Clearing away all the deadweight sitting on the economy is perhaps the way to renewed American prosperity…
Yesterday we likened the economy to an overswollen tick, obese with blood.
Rather than blood, the economy is obese with debt.
Like our ludicrously engorged arachnid, the economy cannot much expand. It is impossibly loaded down… and groans under the burden, horribly swaybacked.
The economy will continue to wallow — unless it can shake off the weight.
But how can it?
Today we blow the dust off an ancient solution… and polish it up for the 21st century.
It may flabbergast and stagger you. You may laugh it out of court.
But it may offer the only way out. What is it?
The answer momentarily. We first check on another preposterously inflated behemoth — the stock market.
The bears won the day on majority decision…
The Dow Jones lost 28 points on the day. The S&P slipped a single point. The Nasdaq, meantime, scratched out a four-point gain today.
In all, a quiet an uneventful December day.
But how can the economy unload the gargantuan debt load that saddles it, hagrides it and torments it?
We must first come to terms with the facts…
Not Much Bang for the Buck
The United States government has since borrowed some $13 trillion since the financial crisis.
These borrowings have hoisted the United States national debt above $23 trillion.
Yet the American economy expanded only $5.1 trillion these past 10 years.
That is, while GDP has expanded less than 40%… the national debt has increased over 120%.
Parallel the past decade to the locust years of the Great Depression…
Real GDP 1929–1940 expanded at a cumulative 19.89% rate.
But for the past 11 years, cumulative GDP expanded 18.85%.
That is, the economy of the Great Depression — cumulatively — outperformed today’s.
Average real annual economic growth since 2009 runs to 2.23%. But the larger trend since 1980 is 3.22%.
The Cost of Lossed Growth
One percentage point may seem a trifle. And one year to the next it is.
But Jim Rickards calculates the United States would be $4 trillion richer today — had the 3.22% trend held this decade.
Run it out 30, 50, 60 years… and Jim concludes the nation would be twice as rich over a lifetime.
Here you have a grim lesson in the meaning of negative compounding interest.
Meantime, the Congressional Budget Office (CBO) projects economic growth to limp along at an average 1.9% per annum 10 years out.
That 1.9% stands against the 3.22% rate common until the great gale of 2008 blew on through.
More debt… less growth.
And so the Keynesian “multiplier” has taken up division.
A “Scoundrel Economics”
Here is the deeper lesson:
Debt-based consumption steals from the future to gratify the present. It brings tomorrow’s consumption forward to today — and leaves the future empty.
We have borrowed from the future so heavily and so long… we are writing checks against a failing bank.
It is a juvenile economics, a wastrel economics, a deadbeat economics — a scoundrel economics.
“The wicked borrows, and cannot pay back”… as Psalm 37:21 informs us.
Meantime, federal debt presently rises three times the rate of revenue coming in. And trillion-dollar deficits gape to the farthest horizon.
CBO projects annual deficits 10 years out will average $1.2 trillion.
Allow for the inevitable smash-up recession. Deficits could double… or possibly triple.
As is, debt service alone could rise to $915 billion by 2028 — nearly 25% of the entire budget.
For the long-term sufferings we turn to the Brookings Institute:
Sustained federal deficits and rising federal debt, used to finance consumption or transfer payments, will crowd out future investment; reduce prospects for economic growth; make it more difficult to conduct routine policy, address major new priorities or deal with the next recession or emergencies; and impose substantial burdens on future generations.
$210 Trillion in Debt?
And we have failed to mention “unfunded liabilities.”
Future Social Security, Medicare and Medicaid obligations are not fully tallied in official number crunching.
Work them in… and America’s true debt may rise to an obscene $210 trillion.
“The pen shrinks to write, the heart sickens to conceive” the enormity of the coming migraine.
Such obscene debt obligation cannot possibly be met. And debts that cannot be paid… will not be paid.
We cannot “grow” our way out of it.
Meantime, America labors under record student loan debt, credit card debt, auto debt, mortgage debt, corporate and state and local government debt.
Again we ask: Is there a way out? Can the economy unload its impossible cargo of debt?
One way out — or partial way out — is hyperinflation on the scale of a Venezuela.
Inflation lightens debt’s burdens. But a hyperinflation hauls them away altogether.
But hyperinflation is a very rough medicine — worse than the ailment it cures. Besides, the Federal Reserve cannot even wring a sustained 2% (official) inflation from the economy.
How could it bumble into a hyperinflation?
Furthermore, no major Western industrial power has endured hyperinflation in over 50 years.
The United States will not likely be the first.
Is there another way out?
In theory — in theory — there is. But we must furl back the scrolls of time… to the sunrise of civilization.
The 5,000-year Old Solution to America’s Debt?
Here is the answer:
A debt jubilee.
That is, the mass forgiveness of debt.
Heave the ledger book into the fire. Run a blue pen across the red ink. Wipe the tablet entirely (or mostly) clean.
The practice began some 5,000 years distant in ancient Sumer and Babylon… where a new king would delete the people’s debts.
Was it because the new king was a swell fellow? Or because he was a tribune of the proletariat, an ancient Karl Marx?
No. He cleared the books to preserve his hide. He was alert — keenly — to social stability.
An impossibly indebted class was a disgruntled class. And a disgruntled class is a dangerous class.
Economist Michael Hudson is the author of …And Forgive Them Their Debts. From whom:
The idea was to restore the economy to the stability that existed before widespread debts ran up during the preceding ruler’s reign. What was “restored” was an idealized “original” or “normal” state in which nobody owed debts to the palace…
The idea of debt amnesties was to prevent debt from tearing society apart — to prevent the kind of crisis that the United States has been in since 2008, when President Obama didn’t cancel the junk-bond debts, or the debts that tore the Greek economy apart — when the IMF and Europe imposed them on Greece instead of letting it default on debts owed to French and German bondholders.
Recognizing that a backlog of debts had accrued that could not be paid out of current production, rulers gave priority to preserving an economy in which citizens could provide for their basic needs on their own land while paying taxes, performing their… labor duties and serving in the army…
Even in the normal course of economic life, social balance required writing off debt arrears to the palace, temples or other creditors so as to maintain a free population of families able to provide for their own basic needs… Societies that canceled the debts enjoyed stable growth for thousands of years.
The debt jubilee was smuggled into Judaic law… and the Bible. Every 50th year would be a jubilee year, says Leviticus:
You shall make the 50th year holy, and proclaim liberty throughout the land to all its inhabitants. It shall be a jubilee to you; and each of you shall return to his own property, and each of you shall return to his family.
Now come home…
Might these United States witness a debt jubilee? After all, the average American sags under $38,000 of debt… or some such.
Already cries arise for a debt jubilee of sorts. Democratic presidential candidates — for example — have announced intentions to forgive student debt.
Four Prerequisites for an American Debt Jubilee
Porter Stansberry of Agora’s Stansberry Research has canvassed the history. He identifies four requisite elements of an American jubilee:
The wealth gap must be getting dramatically bigger.
There must be cultural threats from those with different values or from outsiders (in other words, minority populations and immigrants).
The government must be ineffective at providing solutions.
And there must be growing anger toward the “elites.”
We append no comment.
Clearing away all the deadweight sitting on the economy is perhaps the way to renewed American prosperity.
The economy can then proceed on solid foundations of capital, unencumbered and unbridled by debt… like a stallion suddenly freed from the barn.
Of course, any such jubilee would bring consequences.
It would peel back the lid on a can of wriggling worms…
What about all the creditors a jubilee would clean out? Not all are villain Wall Street banks. Must they all go scratching?
And what of moral hazard?
Who would not load up on debt? After all, someone will one day lift it off your shoulders.
And who would loan anyone money at all — knowing one day he may be fleeced, dragooned and clubbed — and holding an empty bag.
That is, a debt jubilee would tilt the delicate balance between creditor and debtor.
In conclusion, we expect no jubilee of the sort here envisioned.
But we do expect a jubilee… of a sort. Only this jubilee will bring little jubilance.
It will arrive with the next recession. It will wipe out trillions of creaking corporate and personal debt.
It will also sink the economy. And only the avenging gods will rejoice…
Managing editor, The Daily Reckoning