Thursday, October 8, 2009

The Necessity of the Jubilee Cycle in the Modern Economy

As detailed in my last article, the modern economic condition of primarily credit money creates a new economic dynamic:

Under traditional paper money schemes, the excessive issuance of money results in hyperinflation.

Under modern credit money schemes, the excessive issuance of money results in Minski moments of economic collapse because of unsustainable debt levels.

The ancient Jubilee cycle, extinguishing all debt every 50 years, is perfectly suited to this new modern condition. The Jubilee cycle would be the perfect restrictor and regulator of the Minski debt-collapse cycle, and is thus a necessity for economic stability in the modern world.

Many monetary theorists and reformers are looking backwards, and recommending that we reign in the Minski cycle by eliminating the fractional reserve banking system. However correct this proposal is on the theoretical level, it is impractical because time and knowledge cannot be undone. A similar critique faces those who would return us to the gold standard: it was tried, and abandoned, time has moved on. As much as we would like to return to a Constitutional system of limited government, Pandora's box has already been opened.

A debt-cancellation Jubilee is the best solution to our current economic situation, which was caused by excessive debt. The Jubilee system of periodic debt cancellation is the only way to keep it from happening again and again. The Jubilee cycle would be the bedrock of sustainable economic development, which is yet another long-range necessity which must be faced by forward-looking economic leaders.


Anonymous said...

Undoubtedly Steve Keen would appreciate this plan because it would force economists to model it using differential equations.
However,since we are operating under a "credit-money banking system" (my term would be fictional reserve banking) I don't see how this eliminates our current problems.
Early in the cycle we would have gambling on asset prices and later we would have credit contraction.
Please explain how this moves us away from the FIRE (and health care) economy to something more productive?


John R. said...

Justin, I have to disagree. First off, maybe you should clarify your position on fractional reserve banking. A lot of people think it should be "abolished", but I haven't heard any viable method of doing that.

And on the "gold standard", there is no way to "move past" it. The only reason for a gold standard is to define the monetary unit of account for everyone, government included. This solves a host of problems indirectly, just as not having a standard creates a host of problems indirectly.

The way to do this is to define the "dollar" as a unit of account in gold terms in the constitution, so that it can't be changed except my amending the constitution.

Once that is done the central bank can be abolished easily.

Fractional reserve banking should dry up over time as people realize it is fraudulent, but it will probably always be around to some extent for the same reason it came into existence in the first place. Personally, I think it is criminally fraudulent, but it might better be addressed in most instances through civil fraud remedies.

There is nothing wrong with the government defining a monetary unit of account. People can use it or not, as they wish. But in the main it just helps to have a term for money that everyone understands. It facilitates trade and commerce, and thus the economy.

John R. said...


A jubilee would be very discouraging to any future high leverage or complex and opaque financial instruments, because the participants would know that if it got out of hand the debt could just be canceled and the instruments would become worthless.

This would be an extremely healthy thing and a big improvement for the real economy. Real assets and production would be much more secure by comparison. That would encourage people in the direction of real assets and production, rather than the phony "wealth" supposedly conferred by debt instruments, derivatives, etc.

Anonymous said...

John R,
I love the Libertarians for actually discussing productive enterprise vs malinvestment and the idea of market prices conveying meaning to participants. Unfortunately, we part ways on the gold standard. The US was on the gold standard during the Depression and we still had a debt deflation.
As for the Jubilee, I question the length of time for the cycle. Fifty years may have been appropriate for the Jews of the Old Testament in a barter economy. It is way too long for an economy where the time frame for investments can be 50 seconds.
If there is a CEO left in this country actively organizing the company for the long term, it's only because the directors have not yet rooted him (or her) out.
At this moment, all the high returns are in the financial markets casino and that is where the stimulus money is flowing. I don't understand how a 50 year time frame can change the direction of the flow?


Justin said...

Morgan, I would add that the current debt-based model is non-sustainable, because it requires perpetual growth, both of the economy and the money supply.

The resultant perpetual inflation undermines savings, forcing us all onto the debt hamster-wheel, as well as enriching the parasite classes of money-changers.

A Jubilee cycle would limit their power, and protect the common people against their manipulations. Not perfectly of course, but it would be a nice start. Should it be more frequent than 50 years? Maybe! I'd like to build up the awareness of just one to get us started! :-)

Justin said...

John, you bring up some tough questions. The gold standard was abandoned, periodically then finally, because it constrained the hand of govt. From a small-govt perspective, the gold standard is where to be, for sure. It is hard to argue with that, I agree. But people don't like it. We have already discovered that we don't need it, therefore people, in times of stress, will not stick to it. That is all I mean about Pandora's Box already being opened.

Fractional reserve banking allows private banks to create money, in a way that if you or I did it, would be completely fraudulent. No doubt about it. Theoretically, we could eliminate the practice through banking regulation. If you made me vote, I'd vote it down. I think I need to do a bit more research before I feel fully informed.

Anonymous said...

The gold standard is the type of thing that you should only go off of once. If you try to reimpose a gold standard in a credit-based monetary system is leads to a severe increase in the "real" value of preexisting debt. See e.g. William Jennings Bryan.

A Jubilee, followed by reimposition of a gold standard is workable.

John R. said...

Jubilee + gold standard.

That's exactly what I propose. It's a constitutional amendment, which is probably the only way it can be done, because of Section 4 of the 14th amendment.