- Many human endeavors have an element of “We are doing this because everyone else is doing it”. Who can explain the leisure suits or the platform shoes of the 1970’s? Yet, we who lived through those days not only embraced the crazy fashions but thought ourselves “cool” while doing so. Much of our decision making in fashion and other areas is based on “What will others think?” We often fail to think for ourselves, but go along with the conventional wisdom of the day.And so it is with our money. If conventional wisdom is buying mutual funds for retirement because the stock market is always bullish, we purchase buy mutual funds. If conventional wisdom is borrowing lots of money to buy the biggest house affordable, we put ourselves in to debt with a big house, because we know that real estate always goes up in value. We are surprised and angry when “what we know” ( the conventional wisdom ) is wrong.
History is replete with speculative financial bubbles, to name a few; The Tulip bubble of the 1600’s, the South Sea bubble of New World trade in the 1700’s, the Dot com and Real estate bubbles of our own time. Finances, like other human activity, are greatly effected by emotional decisions that are not necessarily based on factual or mathematical information. Truly we need a framework which allows us to be wholly human but will protect us from following each other off a financial cliff like mythical lemmings.
If archaeologists unearthed an ancient civilization which utilized an economic system that allowed its citizens to express themselves both intellectually and emotionally, would you pay attention? What if you were also told how this economic system allowed for risk and reward, failure and collapse, but had within it safeguards so that no person’s entire life or the lives of their children would be destroyed. How about an economic plan that would encourage hard work and leisure, innovation and tradition, education and meditation, saving and risk taking. Would you look for a way to adapt the ancient ideas to modern times? Would you pay attention?
Of course archaeologists have found no such thing, but…In 1991 I heard this paragraph read aloud in a small gathering. “At the end of every seven years you must cancel debts. This is how it is to be done: Every creditor shall cancel the loan he has made to his fellow Israelite. He shall not require payment from his fellow Israelite or brother, because the LORD’s time for canceling debts has been proclaimed. You may require payment from a foreigner, but you must cancel any debt your brother owes you. However, there should be no poor among you, for in the land the LORD your God is giving you to possess as your inheritance, he will richly bless you, if only you fully obey the LORD your God and are careful to follow all these commands I am giving you today. For the LORD your God will bless you as he has promised, and you will lend to many nations but will borrow from none. You will rule over many nations but none will rule over you.”
This brought to mind that as a young man who came of age in the late 1970’s – leisure suit and all!-. I was keenly aware that debt could be an enemy as well as a friend. Many around me who had done very well financially had accumulated wealth by using debt while others who had used debt were destroyed by it financially. Some seemed to be unlucky or have bad timing while others seemed to live charmed lives. For example, a house purchased in 1972 and mortgaged at 5% interest rate for 20 years appreciated considerably in value by 1979. The 1972 buyers were winners. On the other hand, those in debt with a floating interest rate found themselves paying 15-20% interest by 1980. Business types who had leveraged themselves to buy inventory or equipment found themselves with crushing interest costs they had not anticipated and were unable to pay. Many failed, these were the losers.
The afore mentioned paragraph, is an ancient document, recommending that all debt be canceled every seven years. Of course, the document I am referring to is the Bible and the specific passage is Deuteronomy 15:1-6. Debt cancellation under this system would not have been a surprise or a calamity to anyone; it would have been a national economic plan. Therefore, all parties entering into any agreement would have known that on a certain date everyone would be contractually out of debt. No exceptions! Such a financial system would cut short almost all financial bubbles, any business would take into account the future national debt “reset” or resolution.
Would a system with a regularly planned national resolution of the credit/debt cycle create a long term stable economy? Certainly we know Federal reserve banking has not worked; we also know gold and silver standards have not worked. Is a planned end to the debt cycle every seven years the answer?
If a business opportunity presented itself in the fifth year, of the seven year economic cycle, those involved would know that they needed to be in balance within two years. The resolution of debts would keep leveraged speculation in check since the creditors would recognize financial risk within two years if the investment went badly for the debtor. The creditor may arrange that what is unpaid by the end of the seventh year converts to equity, believing in the long-term business opportunity, but regardless, neither the borrower nor the lender has debt outstanding at the end of the seven year economic cycle. Contracts such as the one outlined above, where debt converts to equity, would likely become commonplace. To be sure, creditors would be much more careful in their lending practices if their bonds became equity at the end of the seventh year.
Debtors, on the other hand, would be forced to plan better. At this point in time, purchasing a home is often done via a 30-year mortgage. Rent to own programs might be one answer. Taking home real estate purchases in seven year block increments might be another. For example, a person might take seven years to pay for a plot of land. In the following seven years, they may build and pay for a small expandable house on that plot and in the third seven years to make it what they always wanted. All the while planning to be out of debt at the end of every seven year increment.
The overall society may benefit in other ways as well. Older members of society are usually the ones who have accumulated some wealth. Consequently, older members of society may tend to take a very keen interest in the younger members of society and in what they are investing. Rather than just putting their money with a third party bank, older, wealthy members of society may find it advantageous to hold equity in some young person’s business. In doing so, they will have incentive to also offer counsel and accountability. This may very well be a win-win for both the young business owner and the elderly counselor/investor.
Simply put, it is not hard to imagine how a system like this would be very stable. It would require some serious innovation, but nothing so unusual as credit default swaps or other crazy financial instruments which are now causing so much pain.
None of us has absolute power and can simply rewrite contract law for an entire nation? So how can we implement such a huge change?