Debt jubilees and hyperinflation – why history shows that this might be the way forward for us all

Government debt levels in the United States, European Union and Japan are at all time historic highs, after decades of borrowing money to pay for regular annual expenditures, regular military interventions and multiple bailouts.  Working out what will happen next is a matter of great speculation, but history can provide us with some pointers about what we should be looking out for, two of which are debt jubilees and hyper-inflation.

Much of the government debt accumulated over time will never be repaid and will be rolled over indefinitely.  However, interest on the debt does need to be repaid.  As governments become increasingly indebted, interest payments as a percentage of government expenditure will increase rapidly.  The US CBO expects that by 2025 US interest payments combined with Medicare, Medicaid and Social Security will be so large that they will theoretically consume 100% of all federal tax income receipts.

Clearly, this situation would make no sense and you could expect a general tax payer revolt long before this happened.  Citizens are highly unlikely to be willing to pay taxes if they got nothing in return: no schools, no roads, no hospitals, no defence, no jails and no legal system.

Unfortunately, unlike other government expenditures, such as on defence, education and social security, interest payments need to be repaid.  If they are not, the government will default on its debts, making it harder to borrow more money and to roll over the debt that it already has.

So in a situation where it will be both impossible to pay the interest and impossible not to pay the interest, what will happen?  One answer is to artificially get rid of the debt.   Historically there have been two main ways of doing this: debt jubilees and hyper inflation.

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Debt Jubilee

What is a debt jubilee?  Babylonian kings occasionally issued one off decrees for the cancellation of debts and the release of slaves to their homelands.

The Book of Leviticus in the Bible describes a debt jubilee in Leviticus 25:10 as follows:

This fiftieth year is sacred – it s a time of freedom and of celebration when everyone will receive back their original property, and slaves will return home to their families.”

As this was codified, it appears to be an enhancement of the Babylonian practice, which was more subject to the whims of a particular ruler.

The Romans had debt jubilees too.  For the Romans, indebtedness could result in a person selling themselves into slavery in order to pay down the debts.  On a debt jubilee their debts would be forgiven and they would be released from slavery.

What was important about debt jubilees is that they reset the clock on debts that had gone out of control.  This was clearly of great benefit to those who had been indebted and potentially enslaved in order to pay for their debts.

 

Hyper inflation

Hyper inflation is also an ancient method of wiping out accumulated debts and resetting society.  The Romans started to debase their currency during the crisis of the third century AD.  Gold and silver coins would be issued that had higher and higher percentages of base metals.

This caused huge problems to trade and after many years of failed attempts to halt the debasement of the Roman currency the Emperor Diocletian issued an Edict on Maximum Prices (Edictum de pretiis rerum venalium) which stamped down on currency debasement and imposed a maximum price ceiling for over a thousand products and the wages of specific trades.

These price controls were almost impossible to enforce and created parallel black markets to facilitate trade.  By the time of his death, most of the price restrictions had been abandoned.

Hyper inflation became even easier with the introduction of paper currency.  Shifting money off the gold standard meant that there was no direct link between paper money and gold held on deposit.

One of the most famous cases of hyper inflation during recent times was that of the German Weimar Republic after World War One.  This crisis lasted three years, from June 1921 and January 1924 when a new currency, the Rentenmark, was introduced.

France had led the charge for Germany to pay massive war reparations as a punishment for the war, much to the dismay of John Maynard Keynes who explicitly warned that this would lead to economic collapse in Germany and a rise of extremism.

Unable to both pay the reparations in gold and also pay for services to its citizens, the Weimar Republic printed off bank notes, causing a massive crash in the value of the German Mark. By the 1st November 1923 one pound of bread cost 3 billion Marks, one pound of meat 36 billion Marks and one glass of beer 4 billion Marks.

Household wealth in the form of cash savings and bonds collapsed.  Ownership of hard assets helped to offset some of the chaos, but not sufficiently to stop the rise of Hitler’s National Socialist party.

Hyper inflation, as defined as a monthly inflation rate of more than 50% per month, has occurred in many other countries during the 20th century including Angola, Argentina, Armenia, Austria, Azerbaijan, Belarus, Bolivia, Bosnia, Brazil, Bulgaria, Chile, China, Estonia, france, Georgia, Germany, Greece, Hungary, Kazakhstan, Kyrgyzstan, Krajina, North Korea, Nicaragua, Peru, Philippines, Poland, Russia, Taiwan, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, Yugoslavia, Zaire and Zimbabwe.

Hyper inflation works well at wiping out the value of domestically held government debt.  For example, if the UK government owed £100 billion in pound sterling denominated debt and caused such an increase in inflation that it cost £1,000,000 to buy a loaf of bread that cost £1 today,  it would make the £100 billion pound debt the equivalent of £1,000 in today’s money.

However, for countries in the Eurozone who cannot print their own money, it is almost impossible to inflate their way out of their debts.  By exiting the euro they can inflate their domestic debts in their new currency into nothing, but would still have to pay their euro denominated debt, which would be very painful.

Hyper inflation presents an especially interesting dilemma for the United States today.   They have the ability to inflate their US denominated domestic debts away through the printing of massive quantities of money. As most of their foreign debt is also in US dollars, the act of inflating the US dollar will also wipe out US debts owed to foreigners.

There is a general view that this kind of currency manipulation is a bad thing and that the markets punish countries who are fiscally irresponsible. That may be true in the short term, but in the medium term the markets seem to be quite happy to continue lending money to countries that have previously seen both hyper inflation and have defaulted on their debts.

Once countries emerge from periods of hyper inflation and their currency is more reflective of its true value this can help with making their economies more cost effective and competitive than they were previously.

Advocating that a country deliberately go through a period of hyper inflation or force a debt jubilee appears irresponsible. However, the alternative is arguably not only worse but impossible to achieve: a crushing debt burden on societies and the loss of all services previously paid for by taxation.

For conservative Christians this represents a fascinating dilemma – debt jubilees are both fiscally irresponsible but also biblically sanctioned.

This is an important question.  Your comments and opinions are welcome.

 

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