I don’t have much in the way of political influence. Of any sort, really. Though, I am a digital artist. Perhaps I should go into politics at some point? xD Well, putting that particularly amusing thought aside for the time being, I do nonetheless like to try wrapping my head around the problems of the world, much like many others. I suppose in lieu of actually having real political influence, sometimes writing articles on the subject here might provide some psychological relief, at least, lol.
Today’s article is the product of one such session of musing: The international debt swap. It is a financial maneuver that almost certainly has no real utility over other financial instruments except under a most specific, curious, and propitious circumstance: Total imminent collapse of the international financial order. Sounds quite frightening, doesn’t it? Well, not to worry. It’s actually quite a subtle thing.
Consider the following scenario: The United States, and many other nations around the world, have become swallowed up whole with debt. Interest payments exceed anyone’s true ability to service their respective debts, and future generations are so crushingly doomed to wage slavery that the international order is collapsing. What now?
Well, the baseline course of action is default. No one wants to do this, but this will be the case once circumstances make it impossible to ignore that servicing the debt simply will not happen. This isn’t something that can be pronounced from on high. A government can not say, “Oopsie. We’re going to default!” while still having a functioning governing body and relatively robust GDP.
No, such a situation can only occur if, even when the government swears up and down over the graves of it’s 15 deceased grandmothers that it will pay its debts… everyone else simply walks away.
Under such circumstances, a nation has defaulted, both explicitly, and de facto.
At this point, the international debt swap becomes… well, admittedly, a modest proposal thrown onto the interweb and immediately drowned in a sea of bots, sexual filth, electronically aided autistic screeching. But that’s besides the point. It’s a proposal for something that probably won’t save the world, but might nonetheless have some usefulness should anyone with real power and influence see some utility in it, and as well possess enough political will and capital to attempt to carry it out. A slim chance, indeed.
How it Works
For the sake of simplicity, let’s just consider two nations: The United States, and China.
- The US and China agree to accept surrender of state issued bonds from all bond holders. The two respective governments now have lots of bonds.
- The two governments then exchange equal value bonds of one country for equal value bonds of the other country. China now has Chinese bonds. America now has American bonds.
Now then. Each country then proceeds to do the following:
- Write off and retire those bonds, and create new financial instruments that are capped at the current value and maturity of those bonds. No more interest accrual.
- Distribute these new instruments to citizens of their own country, in proportion to the tax burden allocated towards those citizens. American taxpayers own American bonds. Chinese taxpayers own Chinese bonds.
What Just Happened?
What just happened is that now, instead of governments owing exorbitant amounts of interest to foreign debt holders, much of this debt is now owned by local citizens of the country that issued that debt. The nation effectively owes the money to itself. Or, at the very least, to it’s own taxpaying citizens.
This means that the money that needs to be raised from those who pay taxes, needs to go back towards precisely those same individuals who pay taxes, in order to service the national debt.
Since the government would effectively be taking money to pay money back to whoever they are taking it from, there’s no need to actually take the money. Instead, the payments can be made in the form of tax credits on citizen’s annual refunds.
The debt is not 100% forgiven. But if much of the benefit from paying off those taxes is given directly to those who do it, then people have a very real incentive to no longer feel like all of the fruits of their labor are being stripped from them to feed someone else’s GDP. It’s also a lot easier for a government to deal with its own citizens when servicing debt than having to rely on another government dealing with their citizens.
Will this magically restore the economy and bring balance and justice to the entire world? Absolutely fucking not. Financial elites will take huge losses. They would have to stomach the positively noxious realization that their colossal financial fuck-ups have gone to help… poor people.
At the same time, however, the system does have its benefits:
The System doesn’t get Overthrown
Hey, would you look at that. No mass round-ups and political executions. No institution of Communist ideology. Since all of this potential capital redistribution is implemented by the old financial order, people have to accept the financial order in order to receive their thrifty FDR-bucks. How nice. Can’t receive tax breaks from the government if you overthrow the government, now can you?
Poor People don’t get Interest
These new financial instruments aren’t sovereign government bonds. The US defaulted on those. Sure, it’s paying off an equivalent amount of debt to new bondholders, but at least those poor plebeians aren’t receiving… ugh… interest. God forbid, right? And those original bond holders weren’t going to receive the money anyways since the system wasn’t solvent.
So it’s really a choice between gaining nothing and gaining nothing. But at least rich people can console themselves with the fact that nobody is going to be able to retire and life work-free off of their investments.
People who Work also Generate GDP
People who pay taxes are people who work. (Rich people don’t work. They hold investments.) When people who work receive more money because of the work they’re doing, that’s called increase in GDP.
But wait, doesn’t that increase in GDP get cancelled out by the debt? Yep. It certainly does. But in practice, this looks like Tax breaks. And since the new bonds are no longer interest accruing, the government can stimulate the economy, relieve overwhelming tax burden, and increase revenue all at the same time!
Well, sort of. Revenue would only increase if those tax breaks stimulated the demand side of the economy, spurring businesses to increase hiring to handle that demand. This may or may not occur, and to the extend that it doesn’t occur, the breaks would essentially look like hand outs.
Rich people hate handouts. But they would love the fact that these handouts have an explicit termination date, and the people who receive them were already those who were already working the most to contribute to GDP via their taxes. They would also quite like the fact that much of the money they make from their businesses now gets to feed back into the economy vs being sent overseas to foreign creditors. More money in the citizen’s pockets, after all, means more money for their to suck up as well, so there would be an incentive to continue business operations.
What this (Functionally) Really Is
Taking a look at this proposal for what it is, it’s probably just universal basic income wrapped up in the clothing of a catastrophic financial meltdown emergency stabilization plan, and cloaked in the vestments and garments of the financial industry to implement. The people on top might grumble, but at least they would get to remain on top as the stewards of such a plan, and that’s infinitely preferable to anarchy, I suppose.
Would such a plan stand a chance at actually being implemented? Maybe. Someone with the power, knowledge of all the levers and the skill to pull them all, in the correct sequence, at the right time, might be able corral something like this into existence. They probably would have to use extreme geopolitical instability to bring large swathes of humanity from the brink of crisis.
Stranger things have happened, I suppose.