Four thousand years ago, the rulers of ancient Babylon discovered a technique to ward off violent revolts.
In ancient times, people tended to become desperately indebted 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 release valve for social pressure when there were no other options.
The practice spread throughout the ancient world and became codified in different civilizations.
For example, the Book of Leviticus recognizes the Jubilees of Debt as the end of a biblical cycle of 49 years – seven cycles of seven years.
I think this ancient practice will make a big comeback soon as debt is at unbearable levels today.
In fact, the debt jubilees have already begun…and the consequences for investments will be profound.
It is important to note that debt jubilees do not magically create new wealth. They just redistribute it.
Debt jubilees are government decrees that amount to a massive transfer of wealth with big winners and big losers.
President Biden’s recent student loan forgiveness is the first step in a modern debt jubilee of biblical proportions.
It was unprecedented. Unilateral executive action of this magnitude has never occurred in peacetime. Moreover, Congress, not the president, is supposed to make spending decisions of this magnitude.
The immediate and delayed costs of student loan forgiveness are estimated to be at least $590 billion.
Biden’s student loan debt jubilee has gone too far, even for former Obama chief economic adviser Jason Furman, who described it as follows:
“Pouring about half a trillion dollars worth of gasoline on the inflationary fire that is already burning is unwise.”
Aside from the inflationary effects—which I’ll get to in a moment—the student loan jubilee also set a precedent that I believe will be impossible to reverse.
Consider how people who behaved cautiously feel.
These people followed different career paths to avoid student loans, cut expenses so they could pay for their education without borrowing or paying off student debt.
These people probably feel like suckers now.
Not only will they not get any debt relief, but they will have to foot the bill one way or another to pay those who have had their student loans forgiven.
I imagine these people will be angry and will probably be in huge car, mortgage and credit card debt, as many Americans do. Then they will also want debt relief…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 shown in the chart below.
With interest rates rising, the cost of servicing this record high debt is becoming unbearable for many. As a result, many Americans have reached their maximum debt saturation and are reaching a financial breaking point.
As Biden has demonstrated, all it takes is a stroke of the president’s pen to wipe out hundreds of billions in debt. I think the political pressure to start over will be irresistible, especially ahead of the election, as a way to woo 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 is the government going to pay for all these jubilees?
It is unlikely that they will be able to raise enough taxes to pay them.
Nor would it make sense to issue more debt to cancel other debt.
This leaves printing money as the only way to finance these jubilees. So I guess that’s what they’re going to do.
This is why the next 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 federal debt of the US government.
The US federal government has the largest debt in the history of the world. And it continues to grow at a rapid and unstoppable rate.
In short, the US government is fast approaching the end of the financial part.
Today, the US federal debt has gone parabolic and stands at nearly $31 trillion.
If you earned $1 per second, it would take over 992,956 YEARS to pay off US federal debt.
And it is with the unrealistic assumption that it would stop growing.
The truth is that the debt will continue to pile up unless Congress makes politically impossible decisions to cut spending. But don’t count on that. In fact, they are running in the opposite direction now that they have normalized multi-trillion dollar deficits.
The amount of debt is so extreme that even a return of interest rates to their historical average would mean that paying interest expense on the debt would consume more than half of current tax revenue. Interest expense would eclipse social security and defense spending and become the single largest item in the federal budget.
Second, with price increases reaching 40-year highs, a return to the historical average interest rate will not be enough to suppress inflation, not even close. A drastic increase in interest rates is needed, perhaps up to 10% or more. If this happened, it would mean that the US government is paying more for interest expense than it takes in taxes.
In short, the Federal Reserve is trapped.
Raising interest rates high enough to curb 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 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 how is the US government going to repudiate its impossible federal debt burden?
I guess they won’t be self explanatory. It would look too much like a defect. It would destroy the role of the United States as the center of the global financial system.
Given the choice, I don’t think the US government would choose immediate self-destruction. Since power is not voluntarily surrendering itself, we should assume that they will decide to stealthily implement their Federal Debt Jubilee through inflation.
Inflation is a big bonus for 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 biggest beneficiary of inflation.
That’s why I think the federal debt jubilee will come in the form of a massive wave of inflation.
Here is the bottom line.
The coming debt jubilees could have the effect of wiping out many trillions of liabilities and creating previously unfathomable inflation.
It could trigger the biggest wealth transfer in history.
Remember that debt does not exist in a vacuum. It is a liability for the borrower and an asset for the lender.
Those who store their wealth in government currencies, bondholders and creditors will be the big losers.
Debtors and those with scarce unencumbered assets will be the big winners.
This is certainly not a fair result.
Prudent savers should not be made to pay for the excesses of debtors.
But notions of what’s right or wrong haven’t stopped Biden’s student loan jubilee — and they certainly won’t for jubilees to come.
Although it is unfortunate for many people, there is simply nothing anyone can do now.
Debt levels have already reached saturation point, and the government may soon see jubilees as a politically attractive option.
That’s why it’s best to recognize the reality of this big picture and position yourself accordingly.
It means owning rare and valuable assets that are not simultaneously someone else’s responsibility.
Importantly, this excludes fiat currency in bank accounts.
Remember that fiat currency is the unsecured liability of a bankrupt government.
Also, once you deposit currencies in a bank, they no longer belong to you. Technically and legally, it is the property of the bank, and what you own instead is an unsecured liability of the bank.
In a time of jubilees where debts are cleared, you won’t want to be on the other end of unsecured debt of any kind.
I suspect it could all come crashing down soon…and it won’t be pretty for many.
Editor’s Note: The economic trajectory is troubling. Unfortunately, there is little an individual can do to change the course of these moving trends.
The best you can and should do is stay informed so you can protect yourself in the best way possible, and even take advantage of the situation.
That’s precisely why bestselling author Doug Casey and his colleagues just released an urgent new PDF report that explains what could happen next and what you can do about it.
Click here to download it now.