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?
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 $1.5 trillion. That’s how much our national student loan debt is today!
- Meanwhile, the national debt has ballooned to $20 trillion in 30 years.
- Credit card debt is $1 trillion
- Auto loan debt is $1.2 trillion
And these statistics do not include any debt numbers for corporations, local governments, and other countries.
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.
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 $70 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.
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 (18 years ago), pre and post-Great Recession, and 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.
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 and we need a different approach as the “average Joe” can invest in P2P loans and we live in an easy credit society. The middle class didn’t exist in their society as we know it today.
If Wall Street begins forgiving debts, it’d be 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, 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.
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.
However, we do have an idea of what arrows are in the central banks’ quivers:
- Call a bank holiday and take 25% of 401k assets
- Print more money…a la quantitative easing
- 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. Obviously, savers and the wealthy would be punished the most as their bank account are smaller, worth less if the currency devalues, 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 new amount of disposable income.
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 or less.
One way we do this is by borrowing as little money as possible. 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. For that reason, you need at least three months of living expenses in an emergency fund.
We personally keep our emergency savings in an FDIC-insured online Capital One 360 high-yield savings account.
We never pay bills from this account and 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.
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 gone 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.
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.
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?