Revaluation of Debt

I could title this post “The Jubilee Factor” because it is a simple observation about the teaching of the biblical Jubilee and how it speaks to the current world financial crisis. So, what is the Jubilee?

The Jubilee year (Leviticus 25:11-13) is the year at the end of seven cycles of Sabbatical years, and had a special impact on the ownership and management of land in the territory of the kingdoms of Israel and of Judah. My purpose is not to get into a detailed analysis of the biblical data, but to simply note that the fundamental idea of the Jubilee was the revaluation of debt (property) every so often.

The biblical authors seem to have been aware of the tendency for property and money to end up in the hands of a few people who are particularly blessed with financial skills. And unless this tendency was ameliorated it would cause social problems like tyranny and abuse. The Bible is careful to balance the various social concerns, and money provides a concern that can easily dominate everything else. And when it does, the Bible calls such an unbalance: greed. So, the Bible recommends resetting the economy every fifty years as a way of avoiding various kinds of problems, undoubtedly much like the financial problems our world is currently facing.

That’s my brief take on the idea of biblical Jubilee. Rather than getting caught up in the details, I’m looking at it as a general principle of economic balance.

Our current financial crisis reflects world economies that are out of balance. What do I mean? I mean that income and outgo must remain in balance. I’m not arguing for a closed economic system because economies can grow and shrink. While balance does involve rightly dividing the economic pie, the pie itself is not a fixed element. It is a dynamic element.

Nonetheless, as the old adage goes: when your outgo exceeds your intake, then your upkeep will be your downfall. There are many root causes related to the recent financial crisis, but here I want to highlight the primary personal or individual economic perspective. We will set aside the systemic causes and concentrate on the end user.

As the crisis hit, the resources of the end user were diminished, whether by the crash of the Stock Market, the failure of a corporation, the loss of a job, etc. At any given time Joe Citizen has a certain amount of income and a certain amount of outgo, the largest share of which in our current situation is debt related. The average citizen spends about half of their income on home and automobile payments. The specific amounts of those payments is fixed for the life of the loan.

When financial crisis hits, income is reduced but outgo is not. Thus, upkeep becomes downfall. When the problem is a systemic market crash like we current have, it is the value of one’s assets that is reduced by the crisis. And since ours is a debt economy where market valuation is a function of debt, the actual value of the dollar varies with the market. For the most part, changes in market value (the Dow Jones Average, etc.) translate into changes in the valuation of the dollar. For instance, one day I have x amount of stocks, and the next day I have x+y amount of stocks. The only thing that actually changed was the valuation of the dollar. Though I have more dollar value, that dollar value is a measure of the same company. Stock is only worth more because someone is willing to pay more. And while that does increase the dollars involved, those dollars are inflated. Making money on the Stock Market is a matter of cashing in inflated dollars before they lose their perceived value.

So, when financial crisis hits, income is reduced because the inflated value of the stock is widely discovered and no one is willing to buy the stock at the inflated value. Thus, the value of the shares deflates. The result is that the investor has less dollars.

However, the debt side of the economic balance does not change. Income is reduced by forces outside of personal control, but debt remains the same for the life of the note. This means that debt as a measure of outflow increases relative to income. The dollar value of the market is deflated, but the debt value of the market remains stable. The ratio of debt to income increases and unless something re-balances the end user’s balance sheet, debt will overcome income and result in bankruptcy or foreclosure.

There are two classic solutions to the problem: increase income and/or decrease outgo. But however the problem is solved, balance must be restored. Granted that poor management is often the problem in that a faulty debt to income ratio is established—and much of our current situation can be faulted at the personal financial management level. Nonetheless, if a systemic solution like a “stimulus package” is engaged, adjustments to both sides of the equation must be made if balance is to be restored.

The “stimulus package” solutions so far used do not restore balance for two reasons: 1) all stimulus money has gone to corporations not to people in an effort to maintain the existing economic unbalances in the markets, and 2) all stimulus payments have gone to the income side of the ledger of corporations.

The problem that crashed the markets was bad dept packaged and distributed into complex investment portfolios in ways that hid the bad debt. It is like diluting gold with lead, but selling it as gold. As long as people don’t know about the dilution, they can be tricked into paying full gold prices for lead-laced gold. And the crooks who perpetrated the dilution “make” money. But actually they don’t “make” money they deflate the value of the dollar but cash in on it before other people know about the devaluation. It is crooked and cheating and should be against the law because it ultimately harms society.

The problem is that too much of the rising market value of the past 40 years has been a function of this kind of market inflation (or dollar devaluation). The value of the market rises at the same time that the value of the dollar falls. Of course, some of the market growth has resulted from market expansions worldwide and does represent wealth increase. This kind of growth has real substance behind it, unlike the inflated growth of dollar dilution that does not.

If the value of debt floated with the value of the dollar like the value of the market floats with the value of the dollar, economies would remain in balance. In other words, if debt payments decreased as income decreased, there would be much less bankruptcy and foreclosure. But when the value of assets decreases while the value of indebtedness remains constant, the balance that is required for market stability is lost.

Consequently, a market Jubilee revaluation of indebtedness may be in order. How could it work? On the principle of Matthew 6:12: “forgive us our debts, as we also have forgiven our debtors.” In our world every debt is a source of income for someone else. So, when we forgive our debtors, we accrue a personal financial loss or at the least we write off potential income depending where the debt is in the payment schedule. The point is that forgiveness of our debtors translates into a decrease in the value of our personal portfolio. Forgiveness is costly, but it is surely better than bankruptcy.

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