The book of Leviticus in the Old Testament of the Holy Bible ordered the Hebrews to observe the year of the Jubilee every 50 years. Essentially three things were to happen. Number one, the land was to be allowed to lay fallow (unplanted) so that it might have time to replenish itself. Number two, all slaves were to be freed. Many of these slaves had really sold themselves into bondage; because they could not support themselves in any other way. Number three, all land which had been sold had to be returned to the seller, again because it had been sold because of hardship. Esoterically, the Hebrews understood this to be an analogy of God’s forgiveness of the debt of sin to Him. Practically, you can see how the value of both land and slaves (real and personal property) would adjust according to how near it was to a Jubilee year. Verily, I say unto you, contemplate the great value this process had to fight inflation through the years.
In fact, Israel’s Mesopotamian neighbors, kings of Sumer and Babylonia in the Bronze Age, had issued royal edicts doing the same thing as early as 2400 BC, and many times thereafter. When you are the king, debt forgiveness makes for a happy populace.
Now comes Australian economist Steve Keen with the idea that it is the mountain of private debt we owe, not the government debt, which is killing the US economy. He may be right. I suggested as much in September 2009, because of Japan’s history. Let’s compare the decade of the1920s to the first decade of the 2000s. Government debt, bad as it is, was only about 80 percent of Gross Domestic Product (total national economic output) at the start of the first depression. It reached 120 percent by the end of World War II, which we had to finance. It then lowered to about 60 percent during the prosperous Reagan years, but has increased since until it finally surpassed 100 percent again this year.
At the same time, private debt (corporate and household) had reached 240 percent of GDP at the start of the first depression, and had reached a full 280 percent by 2007. The stock market crash of 1929 is infamous, but a lesser known fact is a U.S. real estate bubble from 1921 to 1927 (Florida being a prime example.) The private debt/GDP ratio grew by 45 percent in the decade from 1920 to 1930, and then repeated by growing by 40 percent in the decade from1997 to 2007; largely as a result of the infamous liar loans intended to make anyone who could fog a mirror a homeowner.  Obama’s government stimuli have not helped end the recession, and the private sector cannot lead the U.S. current economy to strong growth either, until it has lower leverage, or less debt.
Keen says the only salvation of the developed world’s economies is a year of Jubilee to write off the mountain of non-government debt. He goes on to argue that the lenders who greedily offered much of this debt, not caring about the consequences; should be made the victims, as opposed to the debtors. He first noticed the exponential growth of private debt in Australia in1995, and then noticed a similarity in the U.S. In 2005, he was the first economist to predict a coming economic relapse because of such private debt. Two years later, it arrived with a vengeance.
In truth, in the United States, most of the problem was the real estate values bubble caused by lending to people who had no real ability or motivation to repay. Such lending was devised to meet the needs of Wall Street; to be able to offer mortgage backed securities in amounts as low as $1,000 each; to be sold to investors around the world as AAA credit rated securities, when they were anything but. The economic models which proved the supposed viability of such lending were based on the presumed fact that real estate values would never fall, only rise. If a home ever had to be repossessed, it was bound to be worth more than the mortgage, so there was no way the scurrilous lender could lose. Too bad they totally ignored the American economy of the '20s, and the Japanese economy of the '80s, which fell about 1990, and has not yet fully recovered. One of the reasons is the Japanese allowed the banks to keep assets such as these on the books at their old value. I have a rental property in another county which was worth over $100,000 before the crash, and comparable sales in the neighborhood are now $30-35 thousand.
Keynesian economists have been preaching for years that, in times of recession, the federal government should borrow and spend, thus multiplying money available for the public to borrow and spend, thus reviving the economy. We have been doing this for nearly four years now and it is not working. The electorate seems to have so much more sense than the elected. Largely, they do not want to borrow and spend again because they are overleveraged already. The Federal Reserve is now trying to push a string, with no luck. The first fault with the Keynesian idea is that the government never tries to pay back its borrowing, even when times are good. Federal debt was last paid off by Andrew Jackson in 1835. FDR perfected the process of growing the debt until it approached our GDP, and it has continued since. The second fault is– Keynes is not working this time. Drastic measures are necessary, or we fall off a different cliff.
Keen’s solution next time.

Printed in the December 13, 2012 edition