Is it possible for creditors to forgive debt, and could that be solution to the country's/world's problems?

This is done all the time, but the bill still has to be picked up by somebody. The U.S. has occasionally forgiven some foreign debt, but it gets paid for by the taxpayers.

The credit markets are very complicated. For example, when you get a mortgage from a bank, they usually sell the mortgage to another bank, who then services the mortgage. The bank that services the mortgage will often buy something called a CDS contract to protect them against default. CDS contracts are like insurance, but there isn’t enough equity backing them, which is why the financial system is in near meltdown. I don’t pretend to understand all of the nuances, but the bottom line is that the piper must eventually be paid by someone.

You mean like the end of Fight Club? ツ

Debt in this country is a form of property that is owned and has value. To “erase” all of those assets would kill the businesses that own them.

In his review of Hernando de Soto’s The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, Richard M. Ebeling writes about ownership of physical property:

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Consider the term “the Third World.” Most people probably would conjure up in their minds the image of tens of millions of poverty-stricken people living in Asia, Africa, and South America possessing no means for survival other than their unskilled and primitive labor. Property ownership, in this image, is limited to a select few extremely wealthy individuals and families, who exploit others in societies so they may live lives of comfort and luxury.

Hernando de Soto, Peru’s leading free-market economist, says this image is both false and misleading. The ordinary peoples in the “undeveloped countries” of the world, in fact, have a vast amount of wealth. And this wealth enables a flourishing world of trade, commerce, industry, and employment.

Indeed, if one adds up the estimated value of real estate held by “the poor” in these countries, the total value comes to something in the neighborhood of $9.3 billion. The only problem is that most of this wealth is not in the form of legal titles to property; instead, these are “informal” ownerships not recognized or enforced by the political authorities in these parts of the world.
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I’ve wandered a little away from the premise of your question. My point is that physical, legitimate, incontrovertible ownership of stuff is vital to how our markets work today. Simply “erasing” that ownership, if even for “imaginary” things like debt, would possibly start a trend that would throw us back to the Middle Ages.

But if everyone just kept what they had, and we set a new interest rate, wouldn’t everyone be even. I own my house, the bank can begin making new loans (we’d all still need stuff, and money to spend), and we can all begin. Are we just too ingrained in our capitalist pug ways to even conceive of something like this?

Sorry, iPhone disclaimer. I meant pig.

Zeitgeist: Addendum speaks to this question. The answer to your question is that it’s not just about the money. It’s also about control or power.

That’s what I figured. Capitalist pigs. Even it solved all the world’s problems, those in power would never give up their power over others.