Is a Debt Jubilee Approaching?

The McKinsey Global Institute (MGI) made headlines early this year with a report on world debt. Along with other important details, the report claims that since the financial crisis of 2007–08 global debt has increased by US$57 trillion, far outpacing world gross domestic product (GDP) growth. Put into a different perspective, world debt is 286% of GDP, or nearly three times the world’s economy (and rising).

The breakdown looks like this: US$40 trillion is attributed to household debt, US$45 trillion to financial, US$56 trillion to corporate, and US$58 trillion to government.

World Debt

Out of all these areas of liability, MGI believes that government debt poses the greatest risk. In several countries it is already “unsustainably high,” and would require drastic (and politically unnerving) measures to reduce it. In other words, it is doubtful that any steps toward austerity or deleveraging will be on the horizon anytime soon.

As somewhat of a side note, it is rather disconcerting—at least as far as the United States is concerned—that with all this government debt accumulated over the years that U.S. infrastructure is in complete shambles, and that an estimated 3.5 million or more people are homeless on the streets.

Global household debt is also reaching new highs, and it is quite astonishing when compared to global GDP. Presently, it is more than half of GDP, and rising steadily. At its current rate it will exceed GDP sooner than later, and that will be a capitulation the world has never seen before. The United States, on its own, experienced a 130% rate just before the financial crisis hit. Suffice it to say, if the entire world’s household debt reaches parity with global GDP then things could spiral downhill very quickly.

The fact is, many economists, politicians, and banking elite don’t exactly know what will happen when global debt hits certain key thresholds (and from certain perspectives it doesn’t seem like they care too much either). There is also nothing in history to compare the current situation to, because the world’s economies are more interconnected now than at any time in history.

As it stands, we are headed into uncharted territory—not even the famed economist John Maynard Keynes could have imagined back in the 1930s a global debt scenario of nearly 300% (or more) of GDP.

Instead of deleveraging for an extended period of time after the Great Recession, the world basically became even more addicted to the punchbowl and just continued getting drunk at an ever-increasing rate.

Not only is this leverage and debt unsustainable, but it is becoming mathematically unreasonable. And we’re losing the ability to ever turn the beast around. Once we approach certain levels it will be impossible for central banks to raise rates, and unbearable for governments to further increase their deficits.

Could this all be according to some plan?

In 2002, former U.S. Vice President Dick Cheney infamously told former Treasury Secretary Paul O’Neil, “Reagan proved that deficits don’t matter.” Oddly enough, this seems almost prophetic of Mr. Cheney, as we are reaching a point where governments around the world will have to start selling (or conning) all their constituents on this exact same idea.

While sidestepping the possibility of this veering into conspiracy theory territory, it does seem that many world governments—Japan, Singapore, Ireland, and Belgium, to name but a few—have basically done just that, and have stopped caring about debt like some 60-year-old casino queen. The thinking appears to be almost like, “we’re on this downward spiral so let your grey hair down, have some fun, and ignore any future consequences.”

There are approximately 40 countries above 100% total debt to GDP. Japan is at the top of the heap at 400%. This is amazing. And not in a good way. Imagine if you or your family had debt that was 400% of your annual earnings… how stressful and anxiety-filled would your life be?

It has gotten so out of hand that one has to assume a debt jubilee (or debt forgiveness) is not only coming but is inevitable. If we simply base this conclusion on what the first world did after the financial crisis it would certainly appear that way. Maybe our dear leaders know something we don’t? Like a global default or bankruptcy is the cure to all that ails us?

Actually, history proves that it’s naïve to believe world leaders would rationally consider debt forgiveness before the world sank into a deep and painful prolonged depression. Governments and leaders rarely act proactively, and usually follow a reactive formula when solving many of the problems facing us today.

But debt jubilee is nothing new. It’s been a part of many ancient cultures that date back to Babylonian and Sumerian times. In some ancient Jewish and Christian societies it was used periodically for universal pardon. In more modern times, we have given it names like debt “restructuring” (although I don’t believe that modern financial engineering is quite as forgiving as returning lands to people and cancelling debts completely).

If debt jubilee is seriously in the cards in the future then let’s hope that global citizens demand forgiveness for all debt, and not just what the government owes. The only way to solve this problem completely is to wipe the slate clean across the board, and to provide sophisticated solutions so it does not happen again (in most of our lifetimes).

The way technology is evolving it certainly would not be that difficult of a transition, and could possibly be a monumental accomplishment.

Of course debt jubilee has been talked about for decades with regards to the third world, but now it’s time for that same discussion to be seriously considered for the entire planet. A quick search on the Internet reveals that some people in the United States are not only discussing it but doing something about it.

Many political pundits on the Right argue that the idea on its surface sounds like something only the political Left could dream up, but the harsh reality is that it may be the only thing that can actually save capitalism from eating itself.