Sunday, July 20, 2014

Jubilee and Debt Forgiveness

It appears that many citizens who otherwise have little use for the Bible are latching onto the idea of "Jubilee" or debt forgiveness.  The popular telling of the idea is that all debts will be forgiven, credit scores repaired and those who were in debt will have a fresh start.

This idea is gaining traction because there are so many people who are in debt.  The concepts of Jubilee and debt forgiveness demand close scrutiny because of the number, and energy of the people who would benefit.

Well, what does the Bible say?

Passages that deal specifically with Jubilee and debt forgiveness occur in Leviticus and Deuteronomy:

Leviticus (Jubilee):

You shall treat this fiftieth year as sacred. You shall proclaim liberty in the land for all its inhabitants. It shall be a jubilee for you, when each of you shall return to your own property, each of you to your own family -Lev 25:10  All Bible quotes from NAB
On the basis of the number of years since the last jubilee you shall purchase the land from your neighbor; and so also, on the basis of the number of years of harvest, that person shall sell it to you. When the years are many, the price shall be so much the more; when the years are few, the price shall be so much the less. For it is really the number of harvests that the person sells you. -Lev 25:15-16
Observe my statutes and be careful to keep my ordinances, so that you will dwell securely in the land. The land will yield its fruit and you will eat your fill, and live there securely.  -Lev 25:18-19
The underlying assumption is that NOBODY would sell their land except in the case of dire emergency.  The land (with God's grace) is the source of both daily sustenance and wealth, i.e., live securely.  A man without land was reduced to being a day laborer, dependent on work and charity from his neighbors to feed his family.

It is also notable that the passage captures the time value of money.  It was Divinely mandated that accommodations be made in the price because both parties knew, beforehand, the length of the property transfer. 

One huge disconnect between the modern, pop incarnation of "Jubilee" and the Biblical version is that ancient creditors knew (ahead of time) that all debtors would default in year seven.  Clearly, the creditors making the loans fully expected to be paid in full, even if the duration of the loan was 10, 15 or even 30 years.

One other minor detail is that the property reverts back to the original owner in the Biblical model. The McMansion must go back to the builder or perhaps the farmer or the Indian tribe.  That diploma must be mailed back to the University (or the portion of the diploma with the University's name must be excised and mailed back).  All photos and knick-knacks must be mailed back to Carnival Cruise.  The spiffy new GMC Acadia must be shipped back to General Motors.

Deuteronomy (debt forgiveness):

At the end of every seven-year period you shall have a remission of debts, and this is the manner of the remission. Creditors shall remit all claims on loans made to a neighbor, not pressing the neighbor, one who is kin, because the LORD’s remission has been proclaimed. -Deut 15:1-2
Be careful not to entertain the mean thought, “The seventh year, the year of remission, is near,” so that you would begrudge your kin who is in need and give nothing, and your kin would cry to the LORD against you and you would be held guilty. When you give, give generously and not with a stingy heart; for that, the LORD, your God, will bless you in all your works and undertakings. The land will never lack for needy persons; that is why I command you: “Open your hand freely to your poor and to your needy kin in your land.  -Deut 15: 9-11

The second part of this passage identifies "loans" as charity.  In a small village, good will is more important than treasure.  The effects of compound interest will poison the village if no safety valve exists.

Key Point:  Both the borrower and the lender knew the sunset of the contract ahead of time.  That would undoubtedly color the terms and the scope of any wealth transfers.

The modern economy

Charles Hugh Smith writes that "debt forgiveness" is warm fuzzy language but the hard mathematics demand that somebody ends up eating a shit-sandwich.

Let's play out various scenarios in our proto-village.

Scenario One:

In this scenario the family that loaned out the funds writes down the entire loan.  This family would typically be an older couple who had lived frugally.  In their youthful vigor they sold their excess chickens, lambs and kids rather than consuming them.  They stayed up late at night mending clothing or altering it for use by the next youngest child.  They were diligent stewards of their resources with the intention that they would not be a burden in their old age.

The debtor's "forgiveness" throws the older couple into pauperhood and dependency.

Even if the older couple had any resources after the forgiveness, nobody is stupid enough loan it out as they guaranteed to be robbed of both principal and interest. 

That would lock up the credit market.  Enterprise would lock up.  Shepherds with superior rams would be unable to sell them because other shepherds would be unable to borrow the needed money.  Merchants would not travel to distant (or nearby) towns to purchase goods on the speculation they could resell them at a profit.  Nephews would not be able borrow a few dinari to pay their taxes and would be sold into slavery.

Scenario Two:

In this scenario the village elders "create" money to compensate the older couple.  Let us say that the additional minting of money doubles the money supply.

They pay the older couple with a pile of shiny, copper coins. Or, they could slip the neediest of the debtors just enough shiny, new coins at the start of each month to keep up the pretense of normality.

There are two consequences.  The immediate consequence is that each penny will now only buy half the goods that it used to buy.

The second consequences is that people loaning out money will figure out that they do not need to exercise due-diligence.


Old men have wisdom and resources.  Young men have energy and ego.

The young man must bend his ego to the older man's approval if he wishes to get the material resources in order to bring his dream to reality. The older man may have no desire to impart wisdom to the younger man.  But the necessity of protecting his assets forces the old man to review the younger man's business plan and armor it against foreseeable adversity.  Are the suppliers trustworthy?  Are the assumptions too optimistic?  Are the collections robust?  Are the reserves adequate?  Who will run the business when you are sick or away? Are you paying yourself too much?

Removing the loaner's risk via money creation takes the old man's skin out of the game.  He knows that he will be "made whole" if/when  the fledgling enterprise fails.  That invariably ends up in a misallocation of resources.  All of the actual, material resources that were invested in the business become stranded when it fails.  It is a "For want of a nail" story.

So not only is the purchasing power diluted but resources are removed from the market by intrinsically (but correctable) flawed, hare-brained, get-rich-quick schemes.

The net result is that the old couple's purchasing power will go down the toilet.  Viable businesses will lock up as the price of inputs spike due to the double-whammy of reduced purchasing power and the hibernation of due-diligence.

Families in the peak of the productive years would choose to either consume resources or not over-produce.  They choose this path rather than converting real resources into rapidly depreciating coins.  Less product on the market contributes to rising prices as day laborers must bid on fewer choices.

Within a generation there would be no "excess wealth" for entrepreneurs to leverage into on-going businesses.  Trade would crater.  Inability to pay tribute (taxes) would result in more prudent, neighboring villages to purchase choice properties and the original families would be marginalized.

Scenario three

Peak oil.  Transition to a basket of currencies for the world reserve currency.  Jhiad.  Malthus.  Climate instability. Politics of divisiveness, envy and resentment. UG99.

Perhaps one of the messages embedded with the scripture of "Jubilee" and "debt forgivness" is that we presume Godlike prescience when we loan money over long time horizons.  Humility (and history) suggest that perhaps we should be willing to make loans but to keep them on short time years, absolute maximum.  And that we should loan the money locally where we can serve as stewards, personally protect our assets and maximize our ability to make our neighbors successful.  We have a God-given mission to transfer our hard-won wisdom to the next generation.

I would love to see some other scenarios sketched out in Comments.  The world is in desperate need of some soft landings.

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