Why wiping the slate clean might make sense.

I wasn’t planning to write a post this week since it’s the Thanksgiving Holiday. Plus I haven’t quite collected all my thoughts on this issue.

Debt is a complex topic with so many related issues and emotions attached to it. It’s one worth your time to understand because we often form our beliefs about debt from family values.

We’re likely going to see some debt relief policies that effect all tax payers in 2021. Some of those policy changes may challenge your beliefs. 

The problem

recent article in the New Yorker does a good job of explaining the economic theory from the book called Debt. The article highlights federal education debt and the mechanisms in place for the federal government to forgive the debt. However, it also makes a case for relieving other forms of debt including medical related debt as part of a Covid stimulus package.

This quote from the article captures is a key problem of economic inequality that we all need to rumble with

High levels of corporate debt are, we mustn’t forget, one reason we are in this mess. For more than a decade, companies took advantage of low interest rates and gorged themselves on credit, often using the funds to buy back stock and push out dividends to shareholders, rather than raising employee wages or saving for a rainy day. These over leveraged companies made our economy more vulnerable to the coronavirus shock. And yet their behavior is being rewarded. In the spring, the Federal Reserve decided to purchase corporate debt, including the junk bonds, or riskier debt, issued by companies whose investment ratings had plummeted because of the pandemic—the so-called fallen angels. Regular debtors, in contrast, are rarely shown such charity; instead of being heralded as divine, they are dubbed deadbeats.

Economic Growth

Debt forgiveness was one of the many “socialist policies” that the Democratic candidates like Elizabeth Warren and Bernie Sanders ran on and has become a hot topic since the election. Unfortunately, many Americans heard the headline and not the rational.

According to the New Yorker article, experts believe America is struggling with a massive insolvency problem that is limiting economic growth. Progressive politicians supporting debt relief believe Americans will put equal value back into the economy through increased demand for goods and services, home ownership and entrepreneurship. All of which would benefit everyone.

Research by Professional Economists supports the anticipated growth. According to the book Unbound, an amount equal to the Trump tax cut invested at the bottom of the economy would produce economic growth of approximately 5%. 

Wiping the slate as experts say may be an effective way of allocating stimulus funding. It something that needs further evaluation by Professional Economists and careful consideration by the Biden Administration given the sensitive nature of the topic.

Limits of Stakeholder Capitalism

I participated in the Deal Book conference last week. It’s worth watching the presentations if you have free time over the holiday weekend.

One thing that became clear to me is that Stakeholder Capitalism has limits. The conversations with Ruth Porat, CFO of Google and Jamie Diamond, CEO of JP Morgan made that clear for me. Both leaders do a good job of considering the health and wellbeing of their ecosystem [aka: stakeholders] but cannot get beyond the interests of their respective companies to consider the greater impact on society. There is a clearly a role for government.

My favorite quote was from the conversation with Masayoshi Son, Founder and CEO of SoftBank…

I would rather accept my stupidity and my ignorance — my bad decisions — so that I can learn from my mistakes.” 
 ~  Masayoshi Son, the founder and chief executive of SoftBank

Happy Thanksgiving

Happy Thanksgiving to everyone observing the American holiday this week. It has been a tough year for everyone for one reason or another. Be extra kind to yourself and to others.