We have an enormous national debt, seventeen trillion and counting. We are a mature economy, following Japan and Europe. Like them, our birthrate is too low and immigration is controversial. European immigration is changing their culture and Japan doesn't even allow it. Their population is aging and shrinking. We won't be able to grow our way or inflate our way out of this accumulated debt. So why wait? If we do it now, it will be less painful.
Cyprus showed us one way, a smaller way that would not suit us. But there are other ways that could be more palatable to America.
Defaulting on Federal bonds, agencies, is not an option. Too many of our IOU's are in foreign hands and that would not sit well with the worldwide investors. I needn't recount who they are except to say they were our friends when we needed them in various decades. They should not be penalized for our proclivity to spend more than we taxed and then asked them to bail us out by buying our IOU's. We Americans bought and borrowed ourselves into this conundrum and we have to buy ourselves out of it.
Had we issued separate bond series for domestic and international consumption, then, maybe, we could default on the domestic issues and hold the foreigners harmless. But there are a multitude of problems with that scenario, loopholes, that would allow domestics to invade the international series and escape the extra risk and perhaps earn a higher interest rate. But, we didn't do that. So that option does not exist, now...yet?
So what should we do?
Jon Kadish writes to us from 2039, the new novel by this author. Jon discusses it with a Canadian history professor at a Winter Lodge in northern New Hampshire. The professor is pressing Jon on the social and economic changes that have happened in the U.S.: The year is 2039, the professor makes a statement and Jon replies...
"So Washington printed dollar after dollar to buy the military industrial industry and put it under military control. Maybe there are some good points to that. But by 2024, your national debt swelled to nearly $30 trillion, your credit rating of A- was in danger, and the US interest cost alone was more than $1.2 trillion that year. Foreign entities would no longer buy your bonds. China had demanded Alaska from you to redeem the trillions you owed them. Many around the world thought that was funny, but everyone here was biting their nails, concerned that China might be ready for a hot war with you, a war for profit. A war to wrest assets from a debtor who failed to meet their promise to repay!"
The proposal isn't as outrageous as it sounds. After all, we bought Alaska from Russian in 1867!
"You're right, professor, those were hairy times." I answered. "Our government had to cancel some of that debt, call it in, in some way if only to reduce the annual interest expense.
"But you exaggerate! Yes, all of North America was startled, especially the residents of Alaska. The Treasury Department commissioned appraisals. The average appraised value came in between $9 and $10 trillion. Discussions were opened with your country, which eventually offered $4.25 trillion for a half ownership interest. Canada was motivated, partly to keep it as a North American owned territory, and also for access to its coastline, fishing grounds, ports and natural resources. An ownership/management contract was worked out and the Alaskan residents overwhelming approved the transaction in a referendum. All US citizens in Alaska were granted dual citizenship with Canada. The border was opened and, so far, it has proved a success. With your payment, China was repaid and the world was saved from nuclear war again for at least a while.
"But we knew we needed to reduce the debt further. A plan was already underway. So our version of a "bail-in" was adopted in 2023 and was implemented over the next three years. In exchange for abolishing the estate tax, the Congress imposed what was promised to be a one time 12½ % asset tax, on every entity in America with net assets in excess of five million dollars. The tax was imposed on corporations, individuals, on universities, churches, foundations, NGOs, everyone! Every entity that had assets in excess of five million dollars had to pay 12½ % of the excess to the US Treasury. The NGO's screamed! Subject to the tax were the Catholic Church, Harvard University, the Getty, Rockefeller, Gates, Buffet Foundations, the Red Cross, AARP, Hadassah, Coca Cola, Apple, Microsoft and all the rest. Foreigners and foreign corporations, the likes of Honda, Toyota, Mercedes, Kia, Sony, Samsung, Ikea and their lot, with major assets in America had to pay on their American assets too.
"The banks and insurance companies fought the hardest. Modifications to the accounting rules and their obligations to their customers, their insureds had to be adopted so banks, life and casualty insurance companies and many other corporations wouldn't immediately fail for lack of capital due to the old formulas. Cash held in offshore deposits were given a tax holiday so they could be repatriated to pay the asset tax. On the personal side, less that 20% of individuals qualified and it was a cheaper prepayment of what would have been a larger estate tax payment later in the future. Over eight trillion was collected and applied to the total debt. These moves cut the accumulated debt by a bit more than half.
"It turned out not as painful as it sounds. The money was due in up-to-three annual installments. People and entities with bonds generally sent them in to pay their tax. The government cancelled them. The money sent in by others was used to buy back an equal amount of bonds, so that the money was simply redistributed in the domestic market. Sure in the end, over eight trillion was paid to the government who used the funds to retire an equal amount of debt. And the government owed that much less. Because the total only amounted to a bit more than 5% of the value of the country, and participation by individual persons was small, life went on for the vast majority without great interruption."
"What was the rationale for taxing the churches, universities and NGOs?" the professor asked.
"Simple, most of their wealth was untaxed funds amassed from tax-exempted contributions, increasing tax free, as they enjoyed the freedom and protection of the United States. They prospered in freedom while the government amassed its unmanageable debt. Assets from persons and business had already been taxed, some multiple times. It was appropriate that the wealthy tax-exempted entities also contribute to the bail-in debt reduction program to save the America in which they prospered."
Just then a kitchen worker comes out to tell Jon his driver is looking for him.
I welcomed the interruption. I could have spent the whole day with the professor. I liked him. He was forthright and seemed to have no personal agenda to promote. We bantered well! But I was overdue to be with Ida. Those few minutes had turned into nearly half an hour...
Search for 2039 here!