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Suggestion: Debt Jubilee Reform

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Helsworth
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Post: #1
Suggestion: Debt Jubilee Reform

A way to help out households by implementing Debt Jubilee Reform. The reform would impact savings rate, consumption, gross investment, public debt and other areas. Basically, this reform should trigger economic growth while increasing public debt for the next quarter at whatever percentage the devs agree upon, without impacting the size of the fiscal deficit.
I think this reform would be very good for AR, since we have Money Reform II which takes care of the government debt. This reform would take care of the private household debt.
Note, it should apply for households only, like Steve Keen argues here:


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This post was last modified: 17.04.2013 23:34 by Helsworth.

17.04.2013 20:06
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Sheep
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Post: #2
RE: Suggestion: Debt Jubilee Reform

I am a bit confused since there is also a "Jubilee Debt Campaign" which focuses on poor countries:

http://www.jubileedebtcampaign.org.uk/?lid=6319

Anyway, you basically propose a reform which erases debt for poor people?


17.04.2013 21:05
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Helsworth
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Post: #3
RE: Suggestion: Debt Jubilee Reform

A Debt Jubilee for all households. A cash injection. Those with debts to pay can only use the Jubilee to pay off their debts, those who don't have debts can either consume the funds immediately or save them.
Thus, there's no discrimination, no subsidizing one's deleveraging while leaving a net saver out to dry.


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This post was last modified: 17.04.2013 22:00 by Helsworth.

17.04.2013 21:50
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Titian
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Post: #4
RE: Suggestion: Debt Jubilee Reform

Besides the temporary popularity boost I do not see any advantages, especially of an economic nature, for which any player could wish to implement such reform, given that it is implemented properly (which, when looking back at the previous achievements of the AR team, does seem to be likely)


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This post was last modified: 17.04.2013 22:07 by Titian.

17.04.2013 22:07
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Helsworth
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Post: #5
RE: Suggestion: Debt Jubilee Reform

Well, in real life it would reduce the painful deleveraging process to one year or two, instead of waiting a decade for that to happen.
It would increase aggregate demand, create jobs/lower unemployment, and increase wages.
The idea of this policy is to act counter cyclically. That means there's high unemployment before the Debt Jubilee. If you'd implement it in a period where the economy worked at full employment or near full employment, indeed it would prove inflationary.
The idea for the Debt Jubilee Reform is to revitalize a regent's economy, by stimulating consumption, gross investment, and lowering unemployment. The cost is added to the regent's national debt, without an increase in the budget deficit.
So the right moment for this reform would have to be carefully planned by the regent.


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This post was last modified: 17.04.2013 22:18 by Helsworth.

17.04.2013 22:18
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Titian
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Post: #6
RE: Suggestion: Debt Jubilee Reform

Well, I am a bit short on time but the things I have to do are in fact quite similar to the issue at hand. So let's look at it.

In what way exactly do you want to write off private debt? Is it simply a law stating that from now on all private debt is gone? In that case you'll have a big problem because even bank deposits are debt.

Do you want the state to inject a huge amount of money into the pockets of the population (pretty much like a one time basic income payment)? In that case critics could counter with a Ricardian argument, which is that the people do not really feel richer (the state and therefore the taxpayers will have to pay the money back at some point so that they decide to save the money instead of spending it), given that we assume everybody to be rational (if they are not things will get even worse once the state cannot meet its obligations through income from taxes).

Do you want to print a whole lot of new money (i.e. "quantitative easing for the public")? In that case you will indeed do something, i.e. redistributing wealth, which gets a whole lot of people out of debt. But then we have to ask ourselves whether this would really be fair and whether it would change anything. Those people who had been in debt can easily take out new loans - after all, their credit worthiness has recovered a whole lot. Hence you only play Robin Hood whilst also delaying some of the problems into the future.

I am also not sure whether gross investment would benefit from this reform, in the cases of both, a closed and open economy. In any case the saving ratio will fall dramatically and hence there will be less investment. If the economy is open interest rates will fall dramatically (at least when ignoring the state if we go for option 3) and this will not only be the case because of a fall in the risk premium. As a result a lot of capital will flow abroad.

Inflation will occur in any case, no matter whether employment is below or above its natural level.


Also, what the guy said in the RT video is not entirely true. It is true that NCs do not often care about the banking sector, but there isn't any problem with plugging it into for example the LM model.
In that case the relevant money supply is simply a multiple of the central bank's money supply.

Sry, if any of this doesn't sound very clear; It's quite late, I tried to keep it simple and, in addition, my head isn't very clear atm


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18.04.2013 01:38
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BaktoMakhno
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Post: #7
RE: Suggestion: Debt Jubilee Reform

It is your second option he is proposing, 'quantitative easing for the public'. Steve Keen is a professor of economics and has written extensively on his proposals.

Steve Keen Wrote:
A Modern Jubilee would create fiat money in the same way as with Quantitative Easing, but would direct that money to the bank accounts of the public with the requirement that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injection would have their debt reduced but not eliminated, while at the other extreme, recipients with no debt would receive a cash injection into their deposit accounts.

The broad effects of a Modern Jubilee would be:

1 Debtors would have their debt level reduced;
2 Non-debtors would receive a cash injection;
3 The value of bank assets would remain constant, but the distribution would alter with debt-instruments declining in value and cash assets rising;
4 Bank income would fall, since debt is an income-earning asset for a bank while cash reserves are not;
5 The income flows to asset-backed securities would fall, since a substantial proportion of the debt backing such securities would be paid off; and
6 Members of the public (both individuals and corporations) who owned asset-backed-securities would have increased cash holdings out of which they could spend in lieu of the income stream from ABS’s on which they were previously dependent.

Clearly there are numerous complex issues to be considered in such a policy: the scale of money creation needed to have a significant positive impact (without excessive negative effects—there will obviously be such effects, but their importance should be judged against the alternative of continued deleveraging); the mechanics of the money creation process itself (which could replicate those of Quantitative Easing, but may also require changes to the legal prohibition of Reserve Banks from buying government bonds directly from the Treasury); the basis on which the funds would be distributed to the public; managing bank liquidity problems (since though banks would not be made insolvent by such a policy, they would suffer significant drops in their income streams); and ensuring that the program did not simply start another asset bubble.


You might not like the idea for ideological reasons, but that is no reason it wouldn't enhance Ars Regendi as a possible reform.


IRL Keen has other proposals to be coupled with the debt jubilee to avoid a return to the current situation:
http://www.debtdeflation.com/blogs/manifesto/


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18.04.2013 09:00
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Helsworth
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Post: #8
RE: Suggestion: Debt Jubilee Reform

Aggregate demand is income plus the change in private debt. That increase of private debt ads to demand. However, that change in private debt if it gets to high and becomes unserviceable for the private agent or household, that will have a negative impact on growth.
As stated in previous posts, aggregate demand drives production, not vice-versa. Producers produce only what they expect to sell. When the desire of the private sector to save has been satisfied, we'll see a rise in sales. Producers will take note of the consumers' signals and they will work to increase their production quotas and hire more workers.
Ask ANY business owner what keeps him from hiring more people and he'll say SALES. Things like the high cost of a loan or taxes are secondary items, and aren't seminal most of the times. In Romania taxes and fees alongside interest rates are pretty high. My cousin opened up a store with a neighbor of his, but they couldn't keep it open for long. Reason? Lack of sales.
Thus, as the private sector deleverages faster, the recession ends quicker. A country won't lose a century to deleveraging and another from lack of growth, like Japan has for instance. Or other countries from the EU. I invite you to read this link, to see the hoaxes of austerity thinkers and their institutions: http://forum.ars-regendi.com/bill-mitche...22923.html

As for inflation. I don't agree with you. So long as aggregate demand doesn't rise above output, monetary inflation won't occur. And if you have free labor willing to work and unused resources, you're clearly not operating at full output. And it's interesting that you use the word "natural" about employment, since it's necessarily tied with the government deficit, which equals the net savings of the private sector in a given year. In a fiat money system, where the government has monetary sovereignty, there's no such thing as "natural". And neither was in ancient rome or in the gold standard centuries. So long as there's demand for money in order to put in motion real economic activity, inflation isn't an issue.


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This post was last modified: 18.04.2013 17:14 by Helsworth.

18.04.2013 09:16
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Roger Mexico
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Post: #9
RE: Suggestion: Debt Jubilee Reform

This is proposed a lot in the US lately (e.g. by Paul Krugman)--forgive nationalized student loan debt, or devalue the currency to clear mortgage debt, etc etc.

In theory it would speed up recovery because people would put more money into new consumption more quickly if they weren't servicing large personal debts.

So you could model it just as an increase in private consumption with attendant effects on inflation/etc, but how meaningful it would be as a game mechanic would probably depend on whether the game code tracks private debt directly as an influence on saving and spending behavior. That isn't a visible stat to the player, so I don't know if it exists as a discrete variable in the game's calculations.

If not, a "jubilee" task would seem difficult to distinguish from any other generic "stimulus" policy. You can always just reduce taxes or something.

18.04.2013 09:22
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Helsworth
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Post: #10
RE: Suggestion: Debt Jubilee Reform

Roger Mexico Wrote:
If not, a "jubilee" task would seem difficult to distinguish from any other generic "stimulus" policy. You can always just reduce taxes or something.

Reducing fiscality impacts the budget deficit. The Debt Jubilee reform would impact only public debt. But I agree with you, it really depends on how the game matrix can suffer such provisions or modifications.


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This post was last modified: 18.04.2013 10:10 by Helsworth.

18.04.2013 09:37
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