Michael Hudson and Paul Craig Roberts: It Is Time To Remove The Debt Barrier To Economic Growth

Yves here. This short post is significant because it shows that some figures whose views are generally classified as right of center (although Paul Craig Roberts shouldn’t be so easily pigeonholed) are recognizing the validity of MMT as a description of how a fiat currency works and its implication. Roberts has also embraced the view that private sector debt is a negative for growth and economic stability.

By Michael Hudson and Paul Craig Roberts. Originally published at Paul Craig Roberts’ website

Out of habit, American economists worry about federal debt. But federal debt can be redeemed by the Federal Reserve printing the money with which to retire the bonds. The debt problem rests with individuals, companies, and state and local governments. They have no printing press.

We have explained that the indebtedness of the population means there is little discretionary income with which to drive the economy. The offshoring of middle class jobs lowered incomes, and after paying debt service—mortgage interest, car payments, credit card interest, student loan debt—Americans’ pockets are empty.

This situation has been worsened by Covid lockdowns. In the US the federal government has sent out a few Covid payments to help keep people’s heads above water as they face expenses without income. The financial press refers to these Covid checks as “fiscal stimulus,” but there is no stimulus. The Covid checks do not come close to replacing the missing wages, salaries and business profits from lockdowns.

Corporations have indebted themselves and impaired their capitalization by borrowing money with which to repurchase their stock. This has built up their debt in the face of stagnant or declining consumer discretionary income.

We propose to deal with the debt crisis by forgiving debts as was done in ancient times. Our basic premise is that debts that cannot be paid won’t be. Widespread foreclosures and evictions would further worsen the distribution of income and wealth and further contrain the ability of the economy to grow. Writing debt down to levels that can be serviced would clear the decks tor a real recovery. Income that would be siphoned off in debt service would instead be available to purchase new goods and services.

A few economists muttered that we were overlooking the “moral hazzard” of absolving people of their debts. But leaving the economy stagnated in debt is also a moral hazzard.

Policymakers did not endorse our proposal, but, in effect, policymakers adopted our policy. However, instead of forgiving the debt itself, they forgave payment of the debt service. Individuals and businesses who cannot pay their landlords or lenders cannot be evicted or foreclosed until June. This doesn’t hurt the lenders or banks, because the loans are not in default, and their balance sheet is not impaired. The banks add the unpaid payments to their assets, and their balance sheets remain sound.

When June arrives, the prohibition against eviction and foreclosure will have to be extended as the accrued debt service cannot be paid. Extending the moratorium on foreclosures and evictions will just build up arrears. Is the implication a perpetual moratorium?

The question is: If policymakers are willing to forgive debt service, why not just forgive the debt. The latter is neater and clears the decks for an economic renewal.

The US economy has been financialized. Debt has been built up without a corresponding gain in productive capital investment in order to carry the mounting debt.

The main purpose of bank loans is to refinance existing investments, not to expand productive capacity with which to service the debt. It is not possible to grow out of debt in a financialized economy, because too much income is used for debt service. The way to deal with this problem is to write down debts.

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  1. Mike R.

    If we zero out the debt, what will prevent it from ballooning again? Without structural changes that put responsible lending back in local hands (e.g., local banks have to hold their loans), nothing will change.

    Second, in case anyone hasn’t thought this through, we don’t need or want economic growth anymore. Climate change as well as the demise of cheap fossil fuel is staring us in the face. The massive amount of economic “activity” that is fueled by cheap oil has to stop. We either do it somewhat on our terms or let mother nature bat last. What that means is that more and more work has to be done by hand, “wealth” will decrease and people will have to live simpler (much simpler) lives.

    The whole debt problem will take care of itself in one gigantic default. The Fed will try and monetize the problem and we will have an inflationary storm. That will be the reset.

    1. jefemt

      +1. Before I read the article, my biased reaction was,
      “Hoo boy, growf is NOT what we need on Mother Erf right now!”

      Great article, at least in terms of paradigm shifts . I sent it along to out to my Congressional delegation. Unfortunately, 2 of the 3 appear to be illiterate dogmatics.

    2. chuck roast

      Well put. And if we don’t want or need economic growth any more what do we want and need? Everybody will be required to be satisfied with their economic lot both now and into the future. Moreover, your kids will have the same future you have. And they already have their anthem. If we don’t want the illusory economic pie is to get any bigger, then the only answer is more equal sized slices for everybody. Uh oh.

      1. Tom Doak

        Most kids would happily take the same future we had. What they are looking at now is much less.

  2. oliverks

    Instead of debt forgiveness, why not just do a direct payment to everyone. By doing this, you can re-balance the wealth of the country in an appropriate fashion.

    This is fair to everyone, regardless of the debt they own. So for example, let’s say the total wealth of the country is W, then you might decide to distribute W/2 in a direct payment.

    This means the bottom 50% will own about 1/6 of the wealth in the country. This would solve the debt problem for almost everyone, and it would not be unfair to people who tried to live debt free or with less debt.

    1. Anonapet

      Yes, this is Steve Keen’s “A Modern Debt Jubilee” but he would also place restrictions on new bank deposit/credit creation to prevent a new bubble.

      This is the way to go but Dr. Hudson seems wedded to wiping out uninsured (large) creditors even if provides no restitution to those who have no debt but aren’t uninsured creditors either.

      Btw, wealth also needs to be addressed in REAL (e.g. land) terms or the rich will simply buy up everything of value they can.

    2. JE

      I like the idea of this proposal, but the practicality? Say wealth (W) in the US is $50 trillion, which seems to be in the ballpark if a bit low. Then you’re talking about giving each individual in the US around $200k. Without a debt forgiveness, this is basically a huge, additional handover of wealth to the rentiers since average househould debt is in the $140k ballpark. I think we can all agree that if we were to mint $50 Trillion new dollars from the ether, we wouldn’t want to give $35 Trillion of that straight to the banks. Right?!!!? What is needed is a complete rethinking of wealth, income, and what we what to incentivize in our society. Failing that, debt forgiveness and a large wealth transfer isn’t a bad start but neither are likely until the wheels are really coming off. Read Robinson’s Ministry for the Future to get one author’s take on how that could play out in the climate change era. Fascinating book that was recommended in comments here. Thanks all!

      1. Anonapet

        Never had a mortgage but my general understanding is that debt can be prepaid for a huge savings in interest costs.

        And why be so concerned about the rich having some more dollars to hoard (or drive up the stock market) when the flip side is people owning their own homes and ceasing to be mortgage slaves?

        1. KiWeTO

          Because it doesn’t solve the underlying structural problems. Said people will then jump on to the mortgage bandwagon for a second home, and become landlords too.

          Unfortunately, it will take a lot of politicking to get the average individual to look beyond their own 100% interests. Sharing 5% would probably be a big fix for society, but hey, no homo economicus wants to be the first altruist. Tax is a horrible inefficient tool to share that 5%… but we haven’t really discovered nor accepted any better tools.

      2. moss

        Never had a mortgage either, but as I understand Steven Keen’s suggestion, on receipt indebted ones would be required to pay back debts first. So, accepting your numbers, $35 Trillion of that straight to the banks which would immediately shrink both sides of their balance sheets by $35Tr and the banks would no longer continue to receive interest (their net revenue) on this amount. What’s not to like?

    3. BlakeFelix

      I agree, although I think that a UBI would be likely better than a lump sum. And liberalize bankruptcy, there should be a path to get out from under oppressive debts, it’s called bankruptcy. Exempting debts like student loans frm bankruptcy is bad, IMO. If you want more kids going to college, give them grants, not “cheap” loans.

  3. Jeremy Grimm

    I am very concerned about the possible impacts of widespread foreclosures and evictions when the moratoriums end. I am also concerned that many of the jobs that were lost and the businesses that closed their doors are gone forever and I do not believe we will just grow out of these problems. Many debts cannot and will not be paid. These issues are peripheral but I believe they are pressingly germane to the larger issues of the growing debt and finance misstructures afflicting the US economy.

  4. Susan the other

    Just calculate the amount of debt, issue some very long term treasuries, and cancel every dime of it. Those treasuries go in bank vaults and become a stabilizing asset. For the rest of the century. The banks will look good on paper finally. Then we can all get to work on social and environmental needs. We can spend as necessary. Jobs will almost automatically be “guaranteed”. Although it’s time to make earning or having a living wage or income part of a codified human rights law. Along with good housing, education, nutrition, and health care. So much to do to make things right.

  5. Anthony G Stegman

    I don’t agree that debt should be forgiven. Many folks are frugal and don’t spend more than they earn. Why should they be punished, and in some cases forced to subsidize those who are profligate spenders? That’s ridiculous!!

    1. JTMcPhee

      Maybe there might be some common benefit, like comes from paying taxes (I know, MMT, but not in the case of state and local expenditures) to fund public schools and roads, in lifting a huge crushing burden that drags down the whole political economy, those “forgive us our debts” often incurred out of desperation and in many cases a result of fraud, from that thing called “society?”

      I see the scum who “collect debts,” often legally extinguished debts or flat-out fraudulently “documented,” immediately jumped on the chance to grab the survival money that Congress (controlled by monied interests) has in its penurious “generosity,” has dribbled out.

      Kicking sideways and down — “I paid my debts (for whatever purpose incurred, necessity or frivolity or whatever) so everybody else should suffer the same thing) so screw the whiners!”

      The worst kind of mean-spirited “means testing,” in at least my view…

    2. michael hudson

      I’m sure that the Rockefeller’s and Jeff Bezos are the most frugal Americans around. So are the bondholders of Citicorp and the 0.1%. If only the poor could be so frugal!

    3. SOMK

      In a scenario where one person has money and the other person does not, it is generally the person who has money who is in power and ultimately it is their call to lend out the money, technically they are giving you a one-off payment and in exchange the debtor will repay that amount in smaller instalments that will add up to a healthy profit for the creditor, the bank and financial institutions have the capacity to do due diligence, also interest rates have been rock-bottom pretty much the duration of the current century, whilst wages have been stagnant for 40 years, so loans are being practically thrown at people willing to take them, many of whom are desperate (health bills) or are looking to better themselves (education, buying a home, setting up a business). I can’t speak to the frivolity or otherwise of the average debt, save to point out that the gross inter generational difference in the ratio of income to house prices is tantamount to theft, seeing as I don’t know anyone under the age of 45 who consented to working three times as long as their parents did to afford their own home. No moralising will change the fact that a debt that can’t be paid won’t be paid.

      Also this:

      “If [a man] spent his money, say, in giving parties for his friends, they (we may hope) would get pleasure, and so would all those upon whom he spent money, such as the butcher, the baker, and the bootlegger. But if he spends it (let us say) upon laying down rails for surface cars in some place where surface cars turn out not to be wanted, he has diverted a mass of labor into channels where it gives pleasure to no one. Nevertheless, when he becomes poor through failure of his investment he will be regarded as a victim of undeserved misfortune, whereas the gay spendthrift, who has spent his money philanthropically, will be despised as a fool and a frivolous person.”

      -Bertrand Russel

  6. Mikel

    But…but…NOW is the V shaped recovery …like the one the claimed was happening months ago.
    Like the one they claim happened after 2008.

    These guys are talking about convincing some power mad people who are scared to death about the non-sense they strut around about. All they have left is pretending anything they do makes sense or is a benefit to the societies around them.
    That parabolic stock market rise isn’y confidence. It’s FEAR.

  7. Charles

    Question: did the middle class engineer the offshoring of their jobs? Not really. The people responsible for that action were the wealthy in this county. This was a great short term strategy for the wealthy class, but the long term consequences are that the middle class amassed huge debts in which to try and maintain their standard of living. Debt forgiveness is one way out of this situation, but at the risk of inflation like we had in the late 1970’s (from Vietnam War borrowing). If the US. is to avoid inflation, then the wealth has to come from somewhere to pay back this debt. Seems to me that this wealth (the value that backs up the paper money) should come from the people that designed the great wealth transfer in the first place, i.e. by taxing the wealthy class to pay down the debt. Some other laws that need to be changed are the re balancing the power between the people that make business decisions and the people that actually do the work of building stuff. Things like reestablishing the negotiating power of unions, and making arrangements like Germany is doing, which is to require 40% of the board members of all large companies to be held by employees. This would be a good start.

  8. dummy

    All our economic problems stem from the nature of our money.
    If all money is to be true money, no one can be permitted to create or destroy money except the government.
    Each citizen who thinks he owns a dollar of real money should own 100 cents of claim on the government and not 15 or 20 cents.
    The government, when it wishes to expand or contract money, should simply add or subtract that many dollars and not have to add or subtract only a fraction as many as reserves, waiting for banks and people to do the rest.
    Above all, no one should enjoy the incidental benefits of money creation but the government, using these benefits for its public purposes.

  9. Cuibono

    Wild: i never thought i would read something written by these two men together. I admire both for very different reasons.

  10. fringe element

    Well, what if we could somehow shut down the tax havens, nationalize the big internet monopolies, levy confiscatory taxes on the wealthy and re-regulate finance?

    As far as work that pays a living wage goes, we need millions of home health care workers and another few millions to moderate social media, and that is before we bring national infrastructure up to modern standards.

    Could all of that be managed without growth or boom and bust cycles?

  11. Chris Herbert

    Public debt can be left to ‘run off,’ without replacement debt. Not a problem, really. Private debt is another matter. Debt forgiveness is a wealth tax. Our crooked tax code for the past 40 years has been criminal in nature and intentionally written to favor the ‘contented’ class. So there is no ‘moral hazard’ in taxing most of it away. If you print money to pay the private debt off, the rich will become more rich and at the first opportunity (the next inevitable recession in our dysfunctional financialized system) they will just buy all the stuff back cheaper. Most of our so-called ‘free markets’ are rigged. Strict regulation once again will pull those horns back. The federal government should always control the ‘commanding heights’ of the national economy.

  12. Dirk

    I’m not a big fan of total debt forgiveness. A limited plan would work, I’m for. I describe later.
    Other things need to be addressed.
    1) Currently there is no control over the money supply. Everyone is creating money (credit) from retailers to wall street. There is no control of any shape or form. This has to addressed before anything.
    2) The Federal Reserve has to contained to the original box of control when created or done away with.
    3) The major source of income inequality are the numerous tax codes that are written to protect the elite.
    pretty much the whole tax code will have to be changed.
    4) The protecting the officers of the corporations have to be changed.
    5) All government spending needs to be controlled.

    Plan for debt forgiveness.
    1) Do away with compound interest, adjustable interest, daily and hidden compounding schemes.
    2) All current debt will be forgiven, with the amount already paid is 150% (max maybe less?) of the original
    loan of credit balance. No exceptions.
    3) Any penalties and other associated fees will also be forgiven.
    4) All future credit and loans will be a simple interest rate.

    This will allow most of the dept to be resolved very quickly.

    1. Yves Smith Post author

      Money supply cannot be controlled. The Volcker/Thatcher pretenses to do so were failures. Volcker talked about controlling money supply but in fact recored show that he didn’t want to try interest rate targeting. His real intent was to let interest rates go as high as they had to to break labor wages. His key metric was an index card tracking construction industry pay rates.

      On top of that, it was found in the Volcker/Thatcher experiments that money supply was useless as a policy tool since it bore no relationship to ANY macroeconomic variable. That’s why no one but monetarists like Ambrose Evans-Pritchard, who managed to miss getting the memo, still talk about it. Even if you can kinda-sorta-not-very-well influence money supply, you can’t control monetary velocity.

      1. Dirk

        You are right on your the comments. I should of came up with a better thought. But you have brought up a point that is the real relevance of the current situation. What, I do in my real world is leading edge technology. I’m one of the nameless persons that designs technology and makes it work. When it’s a total mess, over budget and behind schedule. I’m one of the people that fixes it. The point you made with the Volcker/Thatcher experiments. Is a classic example, of a one method tool to solve a problem in large complex system. Also, there is never a single cause for any problem. And, from experience, the more controls you introduce in to a large complex system. The more out of control the systems get.
        And now “god forbid” they tossed AI (should be Application Intelligence) in to everything. AI is now the one tool solution for everything. At some point, if you have time, I’d like to have a discussion. It might be interesting.

  13. dummy

    I am surprised that learned people like Hudson will prescribe such radical solution.
    There is zero similarities between debts jubilees of the ancient times and the situation we are in right now.
    In the past, debt was owed mainly to the King, and forgiving some didn’t really make them poor or create existential problems for the monarchy.
    We owe the debts to each other and defaults or jubilees would mean instantly for example that most pension funds will be bankrupt. I will let you guess how the house of cards will collapse from there.
    All similar debt problem situation in the past have been resolved through a period of austerity, meaning we have to live within our means , build up savings and pay down debt.
    There is no other fix that won’t be costlier for the society in aggregate and Hudson should know it.

    1. Yves Smith Post author

      This is not “We owe the debts to each other.”

      This is “The 99% owes the 1%”. So it’s strongly parallel to the ancient Jubilees.

  14. JR

    It certainly appears that now is the time to be thinking about the pressures that will come into play when/if the moratorium is lifted. One conceivable outcome is that if renters/borrowers have their obligations forgiven/dismissed, the burden of those obligations will de jure shift from the issuers of those obligations (the renters/borrowers) to the holders of those obligations (landlords/lenders) (and one can argue that a de facto shift has already happened). Thus, there will be many landlords and others who will say that they, too, need to be made whole. This in turn will give rise to pressure for another federal rescue package of one sort or another.

    While I find myself sympathetic to the idea of relief for the mom and pops, I don’t really know yet what to think about whether the hedge funds (name your usual suspects) that bought into the housing space after the Financial Crisis should be afforded any relief.

    One other quick observation relative to debt relief: the ant and the grasshopper issue does need to be addressed; however, and if memory serves, I recall that Mr. Keen has in some measure addressed the issue.

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