If you watch or read the news on a regular basis, you will probably see an occasional report on the staggering amounts of personal debt and government debt that will never be repaid by many. Is it time to revive the debt jubilee that was first implemented in the Days of Moses when debts were forgiven every 50 years?
I first wrote this article in October 2017 and is updated in September 2020. We haven't fallen off the debt cliff yet, but life is sure different than three years ago.
Our Debt Problem
It's no secret that we, as individuals and countries, have lots of debt. Here are some U.S. debt stats you might be unaware of:
- Our national debt in 1984 was $1.7 trillion. That's how much our national student loan debt is today!
- Meanwhile, the national debt has ballooned to $26.7 trillion in 30 years (as of Sep 10, 2020).
- Credit card debt is $987 billion
- Auto loan debt is $1.2 trillion
And these statistics do not include any debt numbers for corporations, local governments, and other countries.
2020 Pandemic Debt
The worldwide economic shutdown is adding fuel to the debt amount for national, state, and local governments. And let's not forget about personal debt and corporate debt. The world seems to be in debt up to its eyeballs.
As there is so much debt, we are seeing US federal lawmakers take these actions to help individuals make ends meet.
- Interest-free federal student loan forbearance through December 31, 2020
- Rent and mortgage moratorium
- Enhanced federal unemployment benefits up to $600 per week (plus state benefits)
- Interest-free loans to small businesses and non-profits (Paycheck Protection Program)
Below is one of the most interesting headlines I've seen in 2020. It's from April 2020, in the throes of the initial global shutdown.
It's no secret the federal Republicans and Democrats cannot form a budget. Several states have money problems too. What's going to happen if states declare bankruptcy? Will the federal government bail them out and add to the national deficit?
There's no serious talk of balancing the federal budget from either party. Instead, we're seeing the opposite approach of Modern Monetary Theory where we continue print more money to paper over the debt cracks underneath. I don't know exactly what the global financial system will look like.
In the meantime, gold stocks and buying physical gold are two of the most popular investments in 2020. Investors are seeking to reduce their exposure to paper-based assets and gold is the oldest physical currency.
I'm not a gold bug, but the rapid climb is debt is concerning to me. I'm sure it is to you as well as you're reading this article.
Puerto Rico Debt–A Future Glimpse of American Debt?
What got my wheels turning about the debt jubilee has been the remarks of several key government leaders in the aftermath of Hurricane Maria–a category 5 hurricane that devastated Puerto Rico in September 2017.
You probably remember some of these headlines: 100% of Puerto Rico loses power, Hurricane Maria throws Puerto Rico back into the Stone Age, and How Will Puerto Rico Ever Rebuild With Their Massive Debt?
Meanwhile, Puerto Rico is $129 million in debt, 43% of the 3.4 million citizens live beneath the poverty line, and they can't print more money like the U.S. Federal government to kick the can down the road. Puerto Rico is broke and it can be a sign of future economic times for the rest of the country and world.
Update: A June 2020 US Supreme Court decision determines the Puerto Rico debt is a “local issue.” It doesn't appear the island territory will receive a debt jubilee at this time. The Puerto Rico debt is the US' largest government bankruptcy so far.
A Brief History of Debt Jubilees
I'm not the first person to mention a debt jubilee for the 21st century.
A quick web search shows articles from Jubilee 2000 (20 years ago), pre and post-Great Recession, and the present day as people either favor or dislike the idea of a debt jubilee. Many a leading financial publication, blog, and national thought leaders have proposed forgiving the debts of sovereign nations from developed countries like Japan or the numerous African nations ravaged by civil war, famine, and unrest.
Central bank printing presses around the world are humming to bail out airlines, other companies and provide direct aid to individuals.
What we haven't seen yet (at least in the United States) is if lawmakers will start forgiving debts.
The Biblical Debt Jubilee
My baseline is the biblical debt jubilee. Yes, times are a little different today but at the end of the day, debt is debt.
In Biblical times, the “Jubilee Year” signified three events:
- Slaves were set free
- Land was returned to the original landowner
- No farmlands were worked for an entire year (even the land got to take a sabbatical!)
Could you imagine not growing any crops for an entire year or taking a review off of work?
Can you afford to take a year off work?
That means building an emergency fund and proactively saving to ensure you had enough food and money to live for the year of rest.
Personal Debts Were Forgiven Every Seven Years
In addition to the Year of Jubilee every half-century, there were also provisions for personal debt forgiveness every seven years:
At the end of every seven years you must cancel debts. 2 This is how it is to be done: Every creditor shall cancel any loan they have made to a fellow Israelite. They shall not require payment from anyone among their own people, because the Lord’s time for canceling debts has been proclaimed. 3 You may require payment from a foreigner, but you must cancel any debt your fellow Israelite owes you. –Deuteronomy 15:1-3
Source: Bible Gateway
Our current financial system is much different than the Israelite financial system. Our most expensive loans have borrowing terms longer than seven years:
- Student loans have a 10-year repayment term
- Home mortgages are usually for 15 or 30 years
Plus, banks lend money to you regardless of your race or creed. Israelites were only required to forgive the debts of fellow Israelites and could continue requiring payments from non-Israelites.
What Does a Debt Jubilee Look Like Today?
Our financial system is much different than ancient Isreal. The middle class didn't exist in their society as we know it today.
If Wall Street or Washington, D.C. begins forgiving debts, it's safe to assume there would be a strong negative impact on the market in the short term and long term. Investors are going to sell because they fear the companies migth go bankrupt. Uncertainty is one thing markets don't like.
And if a government-mandated debt jubilee gets enforced, how do they decide who has their debts forgiven?:
- Borrowers with a high debt-to-income ratio
- Residents of particular states or territories
- Taxpayers who live below the poverty line
- Specific types of debt (i.e. Puerto Rican government debt, auto loans, student loans, medical debt, etc.)
It could be all four of these groups, a combination, or only one.
Those are all decisions that the policy wonks, politicians, and lobbyists would have to make. While there would be some short term stock market volatility, I believe the markets would rebound.
Of course, the debt forgiveness would rapidly expand the government debt above its already historic high levels.
Different Debt Jubilee Options
We don't know how a debt jubilee will look like because we're not there yet. There are too many variables.
Whichever party wins the White House, House, and Senate will give us a better idea.
However, we do have an idea of what arrows are in the government quivers:
- Call a bank holiday and take 25% of 401k assets
- Print more money…a la quantitative easing, yield curve control, and buying distressed debt
- Mandatory debt forgiveness (unpaid loans and bonds are written off with no further payment required)
Once again, the powers that be can decide to pursue one, two, or all three of these options. Maybe there's another option floating around that I can list as well.
Savers Get Hurt
Obviously, savers and the wealthy would be punished the most as their bank account are smaller and the remaining balance loses worth if the currency devalues. For a great explanation of monetary systems, I recommend reading Whatever Happened to Penny Candy by Richard Maybury.
If the government enacts mandatory forgiveness, banks will have to write-off a substantial chunk of change that will affect shareholders and bank members alike.
Or, the stock market tumbles because investors lose confidence because they don't know if more assets will be seized or lending companies can remain solvent now that they are receiving far fewer interest payments.
There will be lots of short term financial volatility in the investment markets and even the employment sector as business models change and private citizens adjust to the new amount of disposable income. Of course, we'll also have to see what the US dollar is worth if they use new dollars specifically for debt forgiveness.
My Opinion on the Debt Jubilee
While I don't think the global economy can go on as it has long-term since the Great Recession where world governments can print more money to put a band-aid on their own federal debt situation, there are steps you need to take as an individual.
Don't Put Your Faith In Princes…Be Self-Sufficient
Psalm 146:3 (NLT) says, “Don't put your confidence in powerful people; there is no help for you there.” While I think many of our government leaders have good intentions, they are humans just like us and we mess up more often than we hit home runs.
After all, how many politicians fulfill most of their campaign promises?
With that in mind, I'm not going to wait for Washington, Wall Street, or the United Nations to decide how debt forgiveness takes place. Yes, their decisions can greatly affect many areas of our economy from lending rates, stock prices, and employment, but we have to make decisions based on the current reality; there are too many variables and a 2018 debt jubilee can look vastly different than a debt jubilee in 2020.
Make Your Own Plan To Get Out of Debt
A personal goal that my wife and I share is to live on $35,000 a year.
One way we do this is by borrowing as little money as possible. If you do borrow money, get a fixed interest rate as banks might increase variable rates on non-forgiven loans to recoup lost profits. Banks might also raise rates if consumers discover they have new spending power to go into debt again.
Currently, our only loan is for a mortgage which we are making extra payments on so we can become debt-free even sooner. When our house is paid for, we no longer have to write a $600 check each month to our lender. That's also an additional $7,200 we can spend (or save) on something we want to.
If you don't know where to start with making a debt-payoff plan, I recommend Dave Ramsey's Total Money Makeover. I have a copy of my own and periodically reread certain sections for personal motivation.
Build an Emergency Fund
When I quit my full-time job in 2015, I wasn't expecting to not work full-time for a year. Could you afford not working for an entire year? We lived on a shoestring budget, but we made it and you can too with proper planning.
During the 2009 Great Recession, if you needed to find a new job, it took three months on average to find one. It might be the same way in 2020 as social distancing is changing how we live life and make money. For that reason, you need at least three months of living expenses in an emergency fund.
We never pay bills from our emergency fund. Plus, we have our paychecks deposited into a different bank account so we don't confuse our emergency fund with our spending money. This also helps guarantee that we will have the money for a rainy day.
While the stock market is cyclical between bull markets and bear markets, the stock market is one reason why America is one of the most prosperous nations in the history of the world. The stock market is one of the few ways your money can outpace inflation. Even if you begin investing with little money, you can build a large nest egg with consistent investing and patience.
How would a debt jubilee affect the broad market?
I'm not an expert, but I think the impact on the market depends on how the debt jubilee pays out. If lenders are required to write off the balances of delinquent loans, those stock prices will tumble in the short term. That decline can spread into the broad market as investors lose confidence because they don't know which sectors will see their balance sheets diminish next.
In the meantime, the US government in June 2020, announced being the “buyer of last resort” for stock ETFs and bonds.
It's almost impossible to predict the day-to-day movements of the market even in normal market conditions, so I'm not going to spend too much time guessing. But, I don't think you should have all of your money tied up in the market in case a market crash occurs or the government captures 25% of your total 401k balance.
Besides solely investing in stocks, you might also consider investing in income-producing tangible assets like:
- Real Estate (Investing in rental properties, flipping houses, and other passive income streams)
- Or these stock market alternatives
Diversification is always the keystone to a sound income strategy.
Get a Side Hustle
I'm a big fan of income diversification and “making hay when the sun's shining.” My wife and I have several different income streams besides our regular 9-5 job. One reason why we like side hustles is that the extra money can be used to pay off debt, invest, or put into savings for future use.
Having a side hustle is also another form of income security. If your employer suddenly goes out of business, you could be out of a job for three months before somebody else hires you. Because you already hustle on the side, you aren't forced to flip burgers at McDonald's until you receive a job offer to begin earning a real paycheck again. Not only can you earn more than minimum wage, your side hustle might also turn into a replacement income.
Take me for example. In three years, I've went from working five days a week outside the home to only having to commute one day a week because I switched to a new career field.
Can We Prepare for a Debt Jubilee?
What to do if or when a debt jubilee happens is a “million dollar question.” There are way too many variables to make an accurate plan, but that doesn't mean we should sit on our hands doing nothing.
Personally, I'm taking my time and money to hedge our wealth into investments and tangible assets. One of the most level-headed resources I follow is the Global Changes and Opportunities Report by Jim Powell. He doesn't focus exclusively on a debt jubilee but he provides advice for investing in today's market and how to prepare for the future. As full disclosure, I subscribe to this newsletter but I receive no kickbacks if you join; Mr. Powell is one of the few trustworthy sources without an ulterior motive.
Stop Living Paycheck to Paycheck
Beyond keeping an ear to the ground, I recommend paying off your high-interest debt as much as possible. Start with your variable interest rates first as they can increase at any time, then concentrate on your fixed interest rates starting with the highest rate first.
Paying off your loans and eliminating a monthly payment means more disposable income you can spend if we experience a sharp rise in inflation or to invest in assets that will help you accumulate wealth as the years pass by.
Don't Rely on a Jubilee
We may very well see an American jubilee happen in 2021. But don't bet the farm on it. Be responsible by not borrowing recklessly.
I'm not going to wait on a national or international debt jubilee to solve our current debt problems. Instead, the one way we can all make a large immediate impact on the debt figures is to not be in debt ourselves. If you're currently in debt, find a way to get out of debt and stay out of debt so you are not another “statistic.” Think of it as your own personal debt jubilee.
Do you think a debt jubilee will happen in the near future? If so, what be debts forgiven? Is a debt jubilee good?
Josh founded Money Buffalo in 2015 to help people get out of debt and make smart financial decisions. He is currently a full-time personal finance writer with work featured in Forbes Advisor, Fox Business, and Credible.