Jubilee: Is it time to press ‘reset’ on the world economic system?

Terrible news piles up in the financial world.  The famous JP Morgan inexplicable $2B derivatives may be as much as $9B, making everyone wonder who is in charge.  The obscurely infamous shifts in the London Interbank Overnight Rate (LIBOR) that signaled the start of the major financial collapse included a lot of manipulation and other illegal activity that’s only now coming to light.  And China is experiencing a slowdown in manufacturing that is only deepening.

It all seems unrelated, and yet it all ties together in this thang called “Globalism” – what happens in one part of the world affects everyone.  Yet there are few agreements and organizations that really have this tied together in a way that seems appropriate, at least making sure that corruption and disease in one place does not bring down the whole world.  And this points to what will have to happen to get us all to start over again – something I have taken to calling “Jubilee”.

The basic Jubilee comes from the ancient Hebrews.  Every 50 years there was a time of pushing the reset button on just about everything.  Slaves were freed, prisoners were pardoned, debts were forgiven – even the fields were let fallow to renew the earth itself.  The timing of it seems to suggest an early adaptation of the Kondratieff Cycle, back when it was tied to solar cycles as much as anything.

What would a Jubilee look like today?  It would start with a few assumptions that seem to be irrefutably true:

The global economy is not going to recover until there is debt forgiveness in the developed world, whether that happens in an orderly way or in a panic.

There is likely to be another round of Quantitative Easing, as there is a clear shortage of cash at least in the US and Europe.  Europe, in particular, will eventually have to print Euros if it wants to have growth.

The previous rounds of Quantitative Easing, which bought mortgage backed securities and US T-Bills, did little good – and actually made things worse to the extent they injected more money into a system constantly throwing the dice harder and harder.

There is one more thing that we know, a simple observation.  The global economic system was last pieced together at a conference in July, 1944 in the New Hampshire resort town of Bretton Woods.  One month after D-Day, as troops were fighting to win the war, economists planned how we would win the peace.  We have operated under variations on the system that they set out since then, more or less, without a complete overhaul.

It is time for a new Bretton Woods, which is to say a new economic system based on not the US Dollar as a reserve currency but on truly international standards.  It is time that we adopt uniform principles across the world, including systems of insurance that allow quick take-over of banks so that nothing is “too big to fail”.  Walls need to be placed between commercial and investment banking.  And financial markets need to have universal limits placed on derivatives so that they do not become detached from the markets they supposedly serve.

But that’s still not Jubilee.  The centerpiece of such a conference would be a one-time Quantitative Easing, the printing of more money, to buy out as much debt as possible.  Imagine for a moment that the US Fed prints $1T to buy up debt while the European Central Bank (ECB) prints upwards of €1T ($1.2T) and Japan and the UK each print about $500B equivalent (their economies are about half the size).  That gives us on the order of $3.2T of new money in the system to be used specifically for debt cancellation in a Jubilee.

Now, let’s hold this as a kind of auction.  Over a short period of time, say a month, any bank or other institution with debt can register that debt to be paid down from the pool proportionally.  For example, if $1.6T is offered for sale to the Fed, that would mean that it all pays out at 60 cents on the Dollar (about what I expect).  That means that the world would see about $5T in total debt forgiveness and fresh start from the coordinated effort.

This is assuming that other nations, trying to avoid a currency war, don’t want to step in be a part of the Jubilee.  There may be much more total forgiveness all around the world.

There are problems with this, not least of which is the “Moral Hazard” of constantly believing that governments will bail everyone out.  That’s why a complete systemic overhaul has to be part of the mix – free bailout has to be billed as a one-time shot before we start a new system.

The details are not as important as the need for global action on both the nature of financial markets at the forgiveness of debt.  A Jubilee is a time to start over.  Can you think of anything more desirable as you read the constant spray of bad news in finance?

This post was written by Erik Hare and originally published on Barataria. Follow Erik on Twitter: @wabbitoid.

If you blog and would like your work considered for Minnesota Blog Cabin, please submit our registration form.

Comments (1)

  1. Submitted by Kent Fralish on 07/17/2012 - 06:20 am.

    Nature and finance don’t mix.
    We can’t possibly continue with what we have now.
    Large tax increases as well as large entitlement cuts are the only remedy to our situation.
    Listen to the advice of the Director of the CBO.
    No bridges to nowhere.

Leave a Reply