Deregulation & Debt Jubilees

Featuring David Zervos

Independent thinker David Zervos from Jefferies sits down with Raoul Pal to expand on the stimulative benefits that a fiscal deregulation cycle would bring to the US economy, the effects on productivity growth and how the BOJ’s rampant purchasing of JGB’s could take them to own 80% of outstanding debt, a position which would allow them to write it off having serious consequences on the Yen and the Nikkei Stock Exchange.

Published on
27 June, 2017
Japan, Fiscal Policy, US Economy
59 minutes
Asset class
Currencies, Equities, Bonds/Rates/Credit


  • DS

    David S.

    29 6 2018 22:21

    0       0

    Bob undefined: I have been thinking about this recently also. The gold standard was the control on printing money in the past. I do not think countries can ever be on the gold standard again - too restrictive politically. More of a sleight of hand than a debt jubilee, would be for the BOJ to issue 100-year zero interest bond to the Japan Government and just let it ride. This would keep the interest on the debt at zero for budget purposes. I am not sure how rating agencies would look at it, but it may be better than an actual write off - of course it could be written off later. The BOJ may already be forgiving part of the debt owed by the Japanese Government already. Maybe they will do both and see what happens. "What a tangled web we weave.." DLS

  • DS

    David S.

    29 6 2018 21:52

    0       0

    The Biblical debt jubilee had a reoccurring end. Lenders probably lent very little near the end and made sure all debts were collected. It is a good idea to force both borrowers and lenders to zero out. In China I believe that they try to pay off loans before the new year. The CB debt today is a different animal and should not be confused with the above. DLS

  • NB

    Nils B.

    6 11 2017 00:06

    0       0

    Good communicator, well-balanced reasoning, gives a relatively humble impression while still being convincing. All in all, great interview!

  • B

    Bob .

    27 10 2017 20:53

    0       0

    I just re-listened to this after four months. This is an extremely important topic and one that will continue to be re-visited. As John Mauldin likes to say, "think the unthinkable".

    I disagree with the idea this will be well communicated beforehand. I think all of the CB's will talk and agree, but this would cause global market dislocation and chaos for months if discussed and implementation dates published. Chaos and market resets will still occur, but nothing like months of fear, discussion and chaos that would occur during endless speculation.

    The advantage of a "rip the bandage off" is that if it goes reasonable well people will be able to see that in real time the impact are Armageddon (or maybe they will) and it may mitigate swings and panic.

    No one knows for sure.

  • CM

    Chris M.

    9 8 2017 21:23

    1       0

    Someone who is better at economic theory please explain how debt jubilee doesn't create hyper inflation and destroy savers in the home country? If this was such a fail safe method, why wouldn't all countries print money, buy back their debt, and start over.

  • RM

    Rainer M.

    9 7 2017 14:39

    0       1

    About Japan and David thesis that in a debt jublilee they will buy other nation state currencies. In my opinion this is rather backward looking. Japan has a very high take up of BTC (Bitcoin) I wonder why I never mentioned Bitcoin in the Japan context. Arguing nation state currencies instead. Is this not too old fashioned and a sign of being out of touch with macro trends ?

  • JL

    James L.

    6 7 2017 21:58

    3       0

    Also, his idea of the BOJ magically "burning" up government debt bought with digital money without any monetary or societal ramifications is laughable. He reminds me of local financial advisors at 3rd rate shops here in Florida. They look smart now (after being panicked in 2007-2009) because global central banks have pumped assets to insane prices, but they have no real explanation of how it won't be catastrophic in the long run. They just hope it will work out.

  • JL

    James L.

    6 7 2017 21:48

    2       0

    I am sorry, but this is one of the worst guests that Real Vision has ever had since its founding. He is a walking, talking statist book of talking points. So, he lauds the actions of the Fed and the hopes for massive fiscal spending and deregulation, and he says that these are problematic policies for debt and society in the long-run. He recommends Gary Cohn as a potential Fed Reserve member, a guy who has shown absolutely no ability at anything other than grifting off of the current financial system. A disappointment despite Raul's interviewing skills.

  • RM

    Russell M.

    5 7 2017 13:09

    1       0

    The German central bank after WWI knew what it was doing. It's inflation policy was a reaction to the French refusal to allow any softening of the war reparation burden which was exacerbating the depression in Germany. Read Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed for a fascinating explanation of the Central Banking history between the wars.

  • SB

    Stewart B.

    4 7 2017 22:07

    2       0

    It's worth noting too that the BoJ and Japanese government do not actually need to have a formal debt jubilee. It should be noted that the yield from QE assets is remitted to the Japanese government and can be used for funding Japanese debt (robbing Peter to pay Paul). The Japanese gov and BoJ together are accumulating assets about twice as fast as debt. Additionally, many of the QE assets have much higher yield than the JGBs. It is the Japanese consumer and employee who are paying for this now through lower real wages, higher import costs and foregone deflation benefits. It all comes to a head once politicans realise they got away with it once ;) Free money is the most addictive substance known to man - just ask John Law ;)

  • JC

    John C.

    4 7 2017 07:48

    2       0

    Wow great interview. Not a believer in some of what he believes but sure made me think.

    Dodd-Frank is a perfect embodiment of what David said about non-level playing fields created by the crony-capitalist/monopoly power side of increased overregulation. Look at how it really hurt small business banking and small businesses under the Obama reign. And also destroyed bond & equity trading liquidity in the bigger markets while centralizing power in the bigger banks and making it harder for the smaller guys to compete.

    Its so difficult to regulate effectively in general, and the quagmire that David says came about due to overregulation really put a crimp on the economy, so it's odd that he seems to think that on the whole it was a good thing. One also has to wonder why David seems to put so much faith in clearly dysfunctional government(s) to continue to 'do more' via policy prescriptions such as regulation, QE, debt jubilees, etc. etc. And/or why the obvious connection to lack of investment/malinvestment brought about by both QE and overregulation in conjunction wasn't discussed much. Just a thought.

    On a separate note, whatever one's political beliefs, this interview doesn't paint a very pretty picture of Obama and the Democrats rule and how stifling it was for business large and small (mostly small though) and how poorly thought out overregulation can really impact an economy.

  • SB

    Stewart B.

    3 7 2017 20:48

    1       1

    Wow - great interview. (1) He is absolutely right on deregulation. Sadly very few economists understand how over-regulation discourages business formation. in order to put upward pressure on real wages, people need to be incentivised to leave their salaries jobs and become employers. This means creating demand for labour. As someone who comes from a family of business people, I am astounded how much things have changed for the worse over the past 20 years. (2) He is also completely right on the jubilee in Japan. I've long felt that the real meaning of QE is to move private assets onto the central bank's (tantamount to the State's) balance sheets. In answer to the question on who pays, the answer is that we all pay while QE is conducted. QE results in lower real wages, increased cost of imports and a lack of deflation to restore purchasing power to the consumer. How else can you argue that the SNB buying uS stock serves any economic value to the Swiss? Note though that the debt doesn't need to be cancelled as coupons and dividends form QE assets are remitted to the Treasury of the government, cancelling out the interest costs on the public debt. This is the first phase. Of course the bigger problem is after, when politicians realise that 'public debt doesn't matter' as they got away with it last time. This will be the end.

  • RS

    Rob S.

    2 7 2017 17:09

    5       0

    So if your responsible, work hard, pay off all your debts and live within your means. Then they decide to pay off all the debts. Seems hardly sporting. Quick run out and borrow as much money as you can buy a bunch of stuff you really don't need with that money you don't really have,
    Sounds wonderful doesn't it?

  • AE

    Alex E.

    2 7 2017 04:06

    7       0

    How unfair that people, corporations and nations can spend themselves into near bankruptcy, and yet, with the turn of a card all is forgiven...God in Heaven, what are we teaching our children?

  • RR

    Raj R.

    2 7 2017 02:24

    2       0

    Debt jubilee in Japan would create hyperinflation. How can it not? Doesn't Nikkie strengthening in itself a signal of inflation in asset prices? Money supply increases tremendously with debt jubilee!

  • TH

    Timo H.

    1 7 2017 06:48

    17       0

    I appreciate his thinking, but don't agree with the conclusions:

    The productivity gap is real, but I don't think it is all about regulatory burden. A significant factor, that deteriorates the productivity is the QE, which has created a "all carrot, no stick" environment. In this environment, mispriced (free) money does not kill unproductive businesses as effectively as it should. That's the "no stick" part of the problem. Furthermore, the price of money sets the floor for investment quality requirements. When the price of money is real rate terms is near-zero, the productivity (i.e. required rate of return) requirement set for investments is also near-zero. That's why the corporations prefer buying their own stock instead of innovating and investing. That's the "all carrot" part of the problem. These two problems together cause misallocation of capital that destroys the productivity. The further we go down this road, the worse the misallocation and the more painful the reset will be.

    The debt jubilee view was overly optimistic. I agree, that a reset in form of debt monetisation is unavoidable. However, I disagree, that the reset can be "reasonably painless". He seems to ignore, that fiat currency is all about confidence. When it goes, the currency goes belly up. Arguing that debt jubilee is "safe" in a deflationary environment is foolish. Deflation can turn to hyperinflation overnight, if the confidence is destroyed. The confidence has nothing to do with economy and everything to do with psychology. If someone does something completely unexpected and causes you to suffer, you won't trust that party any more, because he may do it again. You sell everything that is related to that party. If the asset to be sold happens to be a currency, then that currency hyperinflates, if even small percentage of the population lose their trust. Even if the debt jubilee did not cause hyperinflation, it provides no solution to the productivity problem which causes the vicious circle of debt. The "all carrot, no stick" regime continues and the economy faces another debt jubilee sooner or later. The cure eventually comes in the form of a stick and limited supply of carrots that force the productivity go up. There's no jubilee that day...

  • HK

    H K.

    30 6 2017 11:52

    4       1

    I like RV, but this is one presentation I am lukewarm about. This guy is just another mainstream asshole. If your a Japanese citizen watch out your gonna get your asses handed to you because a bigger bomb is coming than the ones in Hiroshima and Nagasaki. I especially like the reaction and body language of this guy when Raul was asking for more details, who said reality tv is not entertaining.

  • pm

    preston m.

    30 6 2017 06:28

    0       1

    This was really good....thanks

  • JU

    Jay U.

    30 6 2017 05:19

    2       1

    I loved this interview. I don't necessarily agree with all the points made, but I've never heard a lot of these views from anybody. A lot of new and interesting insights to consider.

  • SH

    Steve H.

    29 6 2017 17:27

    5       0

    If you're a Japanese citizen and not buying up every ounce of gold you can, you're crazy !

  • SW

    Scott W.

    29 6 2017 16:26

    2       0

    I like that RV interviews guys like this. Read Zero Hedge if you want perpetual confirmation bias. And what he says in this interview certainly challenges the (or my) Austrian inspired world view. I for one cannot see past paying the piper - somewhere, somehow. Maybe however, just maybe, Japan CAN pull off a debt jubilee without severe consequence. Or, maybe the piper has been paid or is being paid in some fashion Bastiat-style (that which is unseen).

    I suspect that a debt jubilee for Japan however

  • MS

    Matt S.

    29 6 2017 15:49

    4       0

    If there were an economist of the Starship Enterprise... he would look like this.

  • pd

    peer d.

    29 6 2017 15:07

    4       0

    Did I miss something in the interview where Mr. Zervos mentioned how positive QE and zero bound interest rates have helped pensioners, insurance companies, etc. I guess if you have played by the rules, saved money, and don't want to start cannabalizing your principal, you are an absolute idiot for not spinning the wheel and making a deal but going out on the risk curve.

    Germany of course suffered damage at the conclusion of WW I, got forced into the Versailles Treaty (which of course was very burdensome), and had a very careless central bank equivalent, but had great human capital, had solid rule of law, and industrious people yet suffered the same fate as Zimbabwe. Two very different countries, cultures etc. but the same outcome- hyperinflation.

  • RM

    Russell M.

    29 6 2017 15:02

    6       0

    His description of the situation at the Fed vis a vis tightening before the Trump nominees can exert a loosening influence makes sense. Though I personally doubt the Fed will have the nerve to stick to reducing the balance sheet and increasing interest rates if there is a significant market correction no matter how much they dislike Mr. Trump. I hope they will follow through and reduce the balance sheet so the market can become more efficient again.

    His views that the Fed should support the market with low interest is understandable because he works for a brokerage firm that makes money when people invest in the market. So he wants to put off the correction as long as possible. I don't agree that that is a good medium or long term approach to create a healthy market. Politics however exert short term pressure to do the expedient thing which is to maintain the status quo and not let the markets correct.

  • JL

    Jacob L.

    29 6 2017 14:58

    2       0

    One question on the "Increased regulation has caused high profit margins and increased the barriers to entry"-theme: If that was true, where is the inflation?

  • HJ

    Harry J.

    28 6 2017 23:31

    0       0

    What's up?

  • RE

    Rachel E.

    28 6 2017 22:52

    1       0

    Keynes said the same

    Debt does not matter!!!!!

  • SR

    Steve R.

    28 6 2017 21:23

    7       0

    Totally agree with his comment about productivity linked to smartphones! I've been observing this for years. For all its perceived benefits, the smartphone really has been a destroyer of productivity. Companies should ban their use. And Facebook has been the single biggest culprit. Facebook consumes massive amounts of time for zero net gain!

  • RE

    Rachel E.

    28 6 2017 21:16

    3       0

    Imagine all the major industrial countries do debt jubilee????

    End of capitalism.

    Adam Smith & Mises are shaking in their graves!!!!!!

  • AP

    Adrian P.

    28 6 2017 20:43

    7       0

    I liked this video. Agree in the possible end game to resolve the debt problem. Don't buy the over regulation theory, and the explanation for the high productivity in France sound like a joke

  • lD

    lance D.

    28 6 2017 12:55

    0       0

    love this conversation it would be amazing to be able to understand the intricacies but just knowing it is a possibility that it is on the horizon is just awesome . thanks guys

  • DS

    David S.

    28 6 2017 08:38

    2       1

    When Mr. Servos says he is excited about something, it merely means he is myopic. As he said his only advice is to help people invest their money – if it destroys the earth who cares?? Although the residual of America prosperity is still great and many people want to come to the United States, we have become the beacon of a new robber baron mentality. The “let them eat cake” attitude did not turn out so well the last time. DLS

  • TR

    Thomas R.

    28 6 2017 01:37

    4       2

    The comment I would offer in agreement with David would be the simple fact that the financial impact of the printed Japanese currency to buy the bonds in the first place has already happened and is well known. The currency impact is already in the market and the bonds are out of circulation. The outcome for the remaining 20% of outstanding Japanese bonds is not different after the jubilee then before - assuming those independent holders of Japanese bonds are not simply naive to the fact that the BOJ currently owns 60% of JGB's and, in the example created continues to buy to get to the 75% or 80% level. All of this will not be a surprise when it happens. In the US - why couldn't the Fed and the Treasury do the same thing?

  • GG

    Gerald G.

    28 6 2017 01:29

    17       17

    The more I watch RV these days the more I am happy that I didn't waste my money on the 3 year renewal plan. I sure didn't subscribe to RV to watch some arrogant mainstream intellectual proclaim that QE works or that, when the debt gets too big, just go ahead and "burn it". The world is full of this same kind of idiot who thinks that, just because the distortions to the system haven't fully manifested themselves yet, everything is Ok. People like this are like corrupt referees who think that, if the home team is loosing, it OK (just this once) to change the rules of the game and then go back to business as usual. You can NEVER go back to business as usual morons! Because now, everyone KNOWS that the game is rigged and that the rules don't mean shit. Just because the game is now rigged in your favour doesn't change the fact that it is rigged and has lost it's meaning.

  • jn

    john n.

    28 6 2017 00:44

    4       0

    If regulation benefits large corps they will resist deregulation by lobbying congress who are beholden to them for campaign $. I don't think Trump is ready to fight big business.

    Does debt jubilee imply a currency devaluation, regardless of country, which implies gold will benefit?

  • PN

    Philip N.

    27 6 2017 23:49

    13       0

    I think the "interpretation" of the law argument is an extremely slippery slope. IMHO a law's enforcement should not be dependent on the whim of the civil servant who happens to head the regulatory department today as this creates enormous uncertainty. What is to stop the next regulatory head from charging people for a business practice that was "legal" under his predecessor but could be interpreted as illegal? One of the things that put the great in Great Depression was regulatory uncertainty.

  • TS

    Thomas S.

    27 6 2017 23:32

    18       0

    The kind of QE we received in the US put liquidity only into the banks, not the real economy. It was a bailout - primarily for the purchase of the banking system's bad assets with book entry money conjured at the central bank. This was a colossal policy error that disallowed the natural cleansing process necessary for capitalism to function, and forced a less competitive, overly consolidated banking system comprised of behemoths which now wield far too much power. On the other hand, QE for sovereign debt monetization is the effective cancellation of the public debt. QE for the purchase of any other asset is essentially theft by the banking system at public expense. If there is going to be helicopter money it should come directly from the Treasury and be used only toward productivity enhancing purchases in the real economy. Leave taxes to fund government bureaucracy, transfer payments and war thereby making the value for tax calculus transparent.

  • TS

    Thomas S.

    27 6 2017 23:32

    4       0

    The kind of QE we received in the US put liquidity only into the banks, not the real economy. It was a bailout - primarily for the purchase of the banking system's bad assets with book entry money conjured at the central bank. This was a colossal policy error that disallowed the natural cleansing process necessary for capitalism to function, and forced a less competitive, overly consolidated banking system comprised of behemoths which now wield far too much power. On the other hand, QE for sovereign debt monetization is the effective cancellation of the public debt. QE for the purchase of any other asset is essentially theft by the banking system at public expense. If there is going to be helicopter money it should come directly from the Treasury and be used only toward productivity enhancing purchases in the real economy. Leave taxes to fund government bureaucracy, transfer payments and war thereby making the value for tax calculus transparent.

  • MC

    Minum C.

    27 6 2017 22:38

    19       2

    Nice interview. I like how Raoul started throwing out some probing questions at the end with respect to the debt jubilee comments. I seems to me David thinks in a linear way, and I highly doubt a global financial system will act in a linear way if and when his JGB scenario comes true. For example, he thinks the ~80% of JGBs held by the BOJ can be "burned", but what does that mean for the other 20% and how does that impact his scenario? A debt jubilee is a debt default. I find humour in listening to someone who thinks the Government of world's 3rd largest economy can default on its obligations, and everything is gonna be fine. Humans are not predictable animals.

  • JH

    Jesse H.

    27 6 2017 21:22

    18       0

    Very good interviewing skills on display from Raoul. Disagree with many of the views expressed by David, but interesting to hear a different viewpoint. Fundamentally, I felt like David was commenting on the surface issues, without diving into the deeper trends and issues we face in the US or globally in Western countries (e.g. Debt, deflation, demographics and the larger framework). I almost felt like this was an interview with a former Fed employee (which he is, I gather) rather than an investor.

  • DB

    Dennis B.

    27 6 2017 21:10

    4       0
  • BP

    Barry P.

    27 6 2017 20:36

    7       0

    Great interview Ral, really confirms that economists views and potential involvements with monetary policies are a dangerous/toxic elixir.

  • SS

    Sam S.

    27 6 2017 19:04

    12       0

    I don't agree with his comments on regulation. Who's running the show changes and is dangerous. Completely overhaul the regulatory system but by all means keep the bread and butter regulations in place. Not all regulations are bad. I sold two businesses I spent a lifetime building all because of bullshit taxation and massive regulation to support CA employees. Profitable job creating businesses that to this day are failing only because of regulation and taxation. Creating an illusion of positive change is the Wizard of Oz.

  • WS

    William S.

    27 6 2017 18:24

    25       0

    Frankly, I'm a bit stunned by what I consider to be the naïveté of a putative localized (and relatively painless) "debt jubilee." In the context of the 21st century's globalized economy, a debt jubilee on the part of a single major component (e.g. Japan) is merely a variation on the theme of the currency devaluation "race to the bottom", and the downstream consequences simply cannot be confidently predicted. That said, it is virtually certain they would prove to be MUCH more painful than expected. A debt jubilee would be more or less practicable in a closed system, but given the way the global financial system has evolved under the tyrannical reign of the US dollar, the only species of debt jubilee now possible would be one that originated with the USD and simultaneously encompassed the entire planet -- and I simply cannot envision that occurring absent an earth-shattering amount of social turmoil.

  • CY

    C Y.

    27 6 2017 16:49

    19       0

    Raoul's interviewing skills are insane. He has this amazing ability to draw out the best ideas from his guests.

  • SD

    Scott D.

    27 6 2017 15:35

    6       0

    Where can I get the "bond fire" hat?

  • IJ

    Ian J.

    27 6 2017 15:22

    14       0

    Why has their been under investment? Why are corporate profits so high? Why is productivity so low? QE is why.

  • Nv

    Nick v.

    27 6 2017 12:49

    8       1

    The US is already 53% of global investable equities. You really believe it should be more?
    According to BAML, Facebook's market cap is greater than MSCI India (1.3bn people). The US is out of whack. It has limited upside and are over-owned. I suspect its relative valuation will only get crushed in a correction as people will sell what they own. They own the US

  • SC

    Shane C.

    27 6 2017 12:38

    19       1

    The corporatism between Congress and big business is such an important topic. The regulatory handbook is over 75k in pages. This is utterly shocking. Imagine if the US could convince Congress to push tax overhaul through in a few years along with this deregulation issue. But yes, I agree endorsing QE sucks for me. QE simply filtered through the financial channel compounded with a chase for yield due to zero-bound policy. Again, like Mises said, "money velocity is a superfluous concept. Real demand for money comes from human action and the price negotiation between individuals." Put money into people's hands and allow them to produce and spend and you will see real demand return.

  • JS

    John S.

    27 6 2017 12:29

    7       0

    Would love to hear more on the potential for a debt jubilee in Japan.

  • SA

    Sean A.

    27 6 2017 12:01

    33       3

    I have a serious issue with investors who can't make the connection between loose money policy on the central bankers part and the malinvestment that is driving the downside of the business cycle. Saying QE works and giving credence to what is, in my opinion and entirely artificial expansion, just discredits David here a little in my eyes. His view seems to be that all we need to do is stimulate investment to get the economy running, but doesn't have much to say about banks subprime loans and bad debt consuming the balance sheet