Scriptures record that, in ancient Israel, God instructed the Israelites to practice a radical custom meant to ensure dignity and equity to all the people. Every fiftieth year, the people would sound trumpets to “proclaim liberty throughout the land to all its inhabitants” (Leviticus 25:10). This would be a tangible, material liberty — a liberation from multigenerational poverty. Since trumpets in those days were made from hollowed ram’s horns, this special year would be called “jubilee” — derived from the Hebrew word yobhel, meaning “ram” or “ram’s horn.”
The original jubilee from Scripture did not actually refer, as the term does now, to debt cancellation or debt forgiveness. Nor did it involve a redistribution of property. Rather, each family would return to its ancestral land, which that family possessed when the tribe of Israel originally settled the region of Palestine.
Alternatively, the family could sell the rights to farm the land “according to the number of years after the jubilee, and he [your neighbor] shall sell to you according to the number of years for crops” (Lev. 25:15). In other words, the original family would never (indeed, could never) sell the freehold ownership of their land, but they could lease out the remaining number of harvests until the next year of jubilee. "If the years are many, you shall increase the price, and if the years are few, you shall reduce the price, for it is the number of the crops that he is selling to you" (verse 16).
Of course, nowadays, the word “jubilee” refers to debt forgiveness along with redistribution of wealth, especially directed toward the most vulnerable in society. In this sense of the word, it’s plausible that, in the near future, we will see a jubilee of unprecedented size and scope here in the United States. If this is correct, America twenty years from now will look as different as the US in 1950 did from the US in 1930. It may sound far-fetched now, but wouldn’t the various programs of the New Deal sound far-fetched to the average American during the 1920s?
Consider a few points. First: The present moment in which we find ourselves in the debt cycle.
In a previous article, I discussed whether we have already experienced the "big one" of our lifetimes — the conclusion to the longterm debt cycle that finally forces deleveraging and a change of spending behavior. My conclusion, given continually rising government, corporate, consumer, student, and other forms of debt, is that even the pain of the Great Recession did not bring about sustained deleveraging or a substantial change in behavior. Moreover, the Federal Reserve was still able to cut interest rates by their average amount and load up their balance sheets with government debt and mortgage-backed securities. Today, as we creep through the late stages of this economic cycle, the Fed has much less room to maneuver on interest rates and have already tried extensive QE.
Second, consider the financial health of the average American consumer, which I discussed in a recent article highlighting seven ways the average American is worse off today than in decades past. The state of the American consumer vis-a-vis earlier decades, in short, is this: More debt, stagnant income growth, and less savings. We are relying on this financially unhealthy consumer to keep driving American economic growth.
Third, consider the populist political environment in which we find ourselves. In my opinion, it would be a mistake to believe that the popularity of Donald Trump and self-described socialist, Bernie Sanders, in 2016 were one-off events and that American politics will revert to the mean going forward. As the upper echelons of American society continue to become more prosperous, the stagnant lower echelons grow increasingly discontented with their plight and more open to what were previously considered radical proposals. As I discussed in another recent article, the pendulum of political power always swings back to the other side eventually, and currently, the Democrats on the other side are strongly influenced by the insurgent progressive wing of the party.
Fourth, consider the likelihood of a recession happening soon and all the pain it would cause to already vulnerable consumers.
Put these four points together and a jubilee event in the near future appears less unlikely — at least something to contemplate and evaluate potential preparations for.
If you stick with me, I promise we’ll ultimately arrive at some income-producing trade ideas, but first let's explore what this jubilee might look like.
Back to Dalio's Credit Cycle Theory
There are three different monetary policies central banks can pursue in order to ease a financially troubled economy, as Dalio writes in his book, Principles for Navigating Big Debt Crises. The first is a reduction of interest rates. The second, quantitative easing, is predominantly used when the first tactic is no longer viable due to interest rates already at or near zero (p. 36-37).
Dalio argues that when interest rates can’t go lower and QE has already been tried, the last resort is a combined effort from monetary and fiscal policy makers to provide relief for the common people. QE disproportionately benefits the rich by raising the value of their holdings, which exacerbates populism and in turn raises the demand for redistributive policies. The first and second monetary policies, then, prime the political pump for this third form of monetary policy, which "puts money more directly into the hands of spenders instead of investors/savers and incentivizes them to spend it" (p. 37).
The Keynes-inspired thinking goes that the wealthy spend a much smaller share of their income than the less well off, and since 70% of GDP comes from consumer spending, redistributive policies that give more cash to the less well off will stimulate the economy.
This monetary policy may take the form of "helicopter money" that sends cash directly from the central bank to citizens without a coordinating fiscal policy, but more likely, it will be implemented in tandem with fiscal stimulus.
Types and Examples of Consumer Monetary Stimulus
Dalio gives five types of consumer monetary stimulus as well as historical examples of each (all on page 37):
1. "An increase in debt-financed fiscal spending," the debt of which is directly bought by the central bank. Examples: Japan in the 1930s, the US during WWII, and the US and UK during the 2000s.
2. "Increase in debt-financed fiscal spending, where the Treasury isn't on the hook for the debt." This is similar to the first one, except the central bank doesn't buy the debt but rather prints money to cover the debt payments (e.g. Germany in the 1930s) or gives/lends it to non-governmental entities for stimulus projects (e.g. lending to Chinese development banks in 2008).
3. "Not bothering to go through issuing debt, and instead giving newly printed money directly to the government to spend." Examples include devaluing fiat currency (e.g. Imperial China, the US during the American Revolution, the US Civil War, etc.) and debasing hard currency (e.g. Ancient Rome, 16th-century England, etc.).
4. "Printing money and doing direct cash transfers to households (i.e. 'helicopter money')." One historical example of this is the US veterans' bonuses given during the Great Depression. An untested variant would be a one-time universal cash payment or universal basic income funded partially or wholly by QE.
5. "Big debt write-down accompanied by big money creation." This is the modern concept of the "jubilee." Dalio offers Ancient Rome, many nations and corporations during the Great Depression, and Iceland's partial mortgage debt cancellation as examples.
What Would an American Jubilee Look Like?
As Porter Stansberry has pointed out, calls for a debt jubilee occur during times of large wealth gaps, cultural threats, ineffective government, and increasing populism. We have all four currently. I might add one more: calls for a debt jubilee naturally come when debt is high and widespread.
We also have a generation of young people on the Left who came into adulthood in the wake of the Great Recession, absorbing the prominent narrative that the free market caused all this pain, and that corporate lobbying mitigated losses for the rich while leaving average folk high and dry.
The prospect of a White House and Congress under the control of Democrats in 2021 is not implausible, but if there is a recession before the next general election, it likely won't matter who occupies the White House after 2020. The current president would likely make grand promises to the people in an attempt to outbid the Democratic candidate for economically hurting voters.
Which party controls the federal government will likely only affect how consumer stimulus is implemented, not whether it is implemented. With a populist already in the White House and another populist (or at least someone endorsing populist policies) likely to challenge him on the other side, the next general election (or perhaps the one after that) will mostly come down to which brand of populism Americans prefer.
“Occupy (Fill-in-the-Blank)” signs will be dusted off and brought back. Cries of “predatory lending” will echo across the country as credit card companies, auto loan lenders, mortgage originators, and student debt holders are scrutinized. Voters still angry that financial institutions got bailed out last time while they remained stuck with foreclosures and debt will demand a bailout of their own. QE will resume, but it won’t help the growing masses of the unemployed or underemployed who are on the brink of default.
The lack of firepower in monetary policy will be offset by an increase in fiscal stimulus. The stimulus package will have to be bigger than the American Recovery & Reinvestment Act of 2009, but it will likely fund the same sorts of things: healthcare, education, and infrastructure. This time, however, a hefty new line item will be added (if it hasn’t already been dealt with separately): consumer debt relief.
As the Fed did with mortgage-backed securities during the Great Recession, QE will likely be used to buy more "toxic assets" the next time around. It’s easy to see how the Fed might do this with student loans in forbearance, delinquent auto loans, more MBSs, and perhaps even high-debt personal credit lines.
Alternatively, the federal government could go the jubilee route, stimulating consumers through widespread debt forgiveness. There will be (and already have been) calls for sweeping debt forgiveness. See Mian & Sufi’s “House of Debt.”
It's worth noting that household debt (as a percentage of GDP) is still historically high:
Source: Trading Economics
A jubilee for mortgagees would involve forcing banks to take write-downs and bondholders to take haircuts. Fannie- & Freddie-owned mortgages seem like the obvious place debt forgiveness would start. Political pressure may be able to sway the Federal Housing Finance Agency to green light principal reductions of underwater loans. Something similar might be possible with delinquent mortgages owned by the Fed. Less credit extension and higher interest on mortgage and consumer debt would likely follow.
There's little reason to think, however, that mortgage defaults will spike as high as they did in 2008-2010. The same cannot be said for student loans, though.
There are already calls for the Secretary of Education to increase means of student loan debt forgiveness. Some argue that canceling all student debt would boost GDP, but it would only do so at the expense of taxpayers who would be forced to forego the interest payments (which would increase federal debt and thus push the bill right back onto young people and future generations), not to mention whatever is spent to buy out privately held loans. Eighty-five percent of new student loans are owned by the government, the other 15% privately (although guaranteed by the government). Total student debt owned privately, on the other hand, is only about $7.8 billion, or about 5% of the total. The argument will be made (and has been made) that student debt unfairly burdens younger generations and that a debt jubilee would best work in tandem with making college free for all.
Student loan debt forgiveness could be introduced gradually rather than suddenly by expanding the qualifications currently in place for debt forgiveness. For instance, the public service loan forgiveness program requires full-time employment in a government or nonprofit job as well as 10 years of monthly payments on loans. The qualifications could be expanded to include part-time work, and the number of monthly payments could be drastically reduced in exchange for a commitment to remain at the public service job for a set amount of time. Or it could be expanded even wider to include volunteer service hours rather than employment.
Some sort of guaranteed cash income might be given instead of massive consumer debt write-downs, but I don’t find that outcome likely. A basic income would take many years to relieve consumer debt. Politicians will want results quicker than that. One-time debt forgiveness is immediate.
However, if economic pain is strong enough, a guaranteed income (such as a universal basic income) should not be counted out.
Stockton, California, is already running its own UBI experiment. And UBI’s proponents have not been shy in recent years about proselytizing. Even Narendra Modi, the business-friendly leader of India, is considering a basic income for his country in order to support his bid for reelection. Just like the plan Modi is considering, a nationwide basic income program in the United States would almost certainly drop the “universality” element by its final draft so as to maintain some semblance of affordability, but even something along the lines of a negative income tax would be transformative.
Sovereign debt cancellation is also not unlikely, especially for countries like Italy, Greece, and Spain that already don’t know how they'll be able to pay back their debt. During the Great Depression, nations like France and Greece had around 50% of their national debt written off completely.
A debt jubilee could take any of a number of forms and would likely take multiple. But at the end of the day, in the words of Michael Hudson, “Debt that can’t be paid, won’t be.” If the next recession is as painful as the last one, much debt will need to be written off whether as a matter of necessity or in accordance with government dictates.
First and foremost, it is important to realize that tax rates are historically quite low. As such, recession or not, they will likely only go up from here. It's a matter of when, not if. Even though the top 20% of income earners make only 52% of the nation’s income, they pay 87% of income taxes, so any income tax increases would disproportionately fall on the wealthy.
Therefore, the Roth IRA, which allows capital to grow and eventually be distributed untaxed, is of tremendous value. Everyone should have one and max it out yearly, in my opinion.
Secondly, it is just as important, if not more so, to develop ideas of where not to invest one's capital as it is for where to invest. In multiple jubilee scenarios, credit card companies, automobile manufacturers, banks, and mortgage-backed securities would be severely hurt. I am personally staying far, far away from these sectors, as well as companies exposed to consumer lending such as Lending Club (LC).
Also, given the record high corporate debt, as well as the fact that half of investment grade corporate bonds are hovering just above junk, staying away from corporate debt assets would seem a good idea until significant deleveraging is underway.
Thirdly, any consumer stimulus, whether funded by higher taxes on the wealthy or money printing (but especially the latter), would be inflationary. Extensive QE was not inflationary in terms of the CPI or PCE because it channeled money into the coffers of a small share of the population — the wealthy, corporations, and financial institutions — and the resulting "wealth effect" was correspondingly minimal. But any scenario in which average consumers are given more disposable income by fiat is one that would quickly increase demand without supply keeping pace. If the consumer stimulus is funded by QE (and thus an increase in the money supply), it will be all the more inflationary.
Therefore, sometime shortly after the onset of the next recession, it might be a good idea to add Treasury inflation-protected securities (OTC:TIPS) to the fixed income side of one's portfolio.
Fourth, overweighting the equity portion of one's portfolio in sectors which tend to do well during periods of relatively high inflation would seem a good idea. Energy, utilities, basic materials, industrials, and to a lesser extent, real estate, have historically done quite well during high inflation. Real estate with recession-resistant tenants and short-term leases or inflation-based rent hikes (such as that owned by O, NNN, WPC, STOR, MAA, IRT, ELS, CLDT, and FRT) will fare better than real estate without these qualities.
Healthcare real estate that is leased to high-quality tenants who are shielded from political change also ought to do well. Examples might include medical office buildings, life science facilities, and senior living centers (e.g. HTA, DOC, WELL, VTR, NHI, HCP).
And finally, as we face this brave new world before us, cash equivalents such as money markets and ultra-short term bond funds (e.g. GSY, NEAR, MINT, SHY) should be thought of not so much as temporary dry powder or parked money, but rather an indefinite allocation.
More could be said about who might benefit from an American jubilee, but I'll leave it at that. What do you think? Am I onto something here? If so, who would benefit or be hurt?
Disclosure: I am/we are long O, NNN, WPC, HTA, MAA, DOC, WELL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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