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How Debt Forgiveness Can Avoid A Recession 

By Richard Vague. Originally published at ValueWalk.

Recession-Proof

In many of the most prominent ancient civilizations, including ancient Babylon, Egypt, Sparta, China, and others, excessive household debt was a huge and recurring problem. Debt, which was both a necessary and pervasive element of these economies, did many of the same things then that it does now: it facilitated payment for labor, allowed for the acquisition of supplies, and bridged the time between planting and harvest — the sowing and then the reaping of profit.

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Impact Of A Recession

When an economy contracted or experienced a recession, many families who had been relying on debt to survive found themselves in dire financial circumstances. This cohort was unable to borrow more to purchase the basic items they needed survive. When viewed in the aggregate, the inability to purchase basic household goods exacerbated an economy’s contraction on a macro scale, leading to recession.

In these agricultural societies families would find themselves with little option but to amass debt to survive, but this debt could cause them to lose their land, their means of sustenance, and even their liberty. In the tragic form of debt bond servitude, lenders took possession of family members as “repayment” for crippling debts.

Interest rates were high and lenders quickly learned the power of compounding. These ancient economies would sometimes reach the brink of collapse under the staggering weight of private indebtedness. The solution was a debt amnesty, or what the ancient Israelites called “jubilee”. And today we could implement policies for our own society that are similar in effect to an ancient jubilee.

We use the term “debt jubilee” to capture an ensemble of related ideas and terms that deal with broad debt restructuring — including forgiveness, cancellation, modification, or amnesty.

Today, we find ourselves with a similar private sector debt accumulation problem, and the idea of strategic debt jubilee is arguably more urgent than ever. We were drowning in debt before the COVID-19 crisis, and now we’re deluged by it. Household debt now totals $17.5 trillion, up 320 percent from 1950 in relation to income. These debt levels are stifling economic growth and the high burden of this private sector debt has also been an underlying issue in several of our recent, and worst, social and economic problems. Runaway household mortgage debt growth brought the 2008 global crisis.

Over Indebtedness

Recessions are simply those periods when the struggles of businesses and households cause them to reduce spending so much that overall GDP declines. Again and again, we see that a key contributor to these struggles in over indebtedness. As the debt burden rises, the spending of businesses and individuals is diverted into paying interest and repaying principle, causing economic growth to slow.

Student debt is a prime example of this. The burden of this debt causes many to put off buying homes, having kids, and those other events economists refer to as “household formation.”

Thinking creatively, we could introduce a program to let those with student loans get debt relief in exchange for volunteer community service. We could introduce regulations that make it easier for banks to provide mortgage loan relief for loans that are underwater or in arrears due to the COVID-19 pandemic. We could introduce healthcare debt relief programs for surprise medical bills or unexpected but critical healthcare needs. We could streamline household bankruptcy laws.

Strategic debt forgiveness could free up much needed funds for new appliances, capital for new businesses, gas for the weekly drive to work, or money for a child’s college expenses. More participation in the economy related to debt forgiveness would boost the GDP and keep us from reaching crisis levels, such as a recession. Debt relief would bring economic renewal — households would be financially stronger and governments, businesses, and financial institutions would be better off because those households would be stronger. Since debt relief would bring economic renewal for households, it would benefit us all.

A debt jubilee is not a quixotic, impractical dream of the soft hearted, but a key component of a well-functioning economy that should be integrated into the economy. It can improve the functioning of that economy — like the design features of an engine that prevent it from overheating and keep it running smoothly and optimally.

Properly designed, a jubilee would bring what has never been achieved in contemporary economic history — sustained growth coupled with a mitigation of the unchecked rise in the debt-to-GDP ratio and prevention of the crises that follow.


About the Author

Richard Vague is Secretary of Banking and Securities for the Commonwealth of Pennsylvania. Prior to his 2020 appointment, he was managing partner of Gabriel Investments. Previously, he was co-founder, chairman and CEO of Energy Plus, an electricity and natural gas company. Vague was also co-founder and CEO of two banks and founder of the economic data service Tychos. He currently chairs The Governor’s Woods Foundation, a nonprofit philanthropic organization. His new book is The Case for a Debt Jubilee (Polity Press, Nov. 22, 2021). Learn more at richardvague.com.

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