The case for a global debt writedown

Debt that can’t be repaid, won’t be.
==Michael Hudson

Since the 1970s, every economic recovery has been weaker than the one before.  Michael Hudson, in his new book, Killing the Host, said the reason is that, with each recovery, there has been a greater overhang of debt, which drains resources from the real economy of tangible goods and useful services.

The current economic recovery has been a recovery of the financial markets, not a recovery of jobs and wages of ordinary people.   United States and European Union economic priority has been to protect bond-holders and creditors from loss.

HudsonKillingtheHost41Jz7lQkwrLHudson argued that this is unsustainable.   Either there will be a planned write-off or write-down of global debt, or there will be a financial collapse, like the one that began the Great Depression of the 1930s.  Either way, the debt will be wiped out.

His preference is for what he called a Clean Slate, as was done in West Germany in 1947 as part of a currency reform.  Basically, most German debts were canceled, except for employer wage contracts and bank accounts below a certain maximum amount (since wiping out bank debt means wiping out bank savings).

This, together with tax reform, the lifting of wage and price controls and the 1953 forgiveness and restructuring of German public debt, made possible the German economic miracle.

As Hudson admitted, this is pretty strong stuff and unlikely to be accepted.  An alternative is the enforcement of an old New York law, going back to Revolutionary times, against fraudulent conveyance.  This means that a debt is void if the lender knew in advance that it couldn’t be paid back.

If Snidely Whiplash lends money to Mrs. Innocent Goodbody, a poor widow living on Social Security, with her $250,000 house as collateral, with the expectation she won’t be able to keep up the payments and he’ll be able to foreclose on the house—that’s an example of “fraudulent conveyance.”

This applies to the subprime mortgages and “liar’s loans” prior to the 2008 financial crash.  Another concept, “accounting fraud,” applies to the bad loans that were given high debt ratings, securitized and sold to the unwary.  Canceling debt originating in fraudulent conveyance and accounting fraud would have a huge impact.

Hudson said that home mortgages could be scaled back to what is necessary to amortize a property based on its assessed value.  Or mortgages could be scaled back to 25 percent of the borrower’s income, which is what conservative lending practices require in the first place.

Congress in fact authorized a program to do just that as part of the 2008 bank bailout.  But Timothy Geithner, Obama’s Treasury Secretary, declined to implement it.

All this disrupt the financial markets and the economy generally, but Hudson wrote that it would clear the way for a good economic expansion, based on investment in the real economy, as happened in Germany.

Anyhow, he wrote, the alternative is more foreclosures, more economic hardship, more government bailouts until it becomes absolutely clear that that the debts are unpayable.   In the end, debt that can’t be paid, won’t be.

To help prevent a new debt bubble, Hudson advocated better regulation of banks, taxation of unearned income at the same rates as wages and salaries and an end to deduction of interest payments from taxable income.  He favors creation of public banks, perhaps through the Postal Service, that would offer cheap checking accounts, debit cards and credit cards so that small savers could get basic banking services without high fees.

I think a lot could be done simply by enforcing existing law, especially in regard to monopoly power and financial fraud, and restoring the financial firewalls that were taken down after 1980.


The world has been through a global debt crisis at least once before.   At the end of World War One, the British, French and other allies in the war against owed more money than they ever could hope to pay to the United States, and Germany owed more money than it would ever hope to pay in reparations to the western allies.  They went through a process of “extend and pretend” all through the 1920s, with the United States proposing various plans by which Germany could stretch out its payments.

debtbondageclip_image001201All this was a diversion from investment necessary to rebuild all the war-torn countries.  The process came to an end with the 1929 financial crash, and the Great Depression that ensued.   In 1931, the world’s major governments agreed on a moratorium on paying inter-governmental debts.  If they had done this 10 years earlier, maybe the Great Depression and Second World War could have been averted.

The victorious allies chose not to repeat this experience after World War Two.  In 1953, they agreed to write off half of Germany’s public debt (which West Germany had assumed) and to allow payback of the rest on easy terms.

Hudson said this is the solution to the Greek debt crisis and the other international debt crises.  When a national government owes more than it could ever pay, the debt should be scaled down to what is payable, or written off entirely.

The concept of “fraudulent conveyance” applies here, too.  Governments of poor countries were encouraged to take on more debt than they could afford based on bogus projections of economic growth.  When the growth failed to materialize, the lenders sought to impose budget cutbacks, tax increases, wage reductions and sale of national resources and asset at bargain prices.  That is what is going on in Greece right now.

Hudson said it is worthwhile reviving the old doctrine that “odious” debt should not be repaid.  The idea, when applied to governments, is that, for example, when a dictator takes his country into debt to enrich himself and his cronies and pay for police and prisons to keep the people in subjugation, the people of that country should not be forced to pay after the dictator is overthrown.

Actually, Hudson noted, this doctrine has been revived by European leaders, but only in regard to debts owed by Ukraine to Russia.


Hudson’s book is expensive and hard to find, but these linked articles give the gist of his thinking.

Bubbles Always Burst: the Education of an Economist, an excerpt from Michael Hudson’s Killing the Host.

Reforming the U.S. Financial and Tax System, an interview of Michael Hudson for station KPFK in Los Angeles.

Parasites in the Body Economic: the Disasters of Neoliberalism, an interview of Michael Hudson for Counterpunch Radio.

Why Greece’s Debt Is Illegal, an interview of Michael Hudson for the Real News Network.

Tags: , ,

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: