingly. Same reason that Heathrow Airport gets shut down by six inches of snow and O’Hare just keeps on going.

Well, one possibility would be that of a very radical change, rendering all these concepts irrelevant.

True, of course. But my point is that you need to be clear that that’s what you’re asking for.

14

Substance McGravitas 02.24.12 at 8:30 pm

Does anyone think there could be a possibility of small-scale jubilees? Student loan forgiveness for example.

And to make my naïveté more obvious, what exactly is the obstacle to declaring those debts paid and moving along as if they had been, rather than just allowing people not to make payments?

15

Peter T 02.26.12 at 8:08 am

Ajay

Almost as many errors about Hammurabi as Graeber about Apple. Check van de Mieroop’s excellent biography.

16

Gaspard 02.26.12 at 10:20 am

Does anyone think there could be a possibility of small-scale jubilees? Student loan forgiveness for example.

Of course. It’s easy to imagine, say a property tax which would then be used to set against student loan write-offs – the question is a) would this have any major liberating/ emancipating effects, or would people just buy bigger cars, houses, and holidays and carry on much as before? b) would this be unfair to those who had worked their way through college and avoided debt?

I think even Graeber makes it clear that there is a wide spectrum from debt-as consumption smoothing mechanism vs debt-as instrument of inescapable oppression and domination.

The sad truth is that it’s easy for the first to flip into the second, as anyone who bought a house with a mortgage in 2006 in Ireland will be able to tell you (recourse on all your assets so no ‘jingle mail’ there).

17

Substance McGravitas 02.26.12 at 6:16 pm

Of course. It’s easy to imagine, say a property tax

I was actually asking a crazier question, in which I imagine no offset necessary, the government being the institution that defines/prints money (although of course the market gets to redefine it endlessly). So, for instance, is a completely bananas scenario in which banks just get to behave as if the loans have been repaid possible? I don’t mean politically as much as technically.

18

ajay 02.27.12 at 3:56 pm

Almost as many errors about Hammurabi as Graeber about Apple.

Really? He wasn’t ruling a tiny and grindingly poor Bronze Age slave empire with a small and simple financial sector? Which bit of that’s wrong?

19

Watson Ladd 02.27.12 at 5:08 pm

Substance, people save and then spend over their lifetimes. If you declare student loans suddenly paid, that’s a shock to the government balance sheet and private originators, which ultimately carries through to people who saved, and who might not be able to recover from such a shock. Part of what made the financial crisis so pernicious is that a drop in housing prices affected a lot of balance sheets for people who can’t just go out and earn more money like the elderly. So there are negative consequences to a jubilee.

20

Substance McGravitas 02.27.12 at 5:46 pm

that’s a shock to the government balance sheet and private originators, which ultimately carries through to people who saved

This is not much of an answer. Where’s the shock?

Part of what made the financial crisis so pernicious is that a drop in housing prices affected a lot of balance sheets

But the balance sheets are an invention ultimately backed by the government. A debt jubilee in which the loans are assumed to be paid off, not just for the students but for the banks that use the leverage for more investment, shouldn’t cause the kind of crisis that the massive shortfalls around insurance and credit derivatives did. If it does, why? It’s fine to say things cause shocks and it carries over to blah blah blah, but it’s already happened with the status quo in place. Why not tinker for good results?

21

Gaspard 02.27.12 at 6:14 pm

SMcG: Yes, this is the Modern Monetary Theory argument – print the money, write off the debt and make whoever the lenders may be, whole. The argument against it is a slippery slope of inflation, unless you can convince the printing is only “one shot”. So in a 12 trillion eurozone, you could make the argument that Greece’s 3-400 billion can be taken care of with only a moderate inflation increase, but what they fear is Greece and other peripheral countries starting to bank on this, chaos ensues, moral hazard (in a country with a dreadful tax collection record), etc. It would take a very brave Treasury or EZ finance minister who would be willing to risk it.

22

robotslave 02.27.12 at 6:14 pm

@17

US Student loan debt has ballooned up to where the total, at $850 billion or so, is greater than total US credit card debt.

So for one, the act of wiping out all student debt would not be “small.”

If I understand your proposal, the government would take possession of the entire student debt load, and then gradually print money to cover all of the principal and interest, according to the various expected payment schedules?

I’ve got little more than a caveman’s understanding of macro, but even I can see that what you’re proposing would be rather inflationary, and over a fairly long term. It would be predictable inflation, at least, so there’s that. But even if various pundits I like are calling for some inflation in the near term, I have to wonder if this idea wouldn’t be too much of a good thing.

And then there’s the question of new students starting school, after you’ve done this “jubilee.” You’d need to have the government’s printing presses pick up the tab for them, too, wouldn’t you?

23

robotslave 02.27.12 at 6:22 pm

OK, it sounded smarter when Gaspard said it the first time.

24

Substance McGravitas 02.27.12 at 6:40 pm

I’ve got little more than a caveman’s understanding of macro

I’m sure I have less than that so I’m thankful to Gaspard as well.

And then there’s the question of new students starting school, after you’ve done this “jubilee.” You’d need to have the government’s printing presses pick up the tab for them, too, wouldn’t you?

I’m only assuming a one-time emergency and no larger plan, but I’m a big hippie who thinks school should be paid for anyway, so probably yes, one way or another.

25

Watson Ladd 02.27.12 at 7:02 pm

Substance, the shock is that when you default on debt, the creditor loses income. The government could assume a lot more debt at low interest rates. If that’s your proposal I don’t see anything really wrong with it right now, but I think I thought it was simply a writeoff.

26

Bruce Wilder 02.27.12 at 7:17 pm

Gaspard is worried about the inflationary implications of wiping out debt; he should worry about the deflationary implications of securing debt, as well.

Deflation is much, much worse than inflation for the “real” economy of working and producing stuff in the now. Pushing Greece into a depression and almost all of Europe into a serious recession has serious and acute, painful costs.

Look, any transaction creating a debt is a transaction with the future — it is a risky bet. The expected outcome is only loosely related to what will be the actual outcome, and when the actual outcome comes to pass, the debt may have to be adjusted to accomodate reality. Reflecting on a dim understanding of the historical practice of jubilee may be intellectually stimulating or not; it remains that debt contracts are contingent on an expected future that may not come to pass. In our very real world, loans are sometimes made, which to use a term of art, are, in some large part, fraudulent — they may be the lender’s fraud or the borrower’s fraud, or both. And, when the fraud is revealed — or, just when the fantasy is dashed to hard reality — adjustments must be made. There’s no moral or economic virtue to continue to lie; if the debt cannot be repaid in full without severely deranging the economy, then the sensible thing is adjust, to wipe it out in whole or part, and make the consequent adjustments to rights of control.

It is the failure to adjust to reality, to tell the truth about the actual, realizable value of a debt contract, which is the source of our problems. To insist on the repayment of a bad debt is economically destructive. It is, in the abstract, deflationary — and deflation is very, very ugly on the ground.

Consider student loan debt. No society should be making students finance their general education with debt. It is economically insane. Investment in education is a sunk-cost investment, which can only be recovered in the future, to the extent that economic rents are created, around credentials and professional licensing and the like. As a general proposition the economic benefits and returns of education in increased productivity diffuse through the market economy, and end up being a gain to owners of real property, as the educated crowd into cities to make use of their education, and rent (actual rent, in this case) takes the lion’s share of the gains. The burgeoning student loan debt will have the effect of sinking a large part of the population into a kind debt peonage, and trying to collect on this debt will stifle the economy, with an oppressive deflationary tendency for generations.

There are investment propositions, which lend themselves well to private financing through various kinds of credit or loan arrangements. And, there are many such propositions, which do not. Just because a fast-talking salesman cum financial wizard cum fraudster can come up with a debt instrument does not mean that it will prove to be in the public interest to make good on it, down-the-line. Ex post judgments that a loan was a mistake can be perfectly sensible and economically functional — more functional than the insistence of the Obama Administration that boatloads of fraudulent loans that should never have been made, should be transformed into full faith and credit obligations of the U.S., or the insistence of the Germans and their ECB, that Greece should stripped of assets and forced back into the third-world, kicking and screaming.

Inflation may well be a reasonable way to arrive at such a broad adjustment. It is certainly to be preferred to a deflation in service of powerful fraudsters, which ruins the lives of millions.

27

Gaspard 02.27.12 at 7:21 pm

I think this does though show the limitations of what is otherwise a very ambitious book, and the Occupy movement too, in that the ultimate issue of how society is structured (expensive universities, expansion of the need for credentials) is overlooked in favour of cancelling student debt. Economies with free higher ed are not egalitarian paradises and the identification of the intelligensia with the university as an ideal prevents us from thinking more widely. Astra Taylor’s talk http://www.youtube.com/watch?v=LwIyy1Fi-4Q and article at http://nplusonemag.com/ may be the direction to go in.

28

Gaspard 02.27.12 at 7:27 pm

@Bruce, yes, I completely agree, but would add that thanks to the destruction of index-linked pensions in the UK, a lot of pensioners have quite a lot to fear from inflation (even though I agree that ideally they shouldn’t have to). But yes, the current environment favours capital, squeezes the consumer, etc.

29

Substance McGravitas 02.27.12 at 7:31 pm

the ultimate issue of how society is structured (expensive universities, expansion of the need for credentials) is overlooked in favour of cancelling student debt

I should say here that I was talking about student debt as it was already mentioned and it seemed to me to be a smaller area than some attack on mortgage relief, not because that’s my overriding concern.

Though $850 billion isn’t small.

30

Bruce Wilder 02.27.12 at 9:30 pm

The “systemic risk”, which enables the banksters to hold the global economy hostage, and to extract millions and billions and trillions, is a risk to the system of credit and payments. The threat isn’t that old Aunt Matilda is going to be eating catfood, because her investments in Argentine railroad bonds didn’t pan out. The threat is that the money she, and everyone else, has on deposit at the bank (or equivalent) will be worthless.

You can have widespread disappointment, as in the dotcom bubble, without the threat of economic collapse or calls for government bailouts of giant institutions.

The problem, here, is that we have a large sector of the economy manufacturing bad debt out of the credit and payments system. The bad debt is “bad” — it cannot be repaid, consistent with the running of a normally efficient economy. That’s my point about student debt. Most of the value of general education in making an economy more productive and efficient etc. diffuses away from the individual student/graduate in a market economy; they simply cannot be expected to pay it back, from labor-market-derived incomes. (The case of very narrow craft skills or credentialled professionalism can be somewhat different.) This is true of many worthwhile investments. A railroad cannot possibly pay back the cost of construction from the proceeds derived from operating the railroad — the economic return on building a railroad diffuses into the increased value of adjacent real property, labor and businesses, which is why railroad construction was often subsidized by the grant of large tracts along the route; highway and transit construction is sometimes financed from targeted property taxes for the same reason. Loaning money to send a student to college or to build a typical railroad is bad debt, not because the investment should not be made, but because the business model does not make credible the promise to repay.

Now, I happen to think society would be wise to make generous provision for the education of the young. But, that’s not the issue I am trying to raise in this context. This isn’t a question of how much the society should invest in educating the young; this is a question of whether entrepreneurs should be putting the economy at risk, by manufacturing bad debt and otherwise extracting income (“extracting” — meaning deriving income from transactions, which do not involve an exchange of value for value). The financial problem is that the system credit and payments is being put at risk, by permitting the manufacture of “bad debt” — debt certain to go toxic.

In the case of the Euro, the failure to regulate the creation of bad debt has been compounded by an institutional structure, which recreates the worst features of the gold standard, but that’s another story.

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