In a recent article, economist Michael Hudson (author of many books including, recently, … and Forgive Them Their Debts, J is For Junk Economics, and Killing the Host) predicts widespread cancellation of what he terms “bad debts” as an inevitable solution to the (ignored but apparent) economic woes plaguing the United States.
“When debts can’t be paid and debtors default, what happens to these creditors?” Hudson asks. For an example he cites Washington’s bailout of Wall Street in 2008 following the Great Recession precipitated by the collapse of the housing bubble which was created by reckless and predatory loaning practices on the part of major US financial institutions and credit agencies. In order to finance this bailout, the Obama administration simply created more money while zeroing out interest rates.
“But this artificial life support to keep the debt overhead afloat is nearing the reality of the debt wall,” Hudson writes. “The European Central Bank has almost run out of available euro-bonds to buy. The new fallback position to keep the increasingly zombified U.S. and Eurozone financial markets afloat is to experiment with negative interest rates.”
The destructive consequences of mounting and unpayable debts were understood 5,000 years ago. And these civilizations also recognized the need to cancel said debts, lest their empires collapse as Rome’s eventually did:
“To prevent this rising indebtedness from tearing their realms apart, rulers started their first full year on the throne by clearing away the overhang of arrears that had been accruing on personal and agrarian debts. The aim was to restore an idealized ‘mother condition’ in which bondservants were liberated, able to start with a Clean Slate with their self-support land returned to them, in balance with regard to their income and outgo.”
Hudson draws a parallel to post-WWII America, a period of enormous prosperity when Americans were more or less debt free and able to start families and buy homes. Also to post-war Germany, where debts were wiped out (“easy because most debts were owed to Nazis”).
In contrast, the contemporary situation in America is one in which young people graduate from college weighed down by mountains of debt that prevents them from purchasing homes and contributing to the economy. The US’ solution thus far has been to lower interest rates which further increases debt and, by extension, default. The problem isn’t going away, Hudson writes, thanks largely to collective denial on the part of economic institutions and mainstream analysts.
What the US currently offers—quantitative easing and bailouts—is a stop-gap that will only compound the issues it seeks to address. “Debt cancellation is historically the solution,” according to Hudson, who wonders whether a “revamped economics curriculum will include the study of history to see how earlier societies have coped with the inherent tendency of debts to increase faster than the ability to be paid.” After all, “Western civilization has failed to solve the financial problem that Near Eastern societies were able to cope with by intervening from ‘outside’ the economy.”