Debtonomics: Jubilee!


Figure 1: Petroleum prices rebounded $15 per barrel over fears of more warfare in the Middle East (Chart by TFC Charts, click on for big). Spare bags of money are presumably set aside for periods when petroleum is in short supply. The refiners — which buy all crude petroleum with a mind to sell it in other forms to (broke) customers for a profit — are expected to reach for this cash whatever petroleum is scarce and pay whatever price is necessary to get the crude they need. Enter the bags of money: public be damned!

Reality is more complex: any competition for supply requires more credit which pushes prices higher. Availability of credit and willing borrowers (not a given) is the variable. Those with the credit can meet the price, those without don’t. At some point, both fuel and credit become unaffordable: this in turn pulls the plug on prices. This dynamic is the cause of the price movement seen on Figure 1.

What is underway around the world — particularly in Europe — is unaffordable credit and an accompanying decrease in the rate of credit creation. This trend is not favorable for bullish crude oil speculators or producers which need high prices to meet (increasing) demand at exponentially increased cost.

Professor Steve Keen had the following over on his web site:


The Crisis in 1000 words—or less

URPE–The Union for Radical Political Economics–is holding a Summer School for the Occupy movement, and as part of that invited papers that explained the crisis in 1000 words or less (so that they can be printed on one double-sided sheet). Here’s my effort in somewhat less than 1,000 words (though with 2 figures). In the interests of URPE’s objective in this exercise, here’s the PDF of this blog post for general download.


Looking over the URPE’s site there is nothing to seen about 1,000 words or even 2,500 words which is par for the Undertow. Nevertheless, a synopsis of the general economic tenor with a brief set of useful approaches might be positive. Of course, the risk is being excluded from a union of radicals for being too radical.

Toil has produced the requisite 1000 words and time will tell whether it will appear @ URPE or not. If not I will post it here (I will post it here, regardless). Here are Professor Keen’s 1000 words:


Steve Keen (Debt Deflation)

Both the crisis and the apparent boom before it were caused by the change in private debt. Rising aggregate private debt adds to demand, and falling debt subtracts from it. This point is vehemently denied on conventional theoretical grounds by economists like Paul Krugman, but it is obvious in the empirical data. The crisis itself began in 2008, precisely when the growth of private debt plunged from its peak of almost 30% of GDP p.a. down to its depth of minus 20% in 2010. The recovery, such as it was, began when the rate of decline of debt slowed. Across recession, boom and bust between 1990 and 2012, the correlation between the annual change in private debt and the unemployment rate was -0.92.



The causation behind this correlation is that money is created “endogenously” when the banking sector creates loans, and this newly created money adds to aggregate demand—as argued by non-orthodox economists from Schumpeter through to Minsky. When this debt finances genuine investment, it is a necessary part of a growing capitalist economy, it grows but shows no trend relative to GDP, and leads to modest profits by the financial sector. But when it finances speculation on asset prices, it grows faster than GDP, leads obscene profits by the financial sector and generates Ponzi Schemes which are to sustainable economic growth as cancer is to biological growth.

When those Ponzi Schemes unravel, the rate of growth of debt collapses and the boost to demand from rising debt becomes a drag on demand as debt falls. In all other post-WWII downturns, growth resumed when debt began to rise relative to GDP once more. However the bubble we have just been through has pushed debt levels past anything in recorded history, triggering a deleveraging process that is the hallmark of a Depression.



The last Depression saw debt levels fall from 240% to 45% of GDP over a 13 year period, and the ensuing period of low debt led to the longest boom in America’s history. We commenced deleveraging from 303% of GDP. After 3 years it is still 10% higher than the peak reached during the Great Depression. On current trends it will take till 2027 to bring the level back to that which applied in the early 1970s, when America had already exited what Minsky described as the “robust financial society” that underpinned the Golden Age that ended in 1966.

While we delever, investment by American corporations will be timid, and economic growth will be faltering at best. The stimulus imparted by government deficits will attenuate the downturn—and the much larger scale of government spending now than in the 1930s explains why this far greater deleveraging process has not led to as severe a Depression—but deficits alone will not be enough. If America is to avoid two “lost decades”, the level of private debt has to be reduced by deliberate cancellation, as well as by the slow processes of deleveraging and bankruptcy.

In ancient times, this was done by a Jubilee, but the securitization of debt since the 1980s has complicated this enormously. Whereas only the moneylenders lost under an ancient Jubilee, debt cancellation today would bankrupt many pension funds, municipalities and the like who purchased securitized debt instruments from banks. I have therefore proposed that a ‘Modern Debt Jubilee’ should take the form of ‘Quantitative Easing for the Public’: monetary injections by the Federal Reserve not into the reserve accounts of banks, but into the bank accounts of the public—but on condition that its first function must be to pay debts down. This would reduce debt directly, but not advantage debtors over savers, and would reduce the profitability of the financial sector while not affecting its solvency.

Without a policy of this nature, America is destined to spend up to two decades learning the truth of Michael Hudson’s simple aphorism that “Debts that can’t be repaid, won’t be repaid”.


Start here:


… money is created “endogenously” when the banking sector creates loans, and this newly created money adds to aggregate demand—as argued by non-orthodox economists from Schumpeter through to Minsky. When this debt finances genuine investment …


Here are two assumptions: that industrialization is a permanent condition and that industrial enterprises are productive (genuine investment). Both assumptions are false: gravity is a permanent condition, industries are fads like petticoats, mullets and disco. Industrial businesses don’t pay their own way, if they could do so they would have done so already.

Rather, industries are born into debt and there they remain until they fail or are absorbed into larger industries and agglomerations of debt. What we consider ‘growth’ and ‘progress’ has been the expansion of world’s balance sheets over a period of centuries. It’s been around so long we’ve gotten accustomed to it.

Meanwhile, the increase in debt is described by Minsky and Keen to be a speculators’ project rather than the ongoing enabler of industrialization. Minsky: debt is taken on to produce goods and services first. The next stage is an expansion of speculative borrowing to produce money returns on marginally productive enterprises. At the end of the credit cycle, hedging speculators erect Ponzi schemes that rely on the expansion of debt to provide returns. At some point the absence of real returns ends the credit cycle and deleveraging takes hold.

In debtonomics: the first rounds of debt bring firms into being and provide cash flow to maintain them (debt taken on by the firm’s customers, the state or by way of foreign exchange). The next rounds of debt are taken on to refinance the first rounds and provide (large) profits for the entrepreneurs. Succeeding rounds of debt are taken on to finance the preceding rounds: at some point new debts finance existing debt and nothing more.

In both models, credit is endogenous, the product of private finance for its own purposes.

Here is when the cost of an expanding surplus — credit — is overtaken by the expanding costs of managing that surplus. The (Steve’s) First Law of Economics states the costs of managing any surplus increase along with the surplus until they exceed it. Even as credit is structured so that borrowers’ interest costs decline with the increased size of the loans, the associated costs of surplus emerge elsewhere. In our instance they take the form of pyramiding ‘dead money’ debts that are hopelessly unpayable!

Keen and Minsky imply the First Law without addressing it as such: this is because Ponzi financing, the last phase of Minskian credit expansion is a cost.



If America is to avoid two “lost decades”, the level of private debt has to be reduced by deliberate cancellation, as well as by the slow processes of deleveraging and bankruptcy.

In ancient times, this was done by a Jubilee, but the securitization of debt since the 1980s has complicated this enormously. Whereas only the moneylenders lost under an ancient Jubilee, debt cancellation today would bankrupt many pension funds, municipalities and the like who purchased securitized debt instruments from banks. I have therefore proposed that a “Modern Debt Jubilee” should take the form of “Quantitative Easing for the Public”: monetary injections by the Federal Reserve not into the reserve accounts of banks, but into the bank accounts of the public—but on condition that its first function must be to pay debts down. This would reduce debt directly, but not advantage debtors over savers …


Easy to say (and unfair): when the establishment can ‘print’ crude oil or other forms of capital, at that point debt forgiveness can be taken seriously’ (replacement of a virtual good by the real thing.

The problem that Keen seeks to solve is the Debt = Wealth conundrum. Eliminating debt eliminates an equal amount of wealth. All economic accounting entities exist in two reference planes at the same time. That is, every asset is another’s liability and vice-versa. Nothing within the economy is un-owned, no funds exist outside of the economy. The spare bags of money set aside for periods when petroleum is in short supply do not exist. Money/credit in one’s possession must be removed from another, or it is lent into existence with the funds lodged against equal liabilities. In this sense, accounting entities are never created new or destroyed, custody of these entities is passed back and forth between agents.

Central bank funds are not ‘new money’ in the sense that they do not exist before the bank lends them into existence. Funds find their way to the bank from private sector balance sheets where they gain new form but not substance. The central bank balance sheet expands as the private sector’s shrinks. For this to be otherwise the central bank would be insolvent, no different from its insolvent banker-clients.

Injections by central banks are loans. By offering loans to the public Keen suggests that those with debt would repay theirs (deleveraging) while those with no debts would obtain a bonus for being thrifty. This would prevent the thrifty from going postal when deadbeats are taken off the hook (debt) while savers are not compensated in any way (wealth).

The beneficiaries are the commercial banks that made the (bad) loans in the first place. Funds in question would flow to the them whether the citizen-beneficiaries are indebted or not (to both sides of the same banks’ balance sheets).

– If the citizens are indebted they gain no real benefit: the lenders’ credit exposure is passed to the central bank.

– If citizens are not indebted, credit again flows to the banks in the form of liabilities (deposits are banks’ liabilities, unsecured loans by the public to the banks). In order to gain any benefit, the depositor would be required to ‘defeat the system’ which leverages itself against the deposits.

In both instances the customers would be conduits for a bailout: from the central bank => to the public => to the commercial banks => (back to the central bank).

Insolvency would shift from the indebted public => to the commercial banks => to the central bank => back to the public through the back door. The guarantor of central banks’ liabilities is the same public Keen seeks to relieve, the public is writing checks to itself with banks as intermediaries.

Bank deposits would be hypothecated to the central bank as collateral for leveraged loans to the commercial banks on one hand, back to depositors on the other. Welcome to the Twilight Zone!

The central bank cannot offer unsecured loans or create new ‘money’ or leverage itself. Doing so risks the central bank becoming insolvent for the same reason as the other banks. The reason for a Jubilee in the first place is leverage and insolvency. Once the central bank leverages its balance sheet there is no real lender of last resort. The outcome is a system-wide bank run, as is underway in Europe for just this reason.

Any loan by a central bank must be secured by collateral which the general public is unable to offer. Loans made to/by a bank are commodities to third parties, not to the banks’ customers. The public cannot offer collateral other than their deposits, the banks do in their place without any public input in the process. Keen offers deposits as collateral to the central bank because there is no other collateral to be had. Banks’ assets (loans to customers) are non-performing and are not good collateral. Deposits would become collateral for leveraged loans made back to the depositor. Deposits would effectively become bank equity, subject to bankruptcy and margin calls. As with LTRO in the EU, depositors would be subordinated to all other claimants against the bank.

The only way for depositors to escape leverage/subordination is to remove their deposits from the system. Tres bank run!

The Jubilee represents ‘dead money’ debts, taken on to refinance existing debts.

The alternative is for the government — not the central bank — to issue fiat currency (greenbacks) in amounts equal to maturing debt. The debt is retired, the currency issued for the purpose is extinguished. There are risks to the debt-money system which exists with difficulty where the public can issue currency at will.

21 thoughts on “Debtonomics: Jubilee!

  1. Reverse Engineer

    We will get Jubilee in the same way we get Conservation, which is “By Other Means”.

    The likelihood that Da Goobermint will issue Greebacks to J6P to repay his debts is exceedingly small here. The Jubilee you get is simply people no longer paying on Debts recorded on somebody’s Disk somewhere until they finally die and leave no kids behind to attach the debt to.

    As the Industrial economy whithers and dies here, fewer people all the time will have access to any finance based money to buy the products of that economy. No money of any sort will buy what is no longer there to buy at any price, Oil Products mainly.

    Any money that is created if it is to work at all has to be tied to resources actually still available,and that then has to be tied in some way to the Value of Human Labor. Right NOW, money is tied to the thermodynamic energy contained in a Barrel of Oil, not Human Labor. Human labor is near worthless by comparison in Energy terms.

    It will take a complete collapseof the Industrial Economy to reformulate any monetary system which adequately rewards Human Labor. This is still a bit of a ways off here. The interim period is one where the debt overhang is shifted as much as possible onto the backs of J6P, while the Financiers Party Hearty in the Hamptons with $5000/night Hookers and 300 year old bottles of Champaigne fermented from Grapes which grew right about the same time Marie Antoinette’s HEAD went rolling down the Champs d’Elysee like a BOWLING BALL.


    1. steve from virginia Post author

      The government would issue to repay its own debts and only do so as debts mature. (To do otherwise would crash the system.)

      Pure fiat must be handled delicately: injected into finance system, it is no different from pure chloroform injected into someone’s heart.

  2. The Dork of Cork

    “Rather, industries are born into debt and there they remain until they fail or are absorbed into larger industries and agglomerations of debt. What we consider ‘growth’ and ‘progress’ has been the expansion of world’s balance sheets over a period of centuries. It’s been around do long we’ve gotten accustomed to it.”

    Yes but for how many more centuries ?
    The UK pays 2 million bankers a year to recycle the worlds energy flow back into its systems……imagine how much energy it could produce if it had 2 million nuclear scientists , enginners and guys that painted the warning signs on those new reactors.

    But it would have to externalise such vast power rather then controlling & directing it via shortage so therefore its a non runner for now.

    The point is I guess it does not need those reactor guys if it could get by farming / gaming the system / running down global oil , gas and coal flows.

    I always liked this guys (Zubrin) direct non PC in your face aggression and simple mission architecture but he has not covered himself with Glory during his “Energy Victory” (plant ethanol) days and he simply does not understand Northern European Pagan culture in his latest book which sometimes just likes Trees and Rocks for there own sake rather then being some Nazi political vehicle.

    He works best as a Nuclear & rocket engineer but this interview is good comedy….. he seems to be interviewed by what looks like a typical naive Californian environmentalist and cannot get a word in edgewise… the questions have no inherent logic typical of the Californian mindset.

    Solar without subsidy in 50 + degree latitude Germany ? – news to me .
    At least the subsidised Nuclear stuff can be seen on energy balance graphs without the aid of a microscope.

    1. steve from virginia Post author

      This is the endgame. Debt starts as marginally productive to being less productive to non-productive, more debt is counterproductive to the point of becoming actively destructive.

      Can’t pay the debts, can’t forgive them, can’t add to them …

  3. p01

    Keen can’t seem to be seeing the Big Pyramid, for he’s obsessed with flattening the small pyramid. Or maybe he does, but cannot say it, for fear he’d not be taken seriously? Meh … most likely he doesn’t…

  4. paul

    Exactly how do you ensure that people will use this money to pay their debts rather than buy a new TV, or have two weeks in the sun, or some cosmetic surgery, or anything else that they’ve been doing for the last 30 years?

    1. steve from virginia Post author

      Can’t ensure anything. Smart folks pull all their cash and buy real ‘goods’ (not consumer products).

      After Katrina, the FEMA folks decided to write everyone in New Orleans area checks for damages (caused by faulty levees and flood control): $50k per household. People took the money and bought Escalades.

      1. enicar333

        You speak as though everybody is the same, and views life the same – you are Cultural Marxists – correct?

        I do not share your views, and know the truth – therefore I recognize that while you consider the end of the current system to be collapse – I consider it an opportunity for re-birth – The Phoenix. The outcome of WWII only decided a winner/loser –

        America has been Socialist since the great re-organization under Roosevelt. We have social security, abolition of private property via income and property taxes, socialized medicine, free food and housing, free medical care for those who won’t pay, and government jobs under affirmative action for women, minorities and those who will only work minimally. Socialism works!!! That’s an oxy-moron! IT NEVER WORKS! The only thing people work at in Socialist schemes is defrauding the system, learning to live at the expense of others, and breeding and feeding for free!

        The Occupy Movement! Fighting for their demands for FREE STUFF! NOW! …. LOL. UMMM, just who do they think will feed them? They get their food from a Supermarket and government warehouses!!! LOL. OH, that’s right – there are farmers, who are actual breathing people, and lots and lots of illegal aliens who have NO rights and work 24/7 to feed the teeming Occupy Masses.

        The cities of America are filled with low-grade genetically defective problems. They reproduce and yet are NEVER productive in a Societal sense. Detroit IS the end result of your Socialist Dream. It’s Not the fault of the cars or the technology – it is the fault of allowing the genetically defective and inferior to breed, feed, multiply and overwhelm the system with their numbers. Vacant Detroit Becomes a Dumping Ground For the Dead

        Upon the ruins of past great Civilizations, whose technology we cannot imagine, there is always a people to be found who are given the credit for building the missing Civilization – LOL. These people are not the pure genetic relics of the builders on Civilization – they are the degraded remnants that outbred the Creators.

        Modern humans who build great civilizations and use advanced technology *SUDDENLY* appeared 200,000 years ago. “Evolutionary Scientists” preach a religion that we are “evolved chimps” – despite the fact that humans have 46 chromosomes and primates have 48…. Another “missing link” – right?

        The only link missing is that the Universe is teeming with life, only life begets life, and only the builders of civilization can build civilization. And that truth is more than skin deep!

        Jubilee from debt? That will solve NOTHING!

  5. Chartist Friend from Pittsburgh

    Steve – feel free to contact me @ChartistFriend on twitter if you’d like to collaborate on your charts. I took the liberty of reformatting the Brent chart for you:

    And for those Undertowers who missed it, my magnum opus, Destruction Of The Dome, is available for viewing (article):

    “The only way for depositors to escape leverage/subordination is to remove their deposits from the system.” Check.

  6. Sandor

    If the government issues greenbacks to pay off T-Bond holders, don’t the bond holders have freshly printed currency in their hands? I don’t see the currency as ‘extinguished’, only the debt. In this case, all the public debt is effectively monetized and a lot more currency enters the system. With greenbacks, the only restraint on government spending is the demand for the currency. It is easy to envision a scenario in which the government effectively creates greenbacks hyperinflation due to runaway spending. This doesn’t happen in the collateral constrained environment which we have today. What am I missing?

    1. Phlogiston Água de Beber

      What am I missing?

      Not much, I would say. I think it proves to be one of those things that works better in theory than in practice. Nothing to get too bothered over though. I believe there is an infinitesimally small chance that it will be tried.

      For those who just absolutely must see a Jubilee, I recommend going to an antique tractor show and look for a Ford model NAA tractor. They were introduced for Ford Motor Company’s Golden Jubilee and are often referred to as the Ford Jubilee tractor. I think that is as close as you will ever get.

      Government paying off debts of ordinary smucks is thoroughly Un-Amerkin! The herd would doubtless oppose it at least as vociferously as the banksters and their running dogs.

  7. The Dork of Cork

    How could yee tear down something like that…… its a 1950s Sci -fi classic.

    I am guessing here – but there seems a upper limit to the $ price of oil…….the extra money will flow to its most effiecent uses…..people will have tokens in their pockets to get on the Train or Bus ,eat Icecream
    In Europe (the most extreme example) they are simply throwing people off a monetary cliff so as to sustain the unsustainable despite having loads of stuff around that can channel this new money.

    1. steve from virginia Post author

      Both the public and the administrators are clinging to the past.

      New/old money doesn’t matter in the end if what money buys is worth less than what is sold to gain the money.

  8. The Dork of Cork

    Surviving inside Spaceship Earth………..

    Meanwhile this Dork & others is getting real excited about one particular car……landing inside the spectacular Gale crater (hopefully) in a few days……

    Mars is already beginning to show its tiny disk from the (spacecrafts vantage point) excellent Nasa Eyes live from the solar system.

    I can’t help myself Steve ……….I still believe in the power of technology ,especially elegant technology……
    The landing sequence for this craft has me worried sick…
    Its much too complicated in my opinion and has never been tried before.

    1. Phlogiston Água de Beber

      I’ve heard it said that everyone has to believe in something. I think the punchline is something like, “I believe I’ll have another drink.”

      Rube Goldberg would probably have thought it was OK. But, watch this for an example of how Rube thought things should work.
      Best Rube Goldberg Ever

      Now that’s some technological elegance.

  9. The Dork of Cork

    Yes Phlog. , I think you are right on that one…..people need to know the Buffalo will be there tommorow as they were today.

    Still – you can always talk shit around the campfire while sharpening your arrows (great video by the way – evidence that people have too much time on their hands , watching the hands of time tick away)

    More evidence of the quasi fiscal nature of the EIB……that is eroding the remaining power of European nation states. (go to projects …to be financed…TRAMWAY DE GRENOBLE LIGNE E
    in the bag me thinks as work has been ongoing since last year.)

    According to the local Grenoble paper lines A & B will be closed between the 16th of July to the 24th of August so that these lines can be connected to the new line E.

    So The Austin Texas Tram Train gets 1,500 to 2,000 ~ passengers a day and this line is expected to get 45,000 passengers a day………..

    (although they are not quite similar lines with the Metrolink a more train like line and the Grenoble system more Streetcar like)
    Still we get slightly more passengers per day on our similar distance but much smaller population of Cobh & Midleton DMU commuter line and that does not even enter “downtown” Cork.

    Me thinks its all about the settlement pattern, density & culture.Égrève

  10. The Dork of Cork

    Yes -Tram line E does not use the nearby rail system….. which I guess is very ,very busy – but the central section of this very scenic drive / main road.

    The town further beyond has a local train station

    So no need to push further out from the village terminus of –
    wonderful elegance – no doubt helped by the extreme topography of this area.

  11. The Dork of Cork

    Check out.………………..for Y2011

    North Sea Area.(+indivdual countries dynamics..especially the UK….which is affecting the dynamics of this import export market dramatically.)

    North Sea oil exports down 48% in 1 Year !!
    Gas exports down 4.2%

    Norway oil exports down 6%
    Norway gas exports down 4.7%

    UK oil imports increased 77%
    Although its gas imports decreased by 5% as its power stations switched to coal.

    Denmarks oil exports decreased 30%
    Denmarks gas exports decreased 10%

    Dutch gas exports decreased 2.8%…….

    What is Norway to Do ?
    In particular the very wet second (oil) capital Bergen.

    All those domestic highway investments and investing their petro money overseas looks a little bit stupid now………Norway will find itself back to where it started eventually (Hydro surplus electricity Only).
    Best get moving and burn their remaining oil building railway tunnels.
    Their Tram project looks especially expensive (numerous tunnels)
    (first stage video taken before start of commercial operations in the Summer of 2010)

    Second 4KM stage to Radal to be completed next year.
    Third 7.2Km stage to start next year ..completion in 2015 – but looks like a expensive capital project as it involves a 2.8Km tunnel and Bridge.

    No more hiking trips to Nepal soon….. best just use the local funicular to give you a bit of altitude.(at least the cars will be more civilised with less tourists in the cabin…….)

  12. The Dork of Cork

    On board the new Orleans line B Tram (western section)…
    (De Gaulle station intersection with the older Line A)

    The character of the street has changed considerably( Compare with Goggle street views) – for example they have created a brand new street (see 8.00 minutes in when the vehicle turns right)

    The central section

    And the eastern section which runs parallel to the rail line in one area.
    Very Quiet streets …even for French suburbia in July when almost everybody is on holidays.

    There is now a cross shaped Tram pattern to the relatively compact little City of Orleans – although south of the river Loire is not well covered.’Orléans

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