WHTT World Debt Crisis
Note: The text below was written in 1994, so it may seem a little dated. The link below is a 2012 update.
The Half Percent Solution to the USA Financial Problems
Resolution of the World Debt Crisis
The world debt situation is now a chaotic farce. It has become abundantly clear to all that no country will ever repay any of the debt accumulated in the past. All financial negotiations among nations consider only how much of the interest must be repaid and when those interest payments are due. Creditor nations offer special dispensations such as debt restructuring to lower the rate of interest payment in hopes that debtor nations will respond by making their interest payments more or less on time. Debtor nations continue to pay some of the interest they owe in hopes that they can arrange to borrow still more money. Nobody expects anybody to actually repay any "loans".
This situation is not only the fault of the debtor nations. Most of those nations inherited debts from previous politicians in their country. Those politicians pledged the wealth of future generations of their citizens as collateral for loans. Once the loan money was delivered, it would, at best, be spent inefficiently by the government, or, at worst, disappear into the pockets of the politicians' friends. Reprehensible as it is for politicians to squander the resources which must be repaid by their nation's future generations, it is not at all unpredictable.
There are times when governments may need to borrow money to finance projects like building dams, or modernizing infrastructure, but those loans, and all interest, should be fully repaid within one generation. No political leader should have the right to commit future generations of yet unborn children to pay debts they had no voice in creating or deciding how to spend. It is gross political irresponsibility to create big debts, and then just hand them to unborn children to pay.
It is equally irresponsible for lenders to loan money to politicians with no more collateral than just a promise that future generations of children would repay the debt. Imagine what success you and I would have walking into a bank to ask for a million dollar loan that would be repaid someday by our grand children! The lending nations must recognize that their bad lending policies have contributed significantly to the creation of a debt monster that the borrowing nations can no longer afford to feed. Bankers and governments have been irresponsible in loaning money to politicians with no more collateral than the promise that the loan would be repaid by the receiving country's future citizens. The world's current financial state in which no debtor nation will repay any of its previous loans is more than adequate proof that it was unreasonable for those loans to have been made without some form of collateral to encourage repayment. It is obviously unreasonable to hold future generations responsible for previous loans which may have accomplished little more than enhancing the personal wealth of the friends of politicians who negotiated the loans.
All of the world's debtor and creditor nations should arrange for a debt rationalization conference with the objective of converting all previous irresponsible debts built only on political promises into a new and fully collateralized debt structure that is much smaller and realistically manageable. After debt rationalization, any new loan would require the recipient to supply adequate collateral to insure that the loan would be fully repaid with all interest due based on the terms of the loan agreement. Just as when individuals want a loan, nations would be expected to supply full collateral either in the form of tangible movable assets such as gold, oil, or diamonds, or in the form of real estate.
A new mechanism would need to be developed to enable one nation's real estate to be used as collateral for a loan from another nation. One way to accomplish that objective would be for the lending and borrowing nations to agree that a specific tract of land, including all buildings, improvements, mineral rights, etc., would be the collateral for a loan. If the borrowing nation defaulted on the loan repayment obligations, then the lending nation would have full authority to annex that tract of land into the exclusive control and permanent ownership of the lending nation. All buildings on that land would also become the property of the lending nation. The borrowing nation's citizens who owned some of that land or buildings could sell their property to new owners or be compensated by the borrowing nation for loss of the value of their property. Alternatively, the people who owned some of the property or buildings in the collateral real estate could be given the option of becoming citizens of the lending country, or of simply retaining full ownership rights to the land or buildings they previously owned in the borrowing country. For those individuals, the only financial change would be that they would pay future taxes to the lending nation instead of to the borrowing nation.
When the author first proposed this idea to the Federal Reserve Board in 1980, the example was if Mexico wanted to borrow $20 million from the U.S., they should pledge specific real estate adjacent to the southern border of Texas. If Mexico later defaulted on that loan, the U.S. border would move south to the agreed new boundary and, in effect, the defaulted loan would automatically be transformed into a simple sale of land from Mexico to the U.S. That would have actually been a good idea for both countries. Mexico could have paid a much lower interest rate on a loan secured by real estate. If the U.S. subsequently took possession of that real estate, then it would shorten its border with Mexico and simplify its border control problems. The residents of that newly annexed territory would have the option of becoming U.S. citizens, being permanent resident aliens, or moving further south to stay in Mexico. Individual property owners could retain ownership in the same property, or sell it to new owners, but in either case, real estate taxes would be paid to local and state governments in the U.S. instead of being paid to Mexico.
Since the binge of American government debt in the 1980s, however, it may be more appropriate to use an example of the U.S. borrowing $20 Billion from Canada, and pledging the Great Lakes and suburbs around Chicago as collateral. No, make that borrowing $200 Billion from Japan with some of the Hawaiian Islands as collateral! In any case, the process would work the same. Any country that did not repay its debt within a generation would forfeit control of the assets it pledged as collateral.
Some readers might think this plan to be impossible because the U.S. government doesn't own that real estate, but rather that it is owned by individual people or corporations. That is a common misconception, but it is simply not true. Individuals who neglect to pay their annual property taxes are quickly reminded that they don't actually own anything. Instead, in return for prompt payment of taxes, the government rents exclusive control of property to individuals. If taxes aren't properly paid, the government quickly reasserts its total ownership rights. The good old USA may be the most free country on earth, but only because other governments are even more repressive. Americans are still far removed from being truly free.
The transition from the current chaotic world financial environment to a solid and simple extension of normal good banking practices can be accomplished smoothly and easily with a little advance planning. Debtor nations will continue to pay interest on previous loans until the effective date of rationalization because the debtor nations will want to maintain a record of dependability to assist in obtaining good terms for future loans. Lending nations could extend new loans based on separate collateral with the agreement of the borrowing nation that the new loans would not be affected by the rationalization of older loans. The current complex system of world financial transactions could continue with very little dislocation through the transition to a much simpler and more solid world economic structure.
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