Wednesday, July 13, 2011

Babylon is nothing but an infinite game of chance

Awhile back I suggested that the only solution to our economic problems was a Biblical jubilee, and pointed to some economists who were talking semi-seriously about it. Now here's another one, with a twist that could make it work: rather than have one every 49 years, do it probabilistically, with a 2% chance in every year, so people don't game the system.

I wonder if a non-global jubilee would work. What if you only forgave the debts of a randomly-chosen 1/5 of the economy every ten years, or something?

I don't suppose something like this would ever happen; there is a built-in bias against random processes in government, perhaps because of its inevitable extrapolation. There used to be a draft lottery, and some public goods are distributed that way (such as slots in desirable schools in San Francisco), so it's not inconceivable.


scw said...

Maybe better than a "jubilee" in which people were forgiven their debts would be not to allow unsuitable borrowers to get in debt in the first place. The mortgage crisis in this country originated from Fannie Mae's and Freddie Mac's lending to borrowers with only 3% down. No one should ever have got a mortgage with such a negligible down payment. Some people just don't deserve loans.

hoyhoy said...

Michael Hudson always talks about this. I mean, a jubilee is going to happen one-way-or-another anyhow. There's like $200T worth of paper wealth in the world right now (perhaps several quadrillion if you want to take the high estimate of notional derivatives) It'd take Milton Friedman running a planet the size of Jupiter on a neoliberal model with 100B inhabitants to cash in all of these immaterial wealth tokens.

scw said...

Inflation (brought about by the monetization of sovereign debt) is just a gradual sort of jubilee, because it enables those who borrowed dear to pay back cheap, perhaps very cheap. It amounts to a transfer of wealth from savers to borrowers, from creditors to debtors, just as a jubilee would.

The biggest beneficiaries of inflation are of course the biggest debtors - governments - but the smaller debtors are carried along for the ride, as the remora are by the shark, and they batten upon the resultant carnage in like fashion.

mtraven said...

Mild inflation would be good for the economy for just this reason, as it effectively reduces the debt load (but not by enough).

Hyperinflation is not going to be a good time, if we go that route.

scw said...

Pray explain what you mean by "mild" inflation, and just how it is beneficial to a nation's economy.

I was prompted by recent comments on a thread at another blog about the purported "private" ownership of the Federal Reserve Banks (which is an anachronistic legal fiction), to reflect on what a genuine privately owned central bank can accomplish. The Bank of England, established in 1694, was originally privately owned, and remained so until it was nationalised by the Attlee/Cripps government in 1946.

The value of the pound remained stably valued in gold at a rate of $4.86 U.S., with gold officially priced at $20.67/oz., for a century before 1914. The privately-owned Bank of England successfully managed partial-reserve banking under a fully convertible gold standard during a period that saw an industrial revolution, the unparalleled expansion of the British Empire, and an increase in the British population to more than double what it had been, all coupled with an improvement in general living standards.

The 1914-1918 war saw the suspension of gold convertibility. After the war, the British tried to restore the former gold standard and exchange rate, but the world's economy had been so debauched by wartime inflation that it was not sustainable. In 1931, Britain took the management of foreign exchange under its Treasury and went off the gold standard. By the onset of World War II, £1 was valued at about $4.00 U.S., with gold officially priced at $35.00/oz.

After nationalisation in 1946, the exchange rate soon sank to £1 = $2.80. By the 1960s, it was £1 = $2.40. After the abandonment of Bretton Woods in 1972, it has floated downwards to its present rate of £1 = about $1.60. Thus the pound has experienced even more inflation in that period than the U.S. dollar.

If "mild inflation is good for the economy (but not by enough)" then, according to your theory, surely Britain's economy should have been flourishing compared to that of the United States during the post-WWII years. The newly nationalised Bank of England certainly managed to inflate the British currency after 1946. Yet this was a period of British decline, quite unlike the century before World War I, during which the privately-owned Bank of England steadfastly maintained the pound's purchasing power, even as Britain moved from strength to strength.

History teaches over and over again the lesson that countries which are robust and growing maintain stable currencies, while inflation is a symptom of economic decadence and national weakness.