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debt jubilees
How to Deal With the National Debt Without Slashing Services or Triggering Inflation
The current debt trajectory is clearly unsustainable, but what can be done about it? Raising taxes and trimming the budget can slow future growth of the debt, but they are unable to fix the underlying problem—a debt grown so massive that just the interest on it is crowding out expenditures on the public goods that are the primary purpose of government.
Borrowing Is Actually More Inflationary Than Printing
Several financial commentators have suggested that we would be better off if the Treasury issued the money for the budget outright, debt-free. Martin Armstrong, an economic forecaster with a background in computer science and commodities trading, contends that if we had just done that in the first place, the national debt would be only 40% of what it is today. In fact, he argues, debt today is the same as money, except that it comes with interest. Federal securities can be posted in the repo market as collateral for an equivalent in loans, and the collateral can be “rehypothecated” (re-used) several times over, creating new money that augments the money supply just as would happen if it were issued directly.
Chris Martenson, another economic researcher and trend forecaster, asked in a November 21 podcast, “What great harm would happen if the Treasury just issued its own money directly and didn’t borrow it?… You’re still overspending, you still probably have inflation, but now you’re not paying interest on it.”
The argument for borrowing rather than printing is that the government is borrowing existing money, so it will not expand the money supply. That was true when money consisted of gold and silver coins, but it is not true today. In fact borrowing the money is now more inflationary, increasing the money supply more, than if it were just issued directly, due to the way the government borrows. It issues securities (bills, bonds, and notes) that are bid on at auction by selected “primary dealers” (mostly very large banks). Quoting from Investopedia:
Because most modern economies rely on fractional reserve banking, when primary dealers purchase government debt in the form of Treasury securities, they are able to increase their reserves and expand the money supply by lending it out. This is known as the money multiplier effect.
Thus, “the government increases cash reserves in the banking system,” and “the increase in reserves raises the money supply in the economy.” Principal and interest on the securities are paid when due, but they are paid with borrowed money. In effect, the debt is never repaid but just gets rolled over from year to year along with the interest due on it. The interest compounds, an increasing amount of debt-at-interest is generated, and the money supply and inflation go up.
U.S. Currency Should Be Issued by the U.S. Government
Well over 90% of the U.S. money supply today is issued not by the government but by private banks when they make loans. As Thomas Edison argued in 1921, “It is absurd to say that our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one promise fattens the usurers and the other helps the people.”
The government could avoid increasing the debt by printing the money for its budget as President Abraham Lincoln did, as U.S. Notes or “Greenbacks.” Donald Trump acknowledged in 2016 that the government never has to default “because you print the money,” echoing Alan Greenspan, Warren Buffett, and others. So writes Prof. Stephanie Kelton in a Dec. 2, 2024 blog. Alternatively, the Treasury could mint some trillion dollar coins. The Constitution gives Congress the power to coin money and regulate its value, and no limit is put on the value of the coins it creates. In legislation initiated in 1982, Congress chose to impose limits on the amounts and denominations of most coins, but a special provision allowed the platinum coin to be minted in any amount for commemorative purposes. Philip Diehl, former head of the U.S. Mint and co-author of the platinum coin law, confirmed that the coin would be legal tender:
In minting the $1 trillion platinum coin, the Treasury Secretary would be exercising authority which Congress has granted routinely for more than 220 years… under power expressly granted to Congress in the Constitution (Article 1, Section 8).
To prevent congressional overspending, a budget ceiling could be imposed— as it is now, although the terms would probably need to be revised.
Eliminating the Debt
Those maneuvers would prevent the federal debt from growing, but it still would not eliminate the trillion-dollar interest tab on the existing $36 trillion debt. The only permanent solution is to eliminate the debt itself. In ancient Mesopotamia, when the king was the creditor, this was done with periodic debt jubilees—just cancel the debt. (See Michael Hudson, And Forgive Them Their Debts.) But that is not possible today because the creditors are private banks and private investors who have a contractual right to be paid, and the U.S. Constitution requires that the government pay its debts as and when due.
Another possibility is a financial transaction tax, which could replace both income and sales taxes while still generating enough to fund the government and pay off the debt. See Scott Smith, A Tale of Two Economies: A New Financial Operating System for the American Economy (2023) and my earlier article here. But that solution has been discussed for years without gaining traction in Congress.
Another alternative is to have the Federal Reserve buy the debt as it comes due. For the last few years, the Treasury has been issuing an estimated 30% of its debt as short-term bills rather than 10-year or 30-year bonds. As a result, in 2023 approximately 31% of the outstanding debt came due for renewal. As usual, it was just rolled over into new debt. But the nearly one-third coming due in FY2025 could be bought in the open market by the Federal Reserve, which is required to return its profits to the government after deducting its costs, making the debt virtually interest-free. Interest-free debt carried on the books and rolled over does not raise the federal deficit. If a third of the outstanding debt is too much to monetize in one year to avoid inflation, this maneuver could be spread out over a number of years.
Mandating that action by an “independent” Fed would require an amendment to the Federal Reserve Act, but Congress has the power to amend it and has done so several times over the years. The incoming administration is proposing more radical moves than that, including eliminating the income tax, ending the Fed, auditing the Fed, or merging it with the Treasury. The federal interest tab nearly doubled after April 2022, when the Fed initiated “Quantitative Tightening.” It reduced its balance sheet by selling over $2 trillion in federal securities into the economy, reducing the money supply, and by hiking the federal funds rate to as high as 5.5%. Arguably the Fed has overtightened and needs to reverse that trend by buying federal securities, injecting new money into the economy.
Alarmed economists contend that a Weimar-style hyperinflation is the inevitable outcome of government-issued money. But as Michael Hudson points out, “Every hyperinflation in history has been caused by foreign debt service collapsing the exchange rate. The problem almost always has resulted from wartime foreign currency strains, not domestic spending.”
Issuing the money directly will not inflate prices if the funds are used to increase the domestic supply of goods and services. Supply and demand will then go up together, keeping prices stable. This has been illustrated historically, perhaps most dramatically in China. The People’s Bank of China manages the money supply by a variety of means including just printing currency. In 28 years, from 1996 to 2024, China’s money supply (M2) grew by 52 times or 5,200%, yet hyperinflation did not result. Prices remained stable because the funds went into increasing GDP, which went up along with the money supply.
Price inflation during the Covid-19 crisis has been blamed on the Fed monetizing congressional fiscal payments to consumers and businesses, increasing demand (the circulating money supply) without increasing supply (goods and services). But the San Francisco Fed concluded that the surge in global shipping and transportation costs due to Covid-19 along with delivery delays and backlogs, were a greater contributor than this fiscal stimulus to the run-up of headline inflation in 2021 and 2022. The supply of goods could have been increased—producers could have increased production to respond to the increase in demand—were it not for the shutdown of more than 700,000 productive businesses labeled “non-essential,” resulting in the loss of 3 million jobs.
Swapping Debt for Productive Equity
Money printing is not inflationary if the money is issued for productive purposes, raising GDP in lockstep; but how can we be sure that the new money will be used productively? Today the banks and other large institutions that first receive any newly-issued money are more likely to invest it speculatively, driving up the price of existing assets (homes, stocks, etc.) without creating new goods and services.
Economic blogger Martin Armstrong observes that one solution pursued by debt-ridden countries is to swap the debt for equity in productive assets. This has been done by Mexico, Poland, Croatia, the Czech Republic, Hungary, and the United States itself. It was the solution of Treasury Secretary Alexander Hamilton in dealing with the overwhelming debt of the First U.S. Congress. State and federal debt was swapped along with gold for shares in the First U.S. Bank, paying a 6% dividend. The Bank then issued U.S. currency at up to 10 times this capital base, on the fractional reserve model still used by banks today. Both the First and the Second U.S. Banks were designed to support manufacturing and production, according to Hamilton’s Report on Public Credit.
Following the Hamiltonian model is H.R. 4052, the National Infrastructure Bank Act of 2023 (NIB) now pending in Congress. The NIB proposal is to swap privately-held federal securities (Treasury bonds) for non-voting preferred stock in the bank. Interest on the bonds would continue to go to the investors, along with a 2% stock dividend. That would not eliminate the debt or the interest, but if the Federal Reserve were to buy federal securities on the open market and swap them for NIB stock, the securities would essentially remain interest-free, since again the Fed is required to return its profits to the Treasury after deducting its costs.
Lending Directly to Productive Businesses
Another possibility for using newly issued money to increase the supply of goods and services is for the Federal Reserve to make loans directly to productive businesses. That was actually the intent of the original Federal Reserve Act. Section 13 of the Act allows Federal Reserve Banks to discount notes, drafts, and bills of exchange arising out of actual commercial transactions, such as those issued for agricultural, industrial, or commercial purposes—in other words, lending directly for production and development. “Discounting commercial paper” is a process by which short-term loans are provided to financial institutions using commercial paper as collateral. (Commercial paper is unsecured short-term debt, usually issued at a discount, used to cover payroll, inventory, and other short-term liabilities. The “discount” represents the interest to the lender.) According to Prof. Carl Walsh, writing of the Federal Reserve Act in The Federal Reserve Bank of San Francisco Newsletter in 1991:
The preamble sets out very clearly that one purpose of the Federal Reserve Act was to afford a means of discounting commercial loans. In its report on the proposed bill, the House Banking and Currency Committee viewed a fundamental objective of the bill to be the “creation of a joint mechanism for the extension of credit to banks which possess sound assets and which desire to liquidate them for the purpose of meeting legitimate commercial, agricultural, and industrial demands on the part of their clientele.”
Cornell Law School Professor Robert Hockett expanded on this design in an article in Forbes in March 2021:
[T]he founders of the Federal Reserve System in 1913… designed something akin to a network of regional development finance institutions… Each of the 12 regional Federal Reserve Banks was to provide short-term funding directly or indirectly (through local banks) to developing businesses that needed it. This they did by ‘discounting’—in effect, purchasing—commercial paper from those businesses that needed it… [I]n determining what kinds of commercial paper to discount, the Federal Reserve Act both was—and ironically remains—quite explicit about this: Fed discount lending is solely for “productive,” not “speculative” purposes.
Today discounting commercial paper is big business, but the lenders are private and the borrowers are large institutions issuing commercial paper in denominations of $100,000 or more. Except for its emergency Commercial Paper Funding Facility operated from 2020 to 2021 and from 2008 to 2010, the Fed no longer engages in the commercial loan business. Meanwhile, small businesses are having trouble finding affordable financing.
In a sequel to his March 2021 article, Hockett explained that the drafters of the Federal Reserve Act, notably Carter Glass and Paul Warburg, were essentially following the Real Bills Doctrine (RBD). Previously known as the “commercial loan theory of banking,” it held that banks could create credit-money deposits on their balance sheets without triggering inflation if the money were issued against loans backed by commercial paper. When the borrowing companies repaid their loans from their sales receipts, the newly created money would just void out the debt and be extinguished. Their intent was that banks could sell their commercial loans at a discount at the Fed’s Discount Window, freeing up their balance sheets for more loans. Hockett wrote:
The RBD in its crude formulation held that so long as the lending of endogenous [bank-created] credit-money was kept productive, not speculative, inflation and deflation would be not only less likely, but effectively impossible. And the experience of German banks during Germany’s late 19th century Hamiltonian ‘growth miracle,’ with which the German immigrant Warburg, himself a banker, was intimately familiar, appeared to verify this. So did Glass’ experience with agricultural lending in the American South.
Prof. Hockett suggested regionalizing the Fed, expanding it from the current 12 Federal Reserve banks to many banks. He wrote in August 2021:
In time, we might even imagine a proliferation of public banks, patterned more or less after the highly successful Bank of North Dakota model, spreading across multiple states. These banks could then both afford nonprofit banking services to all, and assist the Fed Regional Banks in identifying appropriate recipients of Fed liquidity assistance.
The result, he said, will be “a Fed restored to its original purpose, a Fed responsive to varying local conditions in a sprawling continental republic, a Fed no longer over-involved with banks whose principal if not sole activities are in gambling on price movements in secondary and tertiary markets rather than investing in the primary markets that constitute our ‘real’ economy. It will mean, in short, something approaching a true people’s bank, not just a banks’ bank.”
Humanity Faces Converging Debt Crises
Congressional Hostage-Takers
The United States government reached its congressionally mandated legal debt limit, $31.4 trillion, on January 19th. This debt represents past spending: Cutting the budget now won't make the debt go away. If Congress fails to raise the debt limit, the federal government could default on its debt payments—something it has never done before.
The federal debt limit was created by Congress in 1917. In recent decades, there have been periodic standoffs (in 1985, 1997, 2011, and 2013), in which Republicans threatened to let the deadline to increase the limit pass unless Democrats agreed to spending cuts in social programs. Neither side actually wanted the federal government to default, but brinksmanship served partisan interests. This time, some Republican House Freedom Caucus members appear to regard an actual debt default (not just the threat of one) as a useful tool to force major government spending cuts.
Government spending comes in three large categories—mandatory, discretionary, and interest payments. Most federal spending is mandatory, including Social Security and Medicare payments. Of discretionary spending, defense accounts for more than half. Interest payments on U.S. debt comprise the smallest of the three categories of spending, but it is growing fast and may overtake the military budget by 2025 or 2026.
Some pundits equate debt ceiling fights with hostage negotiations. In this instance, House Speaker Kevin McCarthy (R-Calif.) may have limited ability to prevent his more radical colleagues from metaphorically shooting their captive. McCarthy's leadership is fragile and in order to gain it, he agreed to rules that will give extremists outsized influence in upcoming negotiations. A single member will be able to force a vote on the speakership, possibly plunging the entire body back into days of voting to establish a new leader.
Since U.S. debt (in the form of bonds and other securities) anchors the global financial system, a default could rattle economies across the globe. Americans could face a recession, and stock and bond markets would likely plunge. Still, exactly how a default would play out is uncertain. Since the U.S. government's payment of its financial obligations is mandated in the U.S. Constitution, it is conceivable that a default could be averted by the courts. Nevertheless, there is a very real possibility that not only Americans but millions or billions around the globe could face hardship as a result of political hardball tactics playing out in Washington, D.C.
The debt ceiling standoff in America is unquestionably a volatile situation, but it's only one aspect of the larger debt crisis facing humanity.
Global Debt: Growing to Extremes
According to the late anthropologist David Graeber, debt has been around for about five thousand years. Debt is the flipside of money: Especially in the modern world, where almost all money is created via bank loans, it's impossible to have one without the other. In societies that use money, a pattern has played out again and again. At first, debt and money enable the expansion of trade and the creation of wealth. Then debt begins to accumulate faster than the ability to repay it, simply because it's physically easier to borrow and spend than it is to extract resources and transform them with labor. Finally, a round of debt defaults destroys money and real wealth, leading to widespread misery. Eventually, the cycle begins again.
Over the past two centuries, and especially since 1950, the world has seen the highest rate of production of goods and services in all of history. While technology played a role, the key enabler was cheap, abundant energy from fossil fuels. During this period, GDP was generally adopted as a measure of economic success, and growth became normalized. Because it was assumed that the economy would continue to grow, it was generally believed that most debt incurred now could be repaid in the future. Further, increasing household debt (including credit card debt, mortgages, and student loans) enabled most people to consume now and pay later, and helped expand the whole economy.
This IMF graph breaks total debt into three categories: government (also called "public"), corporate, and household. It also measures debt not simply in terms of money owed, but by the debt-to-GDP ratio. Not only has debt grown in raw numerical terms, but it has also grown in comparison with GDP. Many economists believe that high debt-to-GDP ratios can be cause for concern, since they are often associated with debt bubbles—which usually end in debt deflation, causing bank runs or a currency crisis. Examples include the 1920s stock market bubble (which triggered the Great Depression) and the U.S. housing bubble (which caused the Great Recession).
Most current debt is, in effect, a bet on future growth. But future growth is increasingly problematic. As I have explained elsewhere (in this book and in this article), global growth is coming to an end in the first decades of the current century due to the depletion of fossil fuels and other resources, rising pollution levels, and declining population growth. China, whose population has started shrinking and whose recently spectacular levels of economic growth are now rapidly tapering off, is a global bellwether. High levels of global debt are likely to turn what could be a controllable shift from expansion to contraction into a blowout of unfulfilled expectations and obligations, leading to widespread suffering.
Theft Debt—Three Vast Ways of Stealing
Debt is typically defined as a formal or informal agreement in which one party gives another something of value now, with the expectation of repayment (often with interest) at a later date. If no repayment is wanted or expected, we call the transfer a gift. But sometimes value is taken without agreement between the parties involved. Stealing and looting aren't accompanied by negotiations over interest rates, or by mutual record-keeping. There are legal forms of taking, such as taxes and fines. But where there is no legal basis for taking something of value, societies around the world through history have recognized a moral responsibility on the part of the taker to make restitution, either symbolic or in kind, or both.
For theft debt there can be no default in the legal sense, since default is the breaking of an agreement to repay a debt, and here there has been no agreement. However, there can indeed be consequences of unrepaid theft debt. Indeed, if theft occurs on a large enough scale, those consequences may include the breakdown and collapse of societies and ecosystems.
Three categories of theft debt are relevant here: the debt of high-consuming nations to low-consuming nations, the debt of recent generations to future generations, and the debt of humanity to other species.
Especially since the start of European exploration and colonization 500 years ago, rich nations have derived most of their wealth from natural resources and cheap labor in poor nations (indeed, in many cases the latter nations were made poor by this predatory relationship, which was often militarily enforced). As economic anthropologist Jason Hickel points out, today the Global South contributes about 80% of the labor and resources for the world economy, yet the people who render that labor and those resources receive about 5% of the income the global economy generates each year. Eventually, the deliberate impoverishment of a population by wealthy exploiters tends to lead to resentment and rebellion among those exploited, and corruption and moral decline among the exploiters.
The transfer of wealth also occurs intergenerationally. When people today use or degrade renewable resources (such as forests, fish, aquifers, and soil) faster than nature can regenerate them, this makes it more difficult for people in the future to enjoy equivalent levels of wealth. Nonrenewable resources, such as minerals and metals, can be recycled to a certain extent, but are typically just dispersed into the environment as we use them, making it difficult or impossible for the next generation to access them. We are leaving our grandchildren a depleted and more polluted world, with global ecosystems now stewing in thousands of human-produced chemicals of varying degrees of toxicity. Since natural resources are the ultimate basis of all wealth creation, this means we are, in effect, stealing from the future. Young people are starting to get the message: Surveys say that more than two- thirds of Americans believe today's children will be financially worse off than their parents.
Humanity also, in effect, takes from other species by degrading or transforming habitat. Animals and plants are always jostling amongst themselves within ecosystems, now cooperating, now competing, with some expanding their populations and others losing out. However, humanity, with its astounding fossil-fueled success at population expansion, is taking over habitable space to a degree that threatens not only other species, but our own as well—since humanity depends on healthy and diverse ecosystems for a range of free services such as pollination, pest management, and flood control. Nonhuman animal species have lost, on average, 70% of their members in the past 50 years, marking a nearly unprecedented transfer of habitat from millions of species to just a handful—Homo sapiens and the animals and plants it has domesticated.
These three forms of taking are often perfectly legal, because it is usually the beneficiaries (i.e., privileged humans alive today) who make the laws. But legal theft is still theft, and there will be consequences.
Paying Back, Paying Forward
Debt buildups are often likened to soap bubbles. When a soap bubble bursts, a tiny hole expands during a brief fraction of a second, then suddenly the bubble is gone. As the bubble initially inflates, there's no reason (other than past experience and complex calculations having to do with fluid mechanics) to expect that this magical shiny sphere will soon disappear. Debt bubbles are like that too: They can take some time to inflate, and during that period, there may be little apparent cause for worry (except among historians or ecologists). Then suddenly, financial hell breaks loose. People who understand the mechanics of bubbles, physical or metaphoric, say that the only way to avoid a nasty bursting is somehow to deflate the bubble harmlessly before it pops.
That's often easier in theory than in practice. What about the U.S. federal government's debt bubble? If the government were to rein in its spending significantly, there would be consequences—perhaps including lost jobs in the defense industry and reductions in the security or health of those who receive support payments of various kinds. Modern monetary theorists say it is possible to avoid both potential defaults and the need to make severe spending cuts simply by empowering government to create the money it needs without having to borrow it at interest. But while money may theoretically be easy to create, resources and energy are different matters altogether. And, in the end, money works only when it reliably represents access to energy and resources. If the money supply grows but resources don't, the result can be runaway inflation. For the U.S., modern monetary theory could provide some temporary and partial relief from the government debt crisis, but over the long run there is no getting past the requirement to reduce overall national consumption—and that is likely to provoke a political crisis. That political crisis could be headed off in part by developing rationing systems and by shifting the aim of economic policy away from GDP growth and toward general happiness and cooperation.
The world's vast increase in financial debt over the past few decades ultimately can be resolved only by a round of defaults, or by a deliberate process of debt forgiveness and deleveraging, like the debt jubilees that ancient societies held on a regular basis. The former would lead to widespread bankruptcies and would endanger the entire economy; the latter would, in effect, constitute a destruction of some existing wealth and a transfer of much of what's left of that wealth from the rich to the poor. Such a process might best begin with a redistribution of most of the wealth of the billionaire class.
Theft debt cannot be "forgiven"; there are only two possible outcomes: repayment or consequences.
For international theft debt, repayment would require wealth transfers from rich to poor nations, starting with the cancellation of poor nations' debts. Reparations for slavery and land theft might constitute a key part of this much larger process of global leveling.
Generational theft debt cannot be repaid by somehow replacing nonrenewable resources already depleted: We can't put ores back in the ground (though with renewable resources, we could help forests and fisheries recover). More meaningfully, we could make a start at easing the lives of those who will come after us by creating a way of life that's peaceful, sustainable, cooperative, and beautiful. In many respects, that would be a more valuable legacy than material abundance. And the sooner we start, the more of a legacy we leave them.
Our theft debts to other species likewise probably cannot be repaid in kind, at least not entirely: There is little likelihood, for example, that we will be able to use modern genetics to revive large numbers of species we've already driven into extinction, unless we can provide those revived species with appropriate habitat. But we can stop running up our tab on nature. That might mean ceding half the Earth to ecosystem recovery.
Absent such efforts, bubbles will continue to inflate until they burst. In that case, the worst outcomes can be averted only by starting now to build personal, household, ecosystem, and community resilience.
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