The history of debt jubilees is one of grand gestures. The Old Testament called for a trumpet to be sounded on the tenth day of the seventh month every 50 years — and for debts then to be cancelled and all servitude revoked.
Various ancient eastern kings are recorded as having offered jubilees on making it to the throne (possibly raising sacred torches to the event rather than trumpets). In 1792 BC King Hammurabi of Babylon cancelled all debt to the government and its officials, for example. Imagine the parties.
More recently, after the second world war, in 1953, much of Germany’s external debt was cancelled. It is this kind of hinge-of-history moment that people seem to be looking for when they talk about debt jubilees today.
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Back in the 2000s, Morgan Stanley’s chief economist made the case for a “great haircut”. Others have spoken of a “great reset”, while David Graeber, author of an enthusiastically received history of debt, has called for a “biblical-style jubilee” to deal with both consumer and international sovereign debt.
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It is obvious to most that both household and public debt levels are a problem, especially the latter in the Covid-19 era. Yet the flaws in the idea of wholesale cancellation make it more academic grandstanding than a real possibility. If you cancel your country’s sovereign debt, even if the government only owes it to the central bank, you risk debauching your currency.
Doing it for households invokes another kind of problem: what are those with no debt to think if profligate others are suddenly lifted to the same level of security that they won only by scrimping? It’s politically unacceptable.
Covid relief measures amount to debt jubiless
If only jubilee advocates thought a little smaller, they might find an easier path ahead. With this in mind, look to some of the pandemic relief policies currently on the go around the world.
In the US, there is a relentless programme of ideas to forget about student loans. These may not vanish in their entirety any time soon, but the rise in acceptable loopholes and debt suspensions will amount to much the same thing, eventually.
Look, too, at the cash being doled out in the US. There are the one-off payments of $1,200 per adult and $500 per child. There is also the sharp rise in unemployment payments of a pre-Covid-19 payment plus the pandemic payment of $600 per week. If, a few months ago, you worked in food service, one of the most affected sectors, you now receive more than 150% of your previous income, notes Intertemporal Economics. No wonder demand for credit cards has fallen sharply and consumers have been cutting their credit card debt at an annualised 31% rate.
The US savings rate also hit 13% in March, a 39-year high. Not a formal jubilee but, for those who go back to work after the crisis, definitely an effective one. The UK hasn’t seen quite the same level of generosity. Nonetheless, a large part of the population has been at home with few spending opportunities and, thanks to the furlough scheme, which pays 80% of salaries, they have not suffered significantly reduced income. They’ve also been offered six months’ worth of mortgage holiday.
There is no shortage of experts pointing out that this is a very bad thing. But is it? Definitely not, if you can use the lockdown to pay down more expensive debt. And still not, even if you don’t.
Sure, the interest on the loan accrues during the payment holiday, so you end up being in debt for longer and paying back more in nominal terms. But is a payment in 15 years the same thing as a payment now? Not if your income is rising and not if your mortgage rate is fixed and inflation takes off.
Again, this is not a formal jubilee but it has something of the same effect. In the UK, consumers paid down £3.8bn of debt in March alone.
Dividend cuts may be a good thing
Corporate debt levels are also worth thinking about. On the face of it, the last thing most companies need is more debt. But, regardless of the health of your balance sheet, if you can borrow 25% of your turnover at 2.5% with a UK state-backed Bounce Back Loan and, if you have other more expensive debts, why not make the switch?
You may also wonder about the cancellation of dividends. Some will badly need to do it. Others will be pleased that, after too many years of bloated borrowing, they can use the cover of Covid-19 to cancel them with reputational immunity and slash their debts instead.
The same goes for the growing number of equity issues. A year ago, the market might have looked askance at debt-ridden firms suddenly trying to flog more shares. Today it looks sensible: think of this as shareholder-goodwill-financed debt forgiveness.
There may be a real jubilee ahead for all sorts of companies, where state loans are cancelled or converted into equity. But this kind of mini jubilee counts towards stronger balance sheets too.
Much of this has consequences for government finances, as jubilees effectively transfer debt from the private sector to the public. But if central bank-financed Covid-19 stimulus eventually produces inflation, governments will have effectively created their own stealth debt jubilee — because nothing erodes the real value of debt better than inflation. Who needs trumpets?
• This article was first published in the Financial Times
