Here is how it works: (to keep the analysis simple we’ll ignore profit, administrative costs etc) interest rates are composed of two main components 1) the time value of money and 2) the estimated risk of default on the loan. For example, on a 5 year loan to a medium sized corporation today the time value of money (ie the “risk free interest rate” – typically the rate on equivalent length US Treasury Bonds) might be 3%, while the chance of default by the corporation might be estimated to be 3% a year, for a total interest rate for a 5 year loan of 3+3 = 6%.
The key to the “The Ratchet” is the “risk of default” component of interest rates. Once the idea of a Jubilee starts to circulate, it has to have some effect of increasing interest rates. For example: let’s take the above example and add in the effect of a possible Jubilee. Let’s assume we’re a few years into building the Emancipation Party and the conventional wisdom is that there is a 1% chance that we can get Our Reforms enacted in the next 10 years, triggering the Jubilee. 1% risk divided by 10 years equals .1% per year – thus the market will have to assume that there is an additional .1% per year risk of default-via-Jubilee in addition to the default risk in the normal course of business for the firm. Thus, the interest rate to the corporation instead of being 6% would be 6.1% considering the “extra” default risk from the possibility of Jubilee. This doesn’t seem like much, but even a fraction of a point can be tremendously significant.
Now let’s imagine that time marches on and the prospects for the Emancipation Party continue to improve. Let’s say that “conventional wisdom” now is that EP has a 5% chance of success within the next 5 years. Getting stronger, but a long way from a sure thing. Nonetheless 5% divided by 5 years equals a 1% increase in interest rates: if the “Jubilee risk not considered” rate would have been 6%, then with “The Ratchet” in force, the same loan would have to have a 7% interest rate. And this extra interest effect isn’t going to only impact corporate bonds. All new debt will have to take the default-by-Jubilee risk into calculating the interest rate: government bonds, car loans, credit card interest, mortgages. Every new loan. Total debt in the United States in 2011 was $57 Trillion dollars. An incremental 1% interest on that debt would be an incremental $570 Billion dollars of interest.
Finally, let’s consider the case where the Emancipation Party is showing significant but not yet winning levels of support. Let’s now say that “conventional wisdom” is that EP has a 20% chance of success within the next 5 years. Now the effect of “The Ratchet” on interest rates is 4% added on to all medium term or longer rates. A unadjusted 6% rate goes to 10%. At the 4% level, The Ratchet is beginning to crush the status quo.
It is very reasonable to assume that as interest rates rise and therefore debt becomes more burdensome, more people will support the Emancipation Party and Jubilee. This can be because the increasing cost of debt impresses upon the zeitgeist the instability of our national debt burden, because increasing debt costs require cutbacks in spending or simply because increasing cost of debt affects individuals directly and personally.
Thus, we have the positive feedback loop: as perceived support for the Emancipation Party increases, that increases the extra “Jubilee Risk” interest amount, which causes more support for the Emancipation Party, which causes more increase in the Jubilee-risk component of interest rates, which causes more support for the Emancipation Party, etc., etc.
There will come a time, which we call the Jubilee Inflection Point, when each incremental addition of new support for the Emancipation Party and Jubilee raises interest rates enough to cause even more than that increment of people to join us. This will result in a runaway exponential growth in party supporters and a runaway growth in interest rates, crushing the system in short order.
Calculating what level of support constitutes the Jubilee Inflection Point is beyond our current knowledge, but as the Party rolls out it should be possible to estimate the rate of change of incremental “Jubilee Risk” impact on interest rates per additional increment of popular support for the Emancipation Party and to at least roughly estimate what level of support for the Party will trigger the Jubilee Inflection Point.
Based on some very simple assumptions we have a model that indicates the inflection point might occur when the Party has the support of about 15% of eligible voters or about 33 million people. If one assumes 10% of Emancipation Party supporters become Emancipation Party members, that mean something on the order of 3.3 million members is the number necessary to trigger the accelerating positive feedback effect which would rapidly crush the current financial system.
The Ratchet makes achieving our desired result much more probable in a reasonable period of time. Without the Ratchet, we need sufficient political power to have majorities of 2/3rds of Congress or in the state legislatures in the country to propose our Amendments and 3/4th of the legislatures to ratify them. That could take generations. Using the Ratchet we only need a strategy to get us to the Jubilee Inflection Point, and then the Ratchet will take care of the rest.
In addition to the Jubilee Debt ratchet described above, there will also be a ratchet effect related to the abandonment of the Dollar as its demise becomes more and more likely. Because money is highly liquid and currency risk is relatively easily and inexpensively hedged, we don’t expect the monetary ratchet to have any measurable effect until rather late in the process, except indirectly in the form of interest rates. However, for those same reasons, when the movement to abandon the dollar starts, it is likely to very rapid and will produce huge turbulence as “too many people try to get through the door at once”.
The impact of “flight from the dollar” will be a large fall in the dollar in international currency markets and then a spike in inflation, especially on imports and on commodities, including US produced commodities like food, that circulate in international commerce. These macro economic effects, will, like the Jubilee Debt Ratchet, drive people to support the Jubilee. However, because of the very binary and late in the day nature of the abandonment of the dollar, we will not try to model the impact. Rather we think of it as part of the final collapse of the status quo.