"It is incumbent on every generation to pay its own debts as it goes... " - Thomas Jefferson, 1820.

In what is erroneously called the Old Testament God chose Israel to be His model nation. Israel was to be an example of an orderly and prosperous society. As a result other nations would esteem Israel as a wise and understanding people (Deuteronomy 4:6).

For Israel to achieve this God gave her laws for the smooth running of society. These laws were in harmony with the cyclical pattern that we see in life.

In keeping with this pattern God established a 50-year financial cycle, which included seven smaller ones within it. The financial laws regulating these cycles enable a new cycle to begin afresh without the burdens and inequalities of the previous one.

"At the end of every seven years you shall grant a release of debts And this is the form of the release: Every creditor who has lent anything to his neighbour shall release it..." (Deuteronomy 15:1-2, NKJV).

And if thy brother, an Hebrew man, or an Hebrew woman, be sold unto thee, and serve thee six years; then in the seventh year thou shalt let him go free from thee (Deuteronomy 15:12).

And if thy brother that dwelleth by thee be waxen poor, and be sold unto thee... he shall be with thee, and shall serve thee unto the year of jubilee: And then shall he depart from thee... (Leviticus 25:39-41).

"And you shall count...seven times seven years...forty-nine years. Then you shall cause the trumpet of the Jubilee to sound on the tenth day of the seventh month; on the day of Atonement [Yom Kippur] you shall make the trumpet to sound throughout all your land. For the fiftieth year shall be holy, a time to proclaim liberty throughout the land to all enslaved debtors, and a time for cancelling of all public and private debts. It shall be a year when all the family estates sold to others shall be returned to the original owners or their heirs" (Leviticus 25:8-10, NKJV/Living Bible).

"...if the land is sold or bought during the preceding forty-nine years, a fair price shall be arrived at by counting the number of years until the Jubilee. If the Jubilee is many years away, the price will be high; if few years, the price will be low; for what you are really doing is selling the number of crops the new owner will get from the land before it is returned to you" (Leviticus 25:14-16, Living Bible).

These laws for a then agricultural-based society are the principles on which judgments are to be made for any society.


"Recessions are a normal debt-cleansing part of the economic cycle" (James Stack, Pushing on a string? investech.com, "Market Analyst", February 8, 2008, p.5).

"The severity and frequency of financial crises, especially the combined currency and banking collapses of the past decade, have made financial instability a scourge of our times, one that bears comparison with damage inflicted by famine and war. In a new paper for the Copenhagen Consensus, Barry Eichengreen, from the University of California, Berkeley, has reviewed the literature, attempted to count these costs, and to weigh them against the costs of a particular proposal for remedial action.

"The costs can be reckoned in stalled growth and stunted lives. The typical financial crisis claims 9% of GDP, and the worst crises, such as those recently afflicting Argentina and Indonesia, wiped out over 20% of GDP, a loss greater even than those endured as a result of the Great Depression. According to one authoritative study, the Asian financial crisis of 1997 pushed 22m people in the region into poverty. For developing countries, currency crises are an important subset of financial crises. Mr Eichengreen, while cautioning against taking the precision of such estimates too seriously, reckons that the benefit which emerging-market countries would reap if such crises could be avoided altogether would be some $107 billion a year...

"A fair reading of the studies, and there have been many, suggests that, for most countries, opening up to foreign capital will deliver faster growth in most years - punctuated by a damaging financial crisis about every ten years. Some economists argue that periodic credit crunches are the price emerging markets must pay for faster growth..." (The Economist, A remedy for financial turbulence? April 17, 2004, p.72).

"Bankruptcy serves a vital economic purpose. Most filings are prompted by a catastrophic event - unemployment, divorce, accident or illness. Filers generally have lower and more volatile incomes. Some are surely able to repay part of their debts, but for most it would entail a tremendous hardship. It will also be a burden on the entire economy. Forcing more households on debt repayment plans will constrain the economy's ability to recover from recessions. As unemployment rises and incomes weaken during a downturn, bankruptcy provides households, and thus the economy, with a fresh start..." (Mark Zandi, It's Time To Raise The Flag of Surrender on Bankruptcy Laws, nbr.com, March 22, 2005).

"Periods of recession implicitly reflected the liquidation of the borrowing and spending excesses that had accumulated during the prior boom. In this way, businesses came out of recessions with strong balance sheets and great gains in efficiency.

"The thing to see is that the borrowing and spending excesses that accumulate in the course of the boom essentially disrupt the economy's established pattern of demand, output, incomes, relative prices and profits. These distortions hamper economic growth directly over time, irrespective of the level of interest rates..." (Kurt Richebäche, The Great Deluder, prudentbear.com, April 20, 2004).

"...recessions are traditionally a period where bloated inventories are thinned, while excessive consumer and corporate debt loads are reduced to more manageable levels. Uneconomic enterprises are liquidated, improving profitability for the survivors. Unsustainable macro imbalances, such as outsized trade deficits, are brought back into balance. The concomitant financial bear market is an opportunity for an impaired system to rid itself of the individuals, institutions, and mechanisms that were misallocating resources (financial and real), inciting unsound excesses (economic and financial), and fostering economic vulnerability and financial fragility. We experienced somewhat of a healthy purging process during the early nineties recession, with the downfall of Michael Milken, Drexel Burnham, the S&Ls, the Bank of New England, and such..." (Doug Noland, North Atlantic Tides prudentbear.com, July 11, 2003).

"Business cycle. A recurring series of expansions and contractions in economic activity associated with industrial economies...

"Business cycles are not uniform in frequency, amplitude, or duration. Joseph A. Schumpeter categorised business cycles into three groups, which he named after the pioneers of business cycle theory: (a) long waves, or Kondratieff cycles, lasting from 54 to 60 years; (b) shorter term waves, or Juglar cycles, lasting from nine to ten years and (c) very short term waves, or Kitchen cycles, lasting a 40 month period.

"Since it is difficult to identify regularly recurring expansions and contractions, analysis of the business cycle is often replaced by an analysis of fluctuations" (Richard Tardif - editor, The Penguin Macquarie Dictionary of Economics & Finance, (Ringwood Penguin Books, 1988), p.35).

While it maybe difficult to identify regularly expansions and contractions there are enough hints to suggest the need for regular short and long wave cycles governed by protective laws.

"The United States' economy has been in recession only nine times in the last 60 years, or roughly once every seven years. Before the last recession in 2001, the economy even expanded for a full ten years. And the average recession has only lasted for about four quarters" (Joachim Fels, Recession 2007, morganstanley.com, November 18, 2005).

Though it has been over 28 years since the end of the last recession in Australia, the last three recessions occurred in 8-year intervals, in 1974-75, 1982-83, 1990-91. Each recession was more severe than the last, involving sharp rises in unemployment (Ross Gittins, Softies have to get tough, SMH, May 10, 1997).

Therefore it is not just a coincidence that we see in economic history recurring recessions and occasional depressions. This is in fact the years of release [cancellation of short-term debt] and the Jubilee year [cancellation of long-term debt] working in reverse. The orderly way without pain, and the unorderly way with pain have the same effect. Debt and inequalities in an economy are worked-out so that the cycle can begin afresh.


"At the heart of economic activity lies a magical relationship between the operating activities of a business and its capital structure.

"This relationship - between the real activities of production, investment and service delivery, on the one hand, and the financial structure that supports and amplifies it - has been for so long an implicit part of human life that we take it for granted.

"True, we recognise the amplifying power of the financial side of the partnership by rewarding its participants more lavishly than those who perform the operational roles. But in general, we see the two aspects of the company as straightforwardly complementary and otherwise give the relationship little thought.

"Now and then, however, there are moments that reveal the importance of this relationship. We are living through one of them now.

"In the past week, company after company has made announcements that seemed to have only the most tenuous connection with reality. Corporate restructuring announcements or bankruptcy proceedings demonstrate a yawning gulf between a company's underlying business realities, the values inscribed in its balance sheet, and the formal commitments to shareholders, creditors and other stakeholder.

"Obligations with little in common ... prove to be economically unsustainable. Reality has to be redefined, obligations dropped.

"This adjustment of the relationship of the capital structure to underlying operating activities is in some cases a wrenching process, with a complete reassignment of rights and potentially drastic changes in the day-to-day business company. In other cases it is less disruptive, acting through adjustment of future expectations about evolution of profits, cashflows and dividends rather than any one-off change to their absolute level.

"Capital markets can take most of these smooth adjustments in their stride: their role is precisely to handle day to day calibrations of expectations so that we scarcely notice them. But superimposed on this smoothing process is the bigger disruptive adjustments that flares up in periods like the present.

"We should think of these adjustment periods as the lineal descendant of the biblical concept of the Sabbath year - the seven-year cycle, described in Deuteronomy, which releases debtors... The original biblical text stresses the operating appropriateness of a seven-year cycle as a means of ensuring continued fertility for the land. But the scripture also makes clear that contractual relationships need to be reset. These presumably include the primitive financial relationships that provided leverage for the operating cycle.

"A super-cycle of seven times seven years was also described in Leviticus. How this larger jubilee differed from the seven-year cycle is unclear. But there was more sophistication at work than simply cancellation of debts or other contracts. In particular, there seems to be evidence of a resetting of contracts around some normalised terms, based on fair returns for time expired.

"The implication is that the passage of time and the distortions of the capital market cycle was likely to have caused all obligations to drift upwards towards unrealistic onerous levels. Resetting them to a lower, standardised level was therefore appropriate. A protective clause also requires equitable treatment in the immediate per-jubilee phase, so that the benefits of contractual release are not pre-empted by harsh treatment.

"... whether they were practical guidelines or merely a theological aspiration they offer a glimpse of an underlying truth. This casts light not merely on the relationship between operations and financial structure that governs stable economic activity, but on a third, invisible element: dream, vision, animal spirits.

"It is the presence of the expansionary dream that allows financial innovation to build on current or promised operating returns. Returns are no longer restricted by productivity growth, but are as limitless as financial imagination can devise.

"Entrepreneurs and investors vie with one another to bid up this opportunity. Obligations are heedlessly assumed, since there will be enough potential profitability - say, enough potential subscribers for mid-week football matches in the outer fringes of the Football League - to swamp any risk.

"It did not take the biblical seven years, let alone seven times seven, for the particular set of obligations to prove unsustainable. A similar brevity applies to many other of the contractual relationships now being restructured. In many cases, the ink is not yet dry on the documents with which today's bankrupt companies assumed their now impossible obligations.

"Managers, investors, financial intermediaries, policymakers we can all learn from this experience. The task is a triple one. First, in daily operations ensure that estimates of true underlying returns are realistic, something that demands common sense rather than elaborate technique...

"Second, dreams must balance humility and ambition...

"Third, ensure that financial structures support this present reality and future vision, rather than distorting it..." (Peter Martin, Remember the Sabbath day, ft.com, April 8, 2002).

The same principle of "adjustment" in nature:

"... fire, notes Peter Fule, a forestry professor at Northern Arizona University in Flagstaff, is a necessary part of the life of western forests. Small, frequent fires (cp. recessions) burn off low undergrowth and seedlings while sparing mature trees and giving them first crack at later rainfall. Occasional severe fires (cp. depressions) wipe out tree stands damaged by insects or droughts, giving the seeds that survive the blaze a clean slate" (The Economist, The West, ablaze, August 12, 2000, p.29).

When God gave Israel His financial laws He did not expound, as far as we know, on the hidden laws or forces behind them. God said do this and don't do this for our benefit. They were not arbitrary commands but were established on sound principles for the effective working of society.

There are laws at work in society, which we may not know the mechanics of, that cannot be wittingly or unwittingly avoided. Eventually these forces exact their penalty. Despite the fact that it is around seventy years since the last depression, the next recession will turn into a 'great' depression. The depression will have the beneficial effect of levelling more or less the inequalities of the present long-wave cycle so that the new cycle can begin afresh with its own new challenges.

If the above 'Biblical' laws were obeyed, in a peaceful society, there would be no runaway inflation, onerous interest rates, compounding debt, no wealth inequalities where the wealthy get rich at the expense of the poor, and no great depressions fraught with their own financial, economic, political and social upheavals and discontinuities.

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