Front Burner - Debt jubilee: The case for cancelling debt

Episode Date: January 3, 2022

Canadians have loaded up on personal debt through more than half a century of financial crises — and it’s happening again. During the first year of the COVID-19 pandemic, cash from federal benefits allowed many people to pay down their credit card balances. Last year, however, huge mortgages pushed Canada’s household debt-to-income ratio back toward its all-time high, rising above 177 per cent in the third quarter of 2021. Economist Michael Hudson says this kind of debt buildup chokes economic growth and gives undue power to creditors like banks. He also says it demands a reset: cancelling our debts. Today, Hudson explains the millennia-old practice of debt cancellation and how it could help modern economies.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hey everybody, Jamie here. A very, very happy new year to you. So we've got a bit of a different episode for you today. We're talking about debt and the idea that some of us should just have our debts well wiped out. And I don't know about you, but the holidays can be pretty expensive. And so I bet this idea is sounding pretty good to you right now. All right, here we go.

It's the beginning of a new year, and our first concern is how to pay for last year. We Canadians are not just another year older, as the song says, we're deeper in debt too. So, it's January 1969. And along with your jello molds and shag carpeting, you've got something brand new in your wallet. A credit card. They just came to Canada last year. We used to say that the only certainties in life were death and taxes. To these, we can now add credit buying and the prospect which is all but upon us. This New Year's warning on the radio, though,

it makes you wonder if that plastic permanently damaged the way Canada uses money, plunged us into credit-driven excess. These are the kind of numbers that strike fear into your heart. The personal consumer debt of working Canadians is now over a thousand dollars each. Twenty years ago it was only 135 dollars. In other words, we're getting deeper and deeper in debt. Well, since then, Canada's relationship with debt has changed drastically. And not just because of credit cards. We've normalized huge mortgages amid stagnating or declining wages

and taken on personal debt by spending our way out of recessions. out of recessions. For July to October, our household debt to income ratio was over 177%, which means for every dollar Canadians made, minus taxes and EI and such, we owed $1.77 to creditors. After a dip in debt from pandemic benefits last year, that's getting back to our all-time high. So with the economic fallout of the pandemic looming, I asked economist Michael Hudson what could happen if Canada doesn't get a debt divorce. The worst case scenario is business as usual. The debts continue to mount up. There are more and more breaks in the chain of payment. More and more people go broke into housing and corporate ownership passes into the hands of the 1%, even more economic inequality will polarize and the rich will get richer.

The Canadian economy, both households and businesses and provinces will fall further and further into debt. Professor Hudson is the president of the Institute for the Study of Long-Term Economic Trends, the author of books like And Forgive Them Their Debts, and a professor of economics at the University of Missouri-Kansas City. And he's going to take us through thousands of years, including Babylonia, post-war Germany, and big classical ideas on money to tell us why one answer to our debt problems might just be canceling debt. So before we get to Professor Hudson's solution, let's talk about what's happening with our debt right now.

It reduces the flexibility if some people are very highly indebted. So we're particularly worried about very highly indebted households. This is Bank of Canada Deputy Governor Paul Beaudry at a press conference in November. Because these are households that will have much more difficulty reacting to shocks and reacting to kind of negative effects of their incomes or different changes in the environment. You might wonder whether our central bank should be concerned with our personal debts. But Beaudry is saying this debt is so big, the bank has to consider Canada's financial stability.

I mean, the bank says the number of, quote, highly indebted households is rising. And they've got a debt to income ratio of 350% or more. It's a great example of why Professor Hudson says some people are saddled with debt they'll never pay off. And the pandemic's only made it worse. A lot of homeowners have not been able to pay their mortgage fees because they've been fired, or they've got sick, or they've had to go to work, or they've had to stay home and take care of their kids. So many homeowners are falling very far behind, not only on their home debt, but many people have had to borrow to buy automobiles in order to drive to their jobs. And they're falling further and further behind on their automobile debt.

So in such cases, when you can't pay the debt, your car is repossessed by somebody. And if you can't pay the mortgage debt, then the banks will foreclose. And in the United States, the banks and the landlords are very eager to foreclose right now because housing prices in the U.S., rents have gone up 20% in the last year. Sure. In Canada, we got a bunch of pandemic benefits like CERB to keep up some income. But it doesn't change the fact that for quite a while, many of us lost our jobs or closed our businesses while our rent or mortgages kept coming due and our interest kept growing. It's like a big acceleration in what Professor Hudson says is the fundamental nature of debt. In any country, any economy, debt tends to grow faster than the economy.

And that means that the debt ratio rises more and more. And at a certain point, many people can't pay. Some homeowners can't pay, some businesses can't pay, and even some governments can't pay, as we're seeing in Argentina right now. Trade unions hold regular protests calling for fairer wages to keep pace with inflation. They say that should take priority over repaying Argentina's debt to the International Monetary Fund. It's a scam and paying that debt is incompatible with ending poverty and destitution.

And seeing how long our debt has been piling up, it makes me wonder, just how long can Canada's debt empire last? Every single recovery that Canada has had since World War II has started from a higher level of debt. And now it's so high that the question is, can there be another recovery? From 1945 to today, are we at the end of a buildup of debt where the economy can't grow anymore because it has to pay the debt? To understand this tradition of debt forgiveness, I asked Professor Hudson to start at the beginning. And it turns out that it

goes way back. Well, it actually probably originated in the Stone Age, when certainly according to the Bible, you had cities of refuge. But for today, I think it makes sense if we start at over 2000 years BC in Babylonia. You may have heard of the city of Babylon from the Christian or Hebrew Bible or the Quran, or even from the Boney M hit, which actually comes from a Rastafari song. But Babylonia was the name for the whole region of Mesopotamia, in what's now Iraq. And at harvest time, people would pay off all their debts, basically once a year. So everybody who had a farm, and this was 95% of the population, the local population would bring in the crop, they'd harvest it,

it would be weighed out on the threshing floor. And then they would pay the ale lady. They would pay for the temples or the palaces for any money they owed for agricultural inputs, for irrigation, for farm animals, or if they got married, which was another big source of debt. And had a child, they would have to pay the priest for services. So that was the one thing. But what if farmers rack up these debts, but don't have the crops to pay for them? Once in a while, the harvest wouldn't be in because there were floods, or there was a drought, and they couldn't pay. And at this point, the rulers had to make a choice. If you say the debts have to be paid, then if they can't be paid because the harvest failed, all these cultivators would become debt servants, debt slavery to the creditors who are usually tax collectors and the public officials in the palace bureaucracy.

And obviously, if the farmers have to work for the creditors, they're not working for the kingdom. So the kingdom doesn't get those important crops, plus a host of other problems. And then they can't work on the public infrastructure and ability to be paid, then you're going to have all of a sudden the financial sector are going to be the richest people in the country. So the moral here, if a disaster happens like a drought, or I don't know, maybe even a pandemic, and that disaster interrupts the economy and makes it so people can't pay their debts, That disaster interrupts the economy and makes it so people can't pay their debts. The economy needs to be reset and rebalanced to where it was pre-disaster by forgiving the debts that can't be paid. Otherwise, Professor Hudson says, the creditors snap up labor and

goods the public needs, and the creditors get enough power that they either take over or they de facto rule the kingdom. And all of a sudden, they're going to write a whole different set of debt laws, sort of like bank lobbyists in Canada and America today. And the laws that they'll write after they take over is all the debts have to be paid. And if you can't pay them, then we get all your property. And you have to spend your life, all the money that you get, all the extra earnings above subsistence, you're going to have to pay us so that we end up with the entire economic surplus,

not the government, and certainly not you, 99% of the population. Creditors forcing people to work to pay their debts is sometimes called debt bondage. At its most extreme, there's people around the world held as slaves this way. But looking at this idea of being forced to work off debts in Babylonia, I asked Professor Hudson if something like debt bondage is still happening here. And you don't need to be in physical bondage anymore, but our economy is legalized enough and sophisticated enough that you're in the equivalent of bondage and you can't afford to leave your jobs. For instance, in Canada and

America, a lot of workers feel they'd like to leave their jobs and complain about the jobs, maybe go on strike, but they're afraid to go on strike or to complain because if they're fired and they lose their jobs, then they're going to be behind in the mortgage payments they own or on their rent and they'll lose their home. They'll be behind in their credit card payments. And all of a sudden, their credit card rates are going to go up from 11 percent to 29 percent. So in a way, they're in a trap. And it's not bondage, but it's in a financial track.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that

of the people I speak to, 50% of them do not know their own household income? That's not a typo, 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. We actually have hard proof of Babylon's debt cancellations. It's written into the code of Hammurabi, a list of one king's laws found carved into the seven foot steel pillar. of one king's laws found carved into the seven foot steel pillar. And cancellations happened in more than Mesopotamia. Ancient Sumer did it. It's written in the Rosetta Stone and commanded in the Bible. I mean, in Leviticus, God talks to Moses on Mount Sinai and tells him about

a jubilee year. About every 50 years in the promised land, the Israelites are supposed to forgive personal debts, free people in debt bondage, and return any land that was seized. So in one reading, reset that built up debt in the economy. Debt forgiveness is also in one version of the Lord's Prayer in Christianity, forgive us our debts as we forgive our debtors. More recently, there's also a lot of advocacy for richer countries to forgive the debts of poorer ones struggling to pay. The Pope called for it last year because of the pandemic. And may all nations be put in a position

to meet their greatest needs of the moment through the reduction, if not the forgiveness of the debt burdening the balance sheets of the poorest nations. Bono called for a version of this in the 2000s. I have seen in the last few years, 15 million more Africans going to school because they dropped the debt campaign. That's real and significant. For another example of this in practice, let's look at post-war Germany. The most efficient debt cancellation in modern times was the German economic miracle in 1947. After Germany was defeated, the Allies took over, and as you can imagine, many Germans had run into debt during

the war. Americans and British said, wait a minute, these debts are owed to the powerful people, and they were the Nazis. We don't want the Nazis to be able to collect the debts. We're going to wipe out all the internal German debts, except for the debts that employers owe their employees, and everybody gets to keep like a thousand marks in the bank just to get done. So Germany was able to free its domestic population from debt, and everybody was in favor of that because the creditors were really disliked. The creditors were the Nazi banks and the people who'd supported Hitler. So when Germany emerged essentially debt-free, all of a sudden it was super competitive at making

goods because the people and the businesses who made them could invest their money in production instead of paying down debt. There's certainly debate about what drove Germany's incredible economic rebound, but it's true, many call it das Wirtschaftswunder, and I'm so sorry if I'm butchering that, but it means the economic miracle. Professor Hudson mentioned earlier how Canada's debt has been growing since the Second World War. So let's pick up at home in the decades that followed. There was all that snark about credit cards being introduced in the late 60s. Actually, I got a laugh from this radio column about a love affair with a card gone wrong. I was going to go to Spain and be discreetly identified as financially responsible by the Royal Bank of Canada. I loved my charge ex. it was sort of a valentine from the bank. But I'm going to tear it to shreds.

I don't want their love at 18%. In the 80s, we took on mortgages even as interest rates were soaring. You think people have come to accept mortgages at 15%? Yes. I don't think people think that we'll ever see 12, 11 again.

I think if you have to buy a house, if you're in the area of looking for a house, and that's what the mortgage rates are, what are you going to do? You have to accept it. You have to accept it. And of course it bothers you. The payments are high, but you can't do anything else. Those are the rates. We've used credit to spend our way out of recessions, like after the 2008 financial crisis. For many, the only way out will be bankruptcy, and the number of people choosing that route is soaring. All the while, wages have pretty much stagnated, so we've used debt for basic needs.

I'm just one paycheck shy of losing everything, as a lot of people are. God forbid if I was to lose my job or get laid off or get sick. Even while the Bank of Canada questioned the stability of our household debts in 2018, then-Governor Stephen Polos had to acknowledge our reliance. You know, once Shakespeare wrote, neither a borrower nor lender be. Well, that may have been reasonable advice back in Hamlet's day, but it's hard to imagine a modern economy like ours functioning under that kind of dictum. And for most Canadians, debt is a fact of life, at least at some point. And now there's a pandemic. I mean, our government supported us with programs like CERB, so we wouldn't have to keep ourselves afloat solely on debt. But the Bank

of Canada has kept interest rates super low to boost investment and keep the economy moving. The bank rate's been holding at a quarter of a percent. The economy, my fellow governing council members and I judge that the economy still needs considerable monetary policy support. So Canadians have taken advantage of the cheap credit and piled debt back on. I'll remind you, households are back to an over 177% debt-to-income ratio.

And it begs the question, what are Canadians going to do when the last of the pandemic supports dry up or when interest rates rise, making that debt more expensive? Some experts fear a wave of bankruptcies is on the way. In antiquity, the governments were very careful only to cancel certain kinds of debt. Given our precarious debt situation, I asked Professor Hudson what cancellation could look like today. You want to cancel the personal debt that people can't afford to pay because they shouldn't be able to earn enough money to pay for their housing, to pay for their medical care, pay for emergencies, and get by. So to start, we put aside the complicated business and government debts and look at people,

because personal debts that people might never be able to pay back are the ones that are crushing. Student debts are a really good example of this. If you just graduated from university, you're going to be graduating into the toughest job market in living memory. Some of the things that students have been calling for is extending the moratorium on student loans so that students don't have to pay back. As we see it, one very concrete measure to bring some relief to new grads, free student loan payments. It makes no sense to be burdening new grads with loan payments before they're able to find work. Many students come out of university

and for years they scrimp and save and work exclusively to pay back their student loans, if they can get a job. It's made Canada and America a high-cost economy, compared to countries like Germany and Europe, where education is free. And you don't have to pay student debt. So if you make money, you can afford to buy goods and services and make the whole economy prosperous instead of paying the banks to lend you money. It's kind of like Babylon, right? When our money and labor isn't being snapped up by creditors,

it can help the kingdom. So we press the reset button after the pandemic by canceling the personal debts. All right, this sounds great for the people who are in over their heads in debt. But what about the other side of this, the lenders who are getting their loans blown up? Our government holds our student loans, but so much of our debt is to banks and the rich. The banks in America and Canada have been very irresponsible in making loans way beyond what can be paid. And they're hoping that they'd be bailed out. And they're expecting that they'll be bailed out, but not the homeowners who owe the mortgage. It's not the companies that are going broke and closing down because they can't

pay the debts. So the idea, somebody has to lose and the 1% are going to be doing just fine. They have all their money and the Cayman Islands are offshore. And the idea is to make everybody okay, not just the 1%. The 99% are more important. Right. Somebody has to take the hit for our giant economic pause. And the banks have only gotten richer since they got huge government supports for the 2008 crisis. The class divide has only gotten wider, the rich getting richer, the poor getting poorer. So why would we put this burden on those already struggling to survive with their debt, when the rich and our financial elites could easily swallow the loss? It's very nice if some people who've been able to meet all their

expenses and own their home without any debt and send their children to school without debt, they're in a good enough position that they'll survive. What we're trying to do is make everybody survive. And we're trying to enable people basically to break even. There's another important detail about Canadians' pandemic debt that we haven't covered yet. Let's go back to that November Bank of Canada press conference with that slick PowerPoint presentation from Deputy Governor Beaudry. This is the credit card balances, and we really see that the balances on credit card really reduced over this period, giving that room, extra room in terms of people's indebtedness. That's right. Canadians have had a bunch of money coming in for benefits like CERB and

not a lot to spend it on. You know, we couldn't go to movies, we couldn't go to restaurants, we couldn't travel. And this allowed people to kind of save more. And it's actually quite substantial for per person. We kind of estimate that people managed to save about 8,000, a bit more than $8,000 per person in Canada. So a lot of Canadians paid down their cards. And for 2020, it actually reduced the overall amount of debt Canadians were carrying. So why didn't it stay that way? I'll give you one guess. So the black line tells us the fraction of people taking new mortgages that actually are people that are taking high mortgages relative to their income. Where the credit cards dropped, super high mortgages have filled the gap.

In fact, when it comes to those households with a crazy high debt-to-income ratio of 350% or more, the number of households dropped last year. But this year, the bank projects mortgages have created more highly indebted people than ever before, possibly around so much of Canadians' debt now, do we just get rid of them? Imagine today if you cancel Canada's real estate debt. Most real estate in Canada is bought on credit, especially if you're in British Columbia, you certainly can't afford to save enough money to buy a house, you have to borrow the money. And all of a sudden, you'd have the big real estate owners being the richest people in the country. You don't want to give a free lunch to speculators

or to the businesses. But you want to cancel the debts really of the people, of the population at large, so that you don't have a debt deflation that just shrinks the economy and shrinks it. The problem is freeing the Canadian dollar, stuck paying excessive housing debt without making big money even bigger or by letting them off the hook. And one solution, we only forgive a specific part of our housing debts. Professor Hudson says we should still pay mortgages for the actual amount it costs to make our housing, the bricks and the mortar. But there's all this other stuff that drives up the prices of real estate in Canada that's more about the land and where it is. I mean the

surrounding non-house stuff that adds value. Transit, parks, schools, shops, the neighborhood, the city, and even investors speculating. So Professor Hudson says those dollars for the land are what we take off the mortgage. The mortgage should cover the actual cost of your house, not the land and the market hype for it. Okay, still with me? Because this would still be a giveaway for that land value, right? We need a part two. Money that was being paid to the banks as mortgage

would still be paid essentially to the government in the form of a land tax that was very popular in Canada a century ago. A land tax. Basically, the idea here is instead of paying a smaller property tax on both your house and the land like we do now, the government will tax away the value of the land. Maybe that sounds unfair to you for the government to take that portion of what we pay for housing. But the foundational economists who love this idea would say, hey, the landowner didn't do anything to earn land value. The land price went up because of outside factors like demand and Canadian wealth and what the government built around it. Plus, they'd say, landowners didn't make the land, and there's a fixed amount. Why can investors profit from owning what's really a natural resource like air or water? So maybe instead of banks making money for charging interest on huge

mortgages, the government can tax the value of the land to pay for services, and the public can benefit from its natural resources. Many of the people who think they have a vested interest in their housing price is not going down. It's all debt finan finance. Their debt would be written down to the normal rental value. So they think they've got rich, but they're really much more in debt. And it's the banks that have gotten rich. Well, the homeowners look at the gross value, but they don't look at their debt. And we could certainly hope that big housing speculation would go down. If stock like gains for the land just raise the tax, the way to make more money from a property

is actually to improve the housing on it. Plus, less money going to mortgage interest means, again, way more of our money is free to support the real economy. In Germany, for instance, the cost of housing is about 20% of personal income. So if you just look at, does Canada really get richer by having high prices for housing

that make you pay so much more of your income than in Germany? That's why Canadians are importing their goods from Germany or China. All the while, Professor Hudson says, the government's land tax revenue would be so much that we could cut taxes elsewhere, like income taxes. The tax base would be in a way that sidesteps the banks.

And in Canada, about 80 percent of bank loans to real estate loans. The real estate sector and the financial sector have merged. And if you unmerge that, you'll get rid of the single largest force forcing people into debt to buy their homes. I want to talk about whether canceling debt is feasible. And I think that starts with whether there's a cultural or political appetite for it. I mean, Joe Biden campaigned on canceling $10,000 of student loans per person in the U.S. to much fanfare. Just holding people up. They're in real trouble. They're having to make choices between paying their student loan and paying the rent.

Those kinds of decisions. It should be done immediately. But I think Professor Hudson did a good job of explaining what's actually happened. Well, he decided that was only for show. And he said, well, they're going to have to pay the debt. And if they can't, throw them out in the street. After a pause, student loan payments now begin again in May. There's also the question, if banks eat all these loans they gave out, will they financially collapse?

Professor Hudson doesn't think they're in any real jeopardy. Yeah, that's their threat. But that's nonsense. The banks would begin again the next day because they wouldn't go broke at all. Because it's true, the debts to the banks would be canceled, but so would their liabilities on the liability side of the balance sheet. The stockholders would lose. The bondholders would lose.

Another thing here, our economy, of course, needs some kind of credit to function. So it's hard not to fear what a cancellation would do for Canadians' ability to get credit. I mean, if you lent out money and suddenly the debt was cancelled, why would you ever lend out money again? Well, because when you make a mistake, that's a learning experience. And yes, you'd lose the money. And then if you're a smart person, and many Canadians are very smart about this, they'd say, well, now we know next time we're only going to make loans that can be paid. We're not going to make loans beyond the ability to be paid. You know, if Canada did make a move as big as cancelling personal debts for the first time, how do we know there won't be disastrous knock-on effects that we didn't expect? I mean, haven't our economies gotten way too complex for things that worked in ancient times? It's not really that much more complex at all. It's polarized and it's turned from a

democracy into an oligarchy. And if you think of Canada as an oligarchy, when Plato wrote the Republic, the whole argument of Socrates was, if you borrow a weapon from a crazy person and you own the weapon, should you give it back to him if you know he's going to do something bad? And the student says, no. And Socrates said, well, if you owe money to the creditors and the creditors are going to impoverish the economy, is it really good to repay the creditors? And that's the whole question. And that's why he said, we think the government should be run by people who don't have any wealth of their own and financial wealth and property, because once they get wealth, wealth is addictive. And we want to avoid wealth addiction and we want to avoid predators taking over the government. So that's one idea on how Canada can finally tackle its giant household debts.

I'm sure you have all sorts of questions about specifics that we didn't get into today. There's certainly more to be said about how we might deal with struggling small businesses and local governments who are also strapped with debt. And Professor Hudson is definitely thinking about this, but we have to leave it here today. Agree or disagree with what you heard today, I hope it at least got you thinking. And if you want to hear more, maybe head to michael-hudson.com where you can deep dive on his ideas. Thanks so much for listening to FrontBurner. I'm Jamie Poisson, and we'll talk to you tomorrow.