Four thousand years ago, the rulers of ancient Babylon discovered a technique to stave off violent revolts.
In ancient times, there was a tendency for people to become hopelessly in debt to their creditors. Eventually, they would rise up and cause instability that could threaten the entire ruling system.
The rulers of the ancient world recognized this dynamic.
Their solution was to enact widespread debt cancellation—a debt jubilee.
Debt jubilees acted as a societal pressure release valve when there were no other options.
The practice spread in the ancient world and became codified in different civilizations.
For example, the Book of Leviticus recognizes debt jubilees as the end of a 49-year biblical cycle—seven cycles of seven years.
I think this ancient practice will make a big comeback soon as debt reaches unbearable levels today.
In fact, the debt jubilees have already started… and the investment consequences will be profound.
It’s important to note that debt jubilees do not magically create new wealth. They simply redistribute it.
Debt jubilees are government decrees that amount to a massive wealth transfer with big winners and losers.
President Biden’s recent student loan forgiveness is the first stage of a modern debt jubilee of biblical proportions.
It was unprecedented. Unilateral executive action of this size has never occurred during a time of peace. Moreover, Congress, not the president, is supposed to make spending decisions of this magnitude.
It is estimated that the immediate and deferred costs of the student loan forgiveness to be at least $590 billion.
Biden’s student loan debt jubilee went too far for even Obama’s former chief economic advisor, Jason Furman, who described it as:
“Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless.”
Aside from the inflationary effects—which I’ll get to in a moment—the student loan jubilee also set a precedent that I think will be impossible to reverse.
Consider how the people who behaved prudently feel.
These people took different career paths to avoid student loans, cut back on their spending so they could afford college without borrowing, or paid off their student debt.
These people are probably feeling like suckers now.
Not only do they not get any debt relief, but they will have to foot the bill in one way or another to pay for those who had their student loans forgiven.
I imagine these people will be angry and probably have considerable car, mortgage, and credit card debt, as many Americans do. So they will want debt relief too… and I bet they will get it.
Amid rising prices, consumer debt is skyrocketing. It is at an all-time high of over $16 trillion, as seen in the chart below.
With interest rates rising, the cost of servicing this record debt is becoming unbearable for many. As a result, many Americans have reached their maximum debt saturation and are hitting a financial breaking point.
As Biden demonstrated, all it takes is a President’s pen stroke to wipe out hundreds of billions in debt. I think the political pressure to do this again will be irresistible—especially before elections—as a way to court voters.
The student loan jubilee set a precedent.
I don’t think it will be long before we see a credit card jubilee, a car loan jubilee, or a mortgage jubilee.
How will the government pay for all these jubilees?
It’s improbable they could raise taxes enough to pay for them.
It also wouldn’t make sense to issue more debt to cancel other debts.
That leaves money printing as the only way they can finance these jubilees. So my guess is that’s what they’ll do.
That’s why the coming debt jubilees will pour “gasoline on the inflationary fire that is already burning.”
But it’s not just consumer debt that has become unbearable. The big enchilada is the US government’s federal debt.
The US federal government has the biggest debt in the history of the world. And it’s continuing to grow at a rapid, unstoppable pace.
In short, the US government is fast approaching the financial endgame.
Here’s why…
Today, the US federal debt has gone parabolic and is nearly $31 trillion.
If you earned $1 per second, it would take over 992,956 YEARS to pay off the US federal debt.
And that’s with the unrealistic assumption that it would stop growing.
The truth is, the debt will keep piling up unless Congress makes some politically impossible decisions to cut spending. But don’t count on that happening. In fact, they’re racing in the opposite direction now that they’ve normalized multitrillion-dollar deficits.
The amount of debt is so extreme that even a return of interest rates to their historical average would mean paying the interest expense on the debt would consume more than half of current tax revenues. Interest expense would eclipse Social Security and defense spending and become the largest item in the federal budget.
Second, with price increases soaring to 40-year highs, a return to the historical average interest rate will not be enough to reign in inflation—not even close. A drastic rise in interest rates is needed—perhaps to 10% or higher. If that happened, it would mean that the US government is paying more for the interest expense than it takes in from taxes.
In short, the Federal Reserve is trapped.
Raising interest rates high enough to dent inflation would bankrupt the US government.
In other words, it’s game over. They have no choice but to “reset” the system—that’s what governments do when they are trapped.
How are they going to reset the system?
Nobody knows for sure. But I’d bet a debt jubilee of biblical proportions will be a big part of it.
So then, how will the US government repudiate its impossible federal debt burden?
My guess is that they won’t be explicit. That would look too much like a default. It would destroy the role of the US as the center of the world’s financial system.
Given a choice, I don’t think the US government would choose immediate self-destruction. Since power does not relinquish itself voluntarily, we should presume they’ll decide to stealthily implement their federal debt jubilee through inflation.
Inflation is a big bonus to debtors. It allows you to borrow in dollars and repay in dimes.
And since the US government is the biggest debtor in the history of the world, it is the single largest beneficiary of inflation.
That’s why I think the federal debt jubilee will come in the form of a massive wave of inflation.
Here’s the bottom line.
The coming debt jubilees could have the effect of wiping out many trillions worth of liabilities and creating previously unfathomable inflation.
That could trigger the largest wealth transfer in history.
Remember, debt doesn’t exist within a vacuum. It is a liability to the borrower and an asset to lender.
Those storing their wealth in government currencies, bondholders, and creditors will be the big losers.
Debtors and those who own unencumbered scarce assets will be the big winners.
It’s certainly not a just outcome.
Prudent savers shouldn’t be made to pay for the excesses of the debtors.
But notions of what is just or not did not impede Biden’s student loan jubilee—and they certainly won’t for the coming jubilees.
Although that will be unfortunate for many people, there is simply nothing anyone can do now.
The debt levels have already reached a point of saturation, and the government could soon see jubilees as a politically attractive option.
That’s why it is best to recognize the reality of this Big Picture and get positioned accordingly.
That means owning scarce and valuable assets that are not simultaneously someone else’s liability.
Crucially, this excludes fiat currency in bank accounts.
Remember, fiat currency is the unbacked liability of a bankrupt government.
Further, once you deposit currency into a bank, it is no longer yours. Technically and legally, it is the bank’s property, and what you own instead is an unsecured liability of the bank.
In an era of jubilees in which debts are wiped clean, you won’t want to be on the other end of unsecured liabilities of any kind.
I suspect it could all go down soon… and it will not be pretty for many.
Reprinted with permission from International Man.
