Five Stories

The Smith family's husband and wife, each of whom are 40 years old, carry private debt of $210,000. One of their sons, age 17, who started a grass cutting business, owes a local bank $1,000. Thus, the family as a whole carries debt of $211,000. Nowadays, this is a typical family situation. Both parents' wages are typical, too. They are very frugal. They need a new car but keep holding off. How can they afford to finance it?

Enter the debt jubilee. The Treasury Department awards the Smith family a check for $184,800. To be exact, a letter addressed to Mr. Smith arrives with a check for $92,400 and a letter for Mrs. Smith arrives with a check for $92,400. This is because every American 21 years or older receives $92,400, regardless of their financial situation. The son does not receive a check. Each check of $92,400 comes with an iron-clad requirement: every cent must be used to pay down private debt immediately.

The Smith household is jubilant! Their combined household debt dropped from $211,000 down to $26,200. Their income has not changed but because their debt load is now quite low they can afford that new car and then some!

Mr. Jones, who is 63 years old, lives by himself. He is financially lucky: he is well paid and hasn't carried any debt for some time. Like every American who is 21 years of age or older, he finds a Treasury check for $92,400 in his mailbox. This check comes with the very same stipulation that Mr. and Mrs. Smith respectively received — he must use every cent to pay down debt. But he has no debt. In his case, he must allocate every cent to long-term investment, which could be newly issued corporate shares, long-term locked savings vehicles or government bonds. He smiles when he thinks of the additional income stream. He has wanted to trade in his car for an even fancier sports car. Now he can buy that new car without hesitation.

Where did Mr. Jones invest his $92,400? He chose to invest in the Widget Corporation. The owners of Widget breathe a big sigh of relief. They have been carrying a $1 million loan for years. Thanks to Mr. Jones and other well-off Americans, Widget has received $700,000 in funding on account of the Debt Jubilee. At last, Widget can afford to expand their factory. Now, they produce not only a Widget but also a McWidget. What a boon to their local economy! Local contractors were paid to expand Widget's factory. A lot of the Smith family's neighbors bought McWidgets. The Widget Corporation's profits are rising; they've hired more workers and have increased their pay.

The Smith family and the Widget Corporation both have accounts at Acme Bank. Prior to the enactment of the Debt Jubilee, Acme had lent $211,000 to the Smith household and $1 million to Widget. The owners of Acme had their share of sleepless nights. The economy may have been growing in nominal terms but adjusted for inflation it was stagnant. They could never be sure if Widget or the Smiths might skip a payment or worse, default.

Then they heard about the Debt Jubilee. At first, they panicked. Was this Debt Jubilee about debt forgiveness only? If the Smiths and Widget paid off their debts, what would happen to Acme's stream of interest payments?

Enter another feature of the proposed Debt Jubilee — Jubilee Bonds. Thanks to Jubilee Bonds, the proposed Debt Jubilee is not one but two gifts given to private bankers. Gift One: the Treasury Department assumes $184,800 of Smith's loan and $700,000 of Widget's loan. Gift Two: the Treasury Department awards Acme tradeable Jubilee Bonds exactly matching the terms and payment streams of those loans. The owners of Acme are happy. The Debt Jubilee is done in such a way that they are actually better off than before. Better yet, the economy is booming again. Acme looks forward to a brisk business in new lending.

Between 1938 and 1951, the central bank (Federal Reserve) and the Treasury Department worked much more closely together than they do now; "Fed independence" would begin in 1951, opening the door to the relentless buildup of private debt. The proposed Debt Jubilee also calls for the central bank and Treasury to work closely together, albeit somewhat differently than prior to 1951. In accord with the Jubilee, Uncle Sam is not determining winners and losers in the market and is operating according to law, not whim. This law includes adhering to double-entry bookkeeping.

By law, when the Treasury Department cuts $92,400 checks for every American adult, the central bank credits every recipient's bank account by that amount and simultaneously increases the reserves of that particular bank. (The recipients – we, the American people -, do not have an account at the central bank. Instead, we have an account at a member bank of the central bank system. The member bank, on the other hand, does have an account with the central bank.) These reserves are, by law, noninterest bearing and non-tradeable.

When individuals and businesses pay down their debts, as mandated by the Debt Jubilee, private banks are left with reserves at the central bank. The central bank sells Jubilee Bonds to the private banks and receives in return the aforementioned reserves. Everything is in balance. The private banks hold Jubilee Bonds equivalent to the retired private debts. The Treasury is now obligated to service the Jubilee Bonds.

The goal of the Debt Jubilee is to restore the private debt level of 1950 — reducing private debt as a share of GDP from the present level (136%) down to the 1950 level (50%). To pay every American adult $92,400 requires the sum of $27.36 trillion. Where does this money come from? Requiring neither an increase in taxes nor borrowing, this is fiat money, as explained in the section above, entitled "Uncle Sam." This fiat money is similar to the non-interest, non-debt money (Greenbacks) approved by the GOP-led Civil War Congress and emitted by the Lincoln Administration. Unlike Greenbacks, this fiat money is not meant to circulate indefinitely, having one job to do – eliminate private debts.

All of this fiat money is used to pay down private debt. In the process, this money goes out of existence. (Consequently, there is zero inflationary effect.) At the same time, the Jubilee Bonds come into existence. The Treasury Department must pay principal and interest on $27.36 trillion over 30 years. Assuming an interest rate of 5%, the taxpayer is out $1.74 trillion per year for 30 years.

On the other hand, the taxpayer and Uncle Sam reap a big net gain. Not counting the $1.74 trillion per year, the money supply has not increased one cent, yet the velocity of the pre-existing money (the rate at which money changes hands) has dramatically increased. Workers can do much more with the money they have. The relief inherent in the Debt Jubilee has gone far more to workers who tend to spend rather than to bankers who relatively speaking, being much fewer, spend little. The economy booms, benefiting taxpayers and increasing government revenues. And what about the $1.74 trillion per year? This benefits the banks who have more to lend, which, in turn, lifts the economy, too. All these projections are verified by the open-source "Minsky" economic model.