Debtwatch Manifesto

* Article: The Debtwatch Manifesto. By Steve Keen.

URL = https://www.debtdeflation.com/blogs/manifesto/ pdf

Excerpts

Resulting from reading highlights by Michel Bauwens:

"The seeds of an alter­na­tive, real­is­tic the­o­ry were devel­oped by Hyman Min­sky in the Finan­cial Insta­bil­i­ty Hypoth­e­sis (FIH), which itself reflect­ed the wis­dom of the great non-neo­clas­si­cal econ­o­mists Marx, Veblen, Schum­peter, Fish­er and Keynes, and the his­tor­i­cal record of cap­i­tal­ism that had includ­ed peri­od­ic Depres­sions (as well as the dra­mat­ic tech­no­log­i­cal trans­for­ma­tion of pro­duc­tion). As Min­sky argued, an eco­nom­ic the­o­ry could not claim to rep­re­sent cap­i­tal­ism unless it could explain those peri­od­ic crises:

- it is nec­es­sary to have an eco­nom­ic the­o­ry which makes great depres­sions one of the pos­si­ble states in which our type of cap­i­tal­ist econ­o­my can find itself. (Min­sky 1982, p. 5)

Using insights from com­plex­i­ty the­o­ry, I devel­oped mod­els on the FIH that cap­ture its fun­da­men­tal propo­si­tion, that a mar­ket econ­o­my can expe­ri­ence a debt-defla­tion (Fish­er 1933) after a series of debt-financed cycles (Keen 1995; Keen 1996; Keen 1997; Keen 2000). These mod­els gen­er­at­ed a peri­od of declin­ing volatil­i­ty in employ­ment and wages with a ris­ing ration of debt to GDP, fol­lowed by a peri­od of ris­ing volatil­i­ty before an even­tu­al debt-induced break­down.

The cri­sis itself emphat­i­cal­ly makes the point that a new the­o­ry of eco­nom­ics is need­ed, in which cap­i­tal­ism is seen as a dynam­ic, mon­e­tary sys­tem with both cre­ative and destruc­tive insta­bil­i­ties, where those destruc­tive insta­bil­i­ties emanate over­whelm­ing­ly from the finan­cial sec­tor.

I have formed the Cen­ter for Eco­nom­ic Sta­bil­i­ty Incor­po­rat­ed. Our objec­tive is to devel­op CfE­SI into an empir­i­cal­ly-ori­ent­ed think-tank on eco­nom­ics that will devel­op real­is­tic analy­sis of cap­i­tal­ism, and pro­mote poli­cies based upon that analy­sis.

...

Finance per­forms gen­uine, essen­tial ser­vices in a cap­i­tal­ist econ­o­my when it lim­its itself to (a) pro­vid­ing work­ing cap­i­tal to non-finan­cial cor­po­ra­tions; (b) fund­ing invest­ment and entre­pre­neur­ial activ­i­ty, whether direct­ly or indi­rect­ly; © fund­ing hous­ing pur­chase for strict­ly res­i­den­tial pur­pos­es, whether to own­er-occu­piers for pur­chase or to investors for the pro­vi­sion of rental prop­er­ties; and (d) pro­vid­ing finance to house­holds for large expen­di­tures such as auto­mo­biles, home ren­o­va­tions, etc.

It is a destruc­tive force in cap­i­tal­ism when it pro­motes lever­aged spec­u­la­tion on asset or com­mod­i­ty prices, and funds activ­i­ties (like lev­ered buy­outs) that dri­ve debt lev­els up.

Return­ing cap­i­tal­ism to a finan­cial­ly robust state must involve a dra­mat­ic fall in the lev­el of pri­vate debt—and the size of the finan­cial sec­tor— as well as poli­cies that return the finan­cial sec­tor to a ser­vice role to the real econ­o­my.

The size of the finan­cial sec­tor is direct­ly relat­ed to the lev­el of pri­vate debt, which in Amer­i­ca peaked at 303% of GDP in ear­ly 2009 (see Fig­ure 15). Using his­to­ry as our guide, Amer­i­ca will only return to being a finan­cial­ly robust soci­ety when this ratio falls back to below 100% of GDP.

A Modern Jubilee

Steve Keen:

"Michael Hud­son’s sim­ple phrase that “Debts that can’t be repaid, won’t be repaid” sums up the eco­nom­ic dilem­ma of our times.

The only real ques­tion we face is not whether we should or should not repay this debt, but how are we going to go about not repay­ing it?

We should, there­fore, find a means to reduce the pri­vate debt bur­den now, and reduce the length of time we spend in this dam­ag­ing process of delever­ag­ing. Pre-cap­i­tal­ist soci­eties insti­tut­ed the prac­tice of the Jubilee to escape from sim­i­lar traps (Hud­son 2000; Hud­son 2004), and debt defaults have been a reg­u­lar expe­ri­ence in the his­to­ry of cap­i­tal­ism too (Rein­hart and Rogoff 2008).

But a Jubilee in our mod­ern cap­i­tal­ist sys­tem faces two dilem­mas. First­ly, in any cap­i­tal­ist sys­tem, a debt Jubilee would paral­yse the finan­cial sec­tor by destroy­ing bank assets. Sec­ond­ly, in our era of secu­ri­tized finance, the own­er­ship of debt per­me­ates soci­ety in the form of asset based secu­ri­ties (ABS) that gen­er­ate income streams on which a mul­ti­tude of non-bank recip­i­ents depend, from indi­vid­u­als to coun­cils to pen­sion funds.

Debt abo­li­tion would inevitably also destroy both the assets and the income streams of own­ers of ABSs.

We there­fore need a way to short-cir­cuit the process of debt-delever­ag­ing, while not destroy­ing the assets of both the bank­ing sec­tor and the mem­bers of the non-bank­ing pub­lic who pur­chased ABSs. One fea­si­ble means to do this is a “Mod­ern Jubilee”, which could also be described as “Quan­ti­ta­tive Eas­ing for the Pub­lic”.

A Mod­ern Jubilee would cre­ate fiat mon­ey in the same way as with Quan­ti­ta­tive Eas­ing, but would direct that mon­ey to the bank accounts of the pub­lic with the require­ment that the first use of this mon­ey would be to reduce debt. Debtors whose debt exceed­ed their injec­tion would have their debt reduced but not elim­i­nat­ed, while at the oth­er extreme, recip­i­ents with no debt would receive a cash injec­tion into their deposit accounts.

The broad effects of a Mod­ern Jubilee would be:

1. Debtors would have their debt lev­el reduced;
2. Non-debtors would receive a cash injec­tion;
3. The val­ue of bank assets would remain con­stant, but the dis­tri­b­u­tion would alter with debt-instru­ments declin­ing in val­ue and cash assets ris­ing;
4. Bank income would fall, since debt is an income-earn­ing asset for a bank while cash reserves are not;
5. The income flows to asset-backed secu­ri­ties would fall, since a sub­stan­tial pro­por­tion of the debt back­ing such secu­ri­ties would be paid off; and
6. Mem­bers of the pub­lic (both indi­vid­u­als and cor­po­ra­tions) who owned asset-backed-secu­ri­ties would have increased cash hold­ings out of which they could spend in lieu of the income stream from ABS’s on which they were pre­vi­ous­ly depen­dent.