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The question is what would happen if tomorrow all private and public (government) debt was erased? I am especially curious if normal daily economic activities would go on, what would the role of central banks be and how would the economy come into some equilibrium again.

The question is, indeed, a bit vague but I would like to know some opinions from various aspects. I think it is a very nice gedanken experiment.

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    $\begingroup$ As per Mower's answer, this is not yet a well-defined gedanken experiment, so any answer is possible - the question is likely to be put on hold until some things are clarified. In particular, remember that one entity's debt is another entity's savings: so what happens to those savings in your proposed debt erasure? $\endgroup$ – 410 gone Jul 13 '16 at 8:07
  • $\begingroup$ This is not entirely true (your last comment). Banks do not lend from their savings, right, but they are able to make new capital by lending money. My question is posed under the assumption that everybody would be fine with it. We all gather and agree to erase all kinds of debts (under good will if you want) in a once in a lifetime such event. Assume this wont happen again. Still, I wonder, would people in the next day be able to get loans, mortages etc, even how currencies would possibly be affected. $\endgroup$ – Marion Jul 13 '16 at 8:50
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    $\begingroup$ Yes, of course banks lend from deposits - what else do you think they do with them, keep them in a shoebox round the back? Not that that matters for your question, because every bank deposit is a loan to the bank, and you want to erase all loans, so that means erasing all bank deposits. $\endgroup$ – 410 gone Jul 13 '16 at 9:50
  • $\begingroup$ What I meant is that banks lend from their deposits but banks do not have as much money lent as the amount of their deposits, obviously this is how new money is created. And as per my question, I do not want to consider private people's deposits as loans to the banks, I want to consider real loans and mortages deletes. Finally, not all money in a bank's deposit is from lenders to it since obviously banks have their own huge earnings too. $\endgroup$ – Marion Jul 14 '16 at 7:36
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    $\begingroup$ So you'd erase some debts and not others. So what's the rule, there? Which would be erased, and how? The question as it stands isn't answerable. (And please do check some real banks' balance sheets: you'll find that all banks lend out less than they borrow + have had invested in them) $\endgroup$ – 410 gone Jul 14 '16 at 12:33
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It would depend a lot on how the debt was "erased." If you are simply suggesting a transfer payment from creditor to debtor, what would force such an event? Or would it be voluntary? If it were forced, then you would have a threat to private property rights and therefore, a disincentive for further lending. Security of capital would be diminished and all investment might stop overnight.

This question is very broad. But the answer of what might happen would depend very much on the details of how all this might come about.

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  • $\begingroup$ I do not worry about what would force such an event. I want to work on the basis that tomorrow at 12 am no debt exists. Banks do not own any loans, governments do not have to repay any debts. People still would like to make investments next day, people would still like to get new mortages etc. $\endgroup$ – Marion Jul 13 '16 at 8:47

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