Friday, June 15, 2012

Debt Jubilee? A Very Bad Idea

Listening to TruNews with Rick Wiles tonight featured an interview with Australian economics Professor Steve Keen. Professor Keen had a few good ideas along with some very bad ones.

1. Good:
Keen recognized that a monetary system where gold is used as money is a bad idea because economic growth is tied to the availibility of the physical metal. Keen says there has to be "flexibility" in the monetary system to create money to meet the demand of the next technical revolution.

1. Bad:
Keen says he likes the flexibility our current credit-based monetary system where banks create money via double ledger bookkeeping and fractional reserve lending although he also acknowledges that our current debt-based system is unsustainable.

1. Comment:
The Safety Society system creates money on demand for real assets as citizens are credit worthy. In SSS, the Federal Government creates all money on demand as local citizens become credit-worthy and have a real asset to purchase and demonstrate an ability TI repay.

2. Good:
Keen says that the US should have used robotics to expand our work force to meet the challenges of an expanding dependent-class and a diminishing worker-class in the US with the retirement of the Baby Boomer Generation.

2. Comment:
I have always been impressed with factories like textile mills and the Lego Factory that run all day and night and are fully automated from start to finish. Thus production of goods requires no or very few unskilled laborers.

3. Good:
Keen says that our current banking system generates profits off of debt. Consequently, banks set up to get people to accept as much debt as possible regardless of their ability to pay the loan back.

3. Comment:
Local banks collect loan origination fees and then sell the loans to Fannie Mae. After the local bank has collected its 3% and sold the loan, they don't care what happens to the loan.

4. Good:
The problem is that banks have been lending for stocks and derivatives that have no intrinsic value. Hedge Funds have been making money off of the expanding debt bubble. Keens rightly questions the practice of borrowing based on the hope of making money on the inflated/appreciating price of a commodity.

4. Comment:
The Safety Society System only lends for real assets and never lends for the purchase of stock or other securities. Appreciating assets drive inflation. In SSS there is no inflation. Money Supply = Economic Output.

Keens made a brief point about if 2 people wanted the same home, who would win. I didn't understand Keens mechanism. However, according to SSS, the bank would only approve a loan based on the value of the asset. The winner of the sale would be the person who has the largest amount of private equity to bring to the table.

5. Bad:
Keens thinks QE3 should be a Debt Jubilee or public sector bailout where the US Government creates $100,000 for each household to first pay off or reduce their debts.

5. Comment:
While QE1 and 2 were not as inflationary as they could have been because money stayed with the banks and didn't trickle down. What happened is the Government expanded the money supply that they had contracted by implementing the Basil 2 Accords which tightened fractional reserve requirements.

I'm not sure how an Austrian Economists could call for a Debt Jubilee. I thought that according to Austrian "laissez-faire" principles, private contracts should be free from government intervention. Therefore, of the market is to work, we should let winners win and losers lose.

According to several economists I understood that the government stimulus checks were very inflationary. Consequently, I expect a debt Jubilee to be even more so. A very dangerous idea.

In the Safety Society System, the market allows winers to win and losers to lose. Additionally, there is the right level of local control over money creation. However, unlike the Monetarist system, money creation is controlled on a local level and not the Federal level. If a person is credit worthy, and has a real asset to buy, that person can get a loan and make the purchase and repay the loan with only simple interest.

SSS Banks would not be interested in loading up their customers with as much debt as possible because although they make money on fees, SSS are non-profit. Homes and land are purchased to retain there value and not appreciate as as the currency depreciates.

1 comment:

Anonymous said...

Thanks for posting that comment about the Keen Jubilee, David.

I have picked it up for a thread on my GEI website:

BTW, I am also based in HK.

If you want to join GEI, see: