Destroying the Debt Bomb, or How I Learned to Stop Worrying and Love Deflation

If we can grasp the opportunity the economic shutdown presents to reform our monetary system, perhaps some good may come from this otherwise…

By Bryce McBride of Pembroke Observer

At the end of my previous column (Understanding the affordability crisis, February 5th, 2020) I promised to explore solutions in a subsequent article. Since then, the spread of the COVID-19 virus and consequent economic and societal shutdowns have transformed our lives. However, we should remember that the Chinese word for “crisis” is composed of the characters for ‘danger’ and ‘opportunity.’ If we can grasp the opportunity the economic shutdown presents to reform our monetary system, perhaps some good may come from this otherwise unfortunate time.

Predictably, governments are offering the same solutions to this crisis as were offered in the wake of the 2008 financial crisis – more money printing and more bailouts to re-inflate stock, bond and other asset prices. We should understand that such efforts will be, at best, ineffective, and at worst, disastrous, for three reasons.

First, it must be made clear that the business closures and unemployment we are currently suffering have not been caused by the coronavirus alone. Since last September the big banks have needed to borrow hundreds of billions of dollars each month from the U.S. Federal Reserve System to sustain overnight lending amongst themselves. Clearly, the financial system (and both the liquidity and the trust it needs to function) was in trouble long before people began falling ill in Wuhan. 

Having permitted our economic system to become dominated by a banking sector which has wildly expanded credit for decades, it should come as no surprise that over-indebted businesses and individuals face ruin in the face of the COVID-19 shutdown. Prescribing more of the money printing (a.k.a. debt issuance) which has already made our economic system so fragile can only make it even less resilient and more susceptible to collapse going forward.

Second, this crisis is very different from the crisis in 2008 in that it is not financial in origin but rather centred in the real goods and services-producing economy. In 2008, bad debts could temporarily be made to appear good with the provision of additional credit, in the same way as extending a bar tab can sustain the illusion that the barfly will eventually pay. However, this time around businesses are closed and people are not going to work. Actual economic activity, the transformation of productive resources into goods and services, is on hold. Printing more money while fewer goods are being produced can only have one result: rampant price inflation.

Finally, the money printing and bailouts of 2008 were only effective to the extent that they were seen as a temporary solution that could be reversed once conditions improved. However, 12 years on it should be clear to everyone that, as the commentator Max Keiser so memorably put it, “You can’t taper a Ponzi scheme.” Additional monetary easing is therefore much more likely to cause people to lose confidence in the ability of their government-issued money to retain its purchasing power. When this confidence is lost, hyperinflation is sure to follow.

Of course, governments and the crony capitalists running the banks and large corporations are all in favour of ‘more of the same’ because bailouts and money-printing serve to enhance their power. The endgame of monetary inflation as currently practiced is easy to see.  Whoever has the power to create money from nothing will eventually own everything of value there is to buy. Eventually, every productive asset will be owned by the government, the banks and the largest corporations. Workers and small businesspeople, meanwhile, will be reduced to serfdom. Coming face-to-face with this stark realization should force us to look seriously at embracing deflation as a much more desirable policy objective.

To successfully deflate the economy with the least unnecessary pain, we should first take advantage of the current shutdown to declare a bank holiday during which independent auditors examine bank records. Given the current collapse in household income, it should be apparent that many debts will never be repaid. Consequently, a great deal of personal and small business debt should be written down or forgiven in what the economist Dr. Michael Hudson has termed a jubilee. It is perhaps worth noting, in this post-Easter period, that it was Jesus’ desire to restore the ancient Near Eastern practice of periodic debt jubilees (as shown by the Aramaic version of The Lord’s Prayer, which states “…and forgive us our debts, as we forgive our debtors…”) which sealed his fate with the moneyed elite of his time, the Pharisees.

Of course, such a jubilee would render the banks themselves insolvent. The second reform would therefore be to liquidate them and recast them as regulated utilities, chartered to serve the public interest. Rather than being empowered to create money from nothing by issuing loans for mortgages (which, as was discussed in my previous article, is at the root of the affordability crisis) and other forms of speculation (such as engaged in by venture capital firms, which often enrich themselves by stripping everything of value from their takeover targets before leaving the hollow husk of a once-profitable company to die), they should instead be restricted to the crucial business of directing people’s limited real savings towards productive investment. 

Finally, the Bank of Canada should be made to follow its own charter, and return to its pre-1974 practice of creating money by lending it to governments (virtually interest-free) to finance infrastructure and other productivity-enhancing improvements. While the constitutional lawsuit brought forward by the Committee for Monetary and Economic Reform (COMER) to press this matter was dismissed by the Supreme Court of Canada in 2017 as a political matter, restoring the power to create money and credit to a publicly-owned central bank, and removing it from the private banks from which Canadian governments have been compelled to borrow since the mid-1970s (and to which Canadian governments have paid over a trillion dollars in risk-free interest) would do a great deal to enhance Canada’s economic strength and sovereignty.

The choice we face is clear. At best, efforts to reflate the asset and debt bubbles that have been created since the 1980s will make Canada less affordable, more unequal, less competitive and less free. At worst, they will lead to hyperinflation and economic and social collapse. On the other hand, a purposeful debt deflation will achieve precisely the opposite. Freed from the power of the banks and the weight of their debts, entrepreneurs and workers will be able to build a productive, vibrant economy that holds out the promise of a better tomorrow. With the economy on hold at the moment because of the coronavirus, we need to grasp the golden opportunity the crisis presents to us to create this better future now.

Bryce McBride is a writer, editor, publisher and educator, particularly in the field of economics.