In a period like the one we are living in, World wide Governments are facing with unprecedented problems. The fact is that policymakers attempt to resolve 21st century problems with 20th century solutions.
Are there other possible solutions?
It’s quite interesting what Chris Cook writes in addressing the Cypriot problem; he suggests to resolve the Cyprus National Debt into a Cyprus National Equity..but not equity like we know it:
The first step is for the Cyprus Treasury to create a new class of undated – by which I do not mean permanent – ‘Stock’. This instrument consists of a non interest-bearing promissory note or unit which is returnable at any time (i.e. undated) in payment of €1.00 par value of Cyprus tax.
The second step in the process is the nationalization of the key banks, Bank of Cyprus and Laiki Bank, with shareholders receiving one €1.00 unit of Cyprus Treasury stock at par – i.e. they will receive a zero discount – in exchange for each existing €1.00 share.
The third step will be for all demand deposits, term deposits, and all classes of bonds to be exchanged for Cyprus Treasury €1.00 stock at graduated discounts reflecting the seniority, term and interest rate which applies.
The fourth step is that all existing Cyprus Treasury dated interest-bearing Stock – the Cyprus National Debt — will also be exchanged for and consolidated into €1.00 units of undated stock, again with a discount reflecting the term and interest rate.
The result will be a Cyprus National Equity: a single consolidated fund of Cyprus undated Treasury Stock returnable in payment for Cyprus taxes.
This will be supplemented by the flow of debt repayments (after operating costs) to the Cyprus Treasury from the borrowers of nationalized banks.
In reality what Chris Cook writes is the Fisher solution for the debt deflation situation – Forward Tax Receipts.
As Fisher writes:
Recognizing that the federal government issues liabilities (debt) in its own currency and thus can never go bankrupt, another solution is for the federal government to become more like the corporate capital markets with debt issuance at high real interest rates and equity like issuance at even higher real rates of appreciation. The likely candidate for equity like issuance by the federal government is forward year tax receipts. A forward year tax receipt is a receipt for taxes paid in advance that are due some time in the future. Like government debt issuance, forward year tax receipts have a rate of appreciation and a duration. Unlike, government debt, the rate of return is not guaranteed. The realized rate of return is totally dependent on the owner’s future income and subsequent tax liability. And so savers are rewarded with a positive real rate of return and debtors can realize an after tax cost of credit that is significantly less. For instance if the federal government sells 30 year debt with a 3% real rate of return and sells forward year tax receipts with a potential 7% real rate of return, then a debtor can realize a -4% cost of credit. At that point inflation is not required nor should it be desired.
Why has this solution been kept into the chest?.. because, as Bernanke wrote in 1995, of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistribution should have no significant macroeconomic effects.
Can the Fisher “Forward Tax Receipts” be the ultimate solution for Europe? Is now time to apply 21st century solutions to 21st century problems?