Who will Lend to Ireland?
Ireland should borrow from the Irish by issuing Bearer Bonds
To fund high budget deficits, Ireland faces increasing costs of borrowing, and needs a lower cost of loans. Irish people should be the lower cost loan source.
Ireland should print bonds and use these bonds as payment for government wages and other benefits.
The bonds should be 0% coupon, 1-year, bearer bonds.
The amount of the bonds printed should be equal to the 2010 Irish deficit.
The government should accept these bonds at par value for taxes and fees.
The acceptance of the bonds should be optional for all others– they are bonds, not “legal tender”, money. But they can be used like money at any conversion rate agreed upon.
Handling a budget deficit
Like many democratic governments, that of Ireland faces the problem of how to pay for prior promises. Government deficits can be handled in four ways:
1) raise taxes, 2) cut benefits, 3) borrow money, or 4) print money.
Voters dislike taxes, and dislike benefit cuts. Printing money is risky, with Zimbabwe today, like the Weimar Republic in the past, showing the social collapse with hyperinflation. In Ireland’s case, it can’t print money unless it leaves the euro zone, only the ECB can print Euros.
If not 1), 2), or 4), then Ireland will have to borrow (3), with the cost of borrowing measured by the interest rate. That rate for Irish bonds is high now and going higher. Ireland, like Greece, is at its limit of borrowing.
Lenders do not believe Ireland is a good risk now. If the Irish government doesn’t borrow at these higher rates, it must raise taxes, or reduce benefits. Or get a bailout.
Solution 3b) – borrow from the people, the government beneficiaries
Ireland should borrow from government workers, and others getting government cash.
Ireland should print “Punt-Bonds”, and should use these bonds to pay 50% of the salaries of government workers, as well as all entitlement distributions over a minimum wage, and if necessary up to 50% of contracting costs to non governmental businesses.
The bonds should have a 1 year maturity (31.12.2011), with a 0% coupon (no interest).
The total amount of bearer bonds should be equal to the budget deficit, to be rapidly distributed within a few months, until the total amount is used, with the 50% maximum being the flexible target which changes.
These Punt-Bonds should be accepted at 100% par value for paying taxes, and all other government fees, but no private business would be required to accept them at par value.
A key point is for the Irish people to bail out the Irish government, not the German, Slovak and other taxpayers. Another clear issue is that receiving bonds instead of euros is a real but small benefit cut, of an unknown amount.
The Irish government should use Punt-Bonds to pay for a part of all its internal Irish obligations: salaries, pensions, and payments to Irish contractors, above the minimum salary per recipient. This proposal is 50% in Euros, 50% in new Punt-bonds, until all authorized Punt-bonds are distributed. With direct deposits, banks would set up new parallel bank accounts to receive these amounts, a real but minor bank cost for banks that already allow multiple accounts and alternate currencies, like USD or GBP; just add Punt-Bonds. With Government officials paid 50% in bonds, the shared pain should decrease backlash against the benefit cut.
Since such Punt-bonds will replace most, if not all current government borrowing, the interest payment pressure on the Irish budget would be nearly eliminated, with little need to borrow from the capital markets. By cutting spending on interest, the deficit will also be reduced. Directly saving the 5-9% of interest that otherwise must be paid to borrow is a key incentive, that remains true even if a bailout if offered.
Punt-Bonds accepted as tax payments, accepted as “money”
Having 100% convertibility when paying the government will encourage more and earlier payments. Because of this legal value, and the cash like anonymousness, these bearer bonds will have significant value. Whenever something tradable is widely accepted as having value, like cigarettes in prison, that value can be the basis of money.
With payment of taxes possible in bonds, it is likely that a small increase in tax compliance will be noted, as businesses choose to pay full tax, sooner, with bonds they’ve received. Most retail companies would be willing to take such bonds with a conversion exchange rate around 90%, as soon as many government employees have the Punt-bonds available.
Big retail chains will likely see that accepting Punt-Bonds at 90% offers them an advantage, even at 95%, even at 99%; without needing laws to require this, the market value will not vary much from the par value. It might well be that some big chains decide to offer a 100% equality rate of Punt-Bonds to Euro, as part of a marketing campaign. In any case, it will converge towards 100% by the 1 year maturity date.
Logistically, Irish banks would need to have sufficient Punt-bonds in bearer bond form, like a new currency, available for withdrawal. ATMs will need to serve government employee customers with bonds first in withdrawals, to get the bonds into circulation.
Ireland borrowing money from the Irish with such bearer bonds is probably not covered by current Euro-zone restrictions. This policy reduces tax increases and reduces nominal cuts, beyond those changes already part of the fiscal adjustments, so most Irish will prefer printing Punt-Bonds to either tax increases, or more benefit cuts. While initial recipients would have some additional hassle, and perhaps a small discount on the Punt-Bonds at first, when compared to a bigger cut of wages in euros, it is much less painful.
It would be a great Teaching Moment about what money is, comparing Euros to Punt-Bonds. They will not print Euros, they will print bonds, Irish bonds.
After a Year, Through to 2013
Printing Punt-Bonds does not solve the short-term problem of excess government expenditures, but it allows the Irish economy another year to make progress on the imbalances. Any graph of government revenue and expenses will clearly show the problem as huge increases in spending. This crisis in excess spending cannot be solved by any merely financial program. However, in making it clear to those getting the bonds that it is their benefits which are excessive, such bonds will increase the knowledge of the crisis among the people. It also allows a year of far less financial pain than immediate spending cuts would cause.
If necessary, perhaps partly due to the need to retire the first issue of bonds, the Irish can issue another budget deficit amount of bonds, rolling over their debt, just like most governments already do. But such a deficit should be far less, so the new bond issue should be less. This can even continue to and through the 2013 time frame of the recent bailout fund agreement.
Alternatively, once Punt-Bonds are in circulation, if the government continues spending more than it is willing to tax by the issue of these quasi-money bearer bonds, there might be a greater quantity issue of Punt-Bonds. This political choice leads to Ireland leaving the euro zone. Then their printing of bond money to cover excess spending will result in a devaluation, making asset owners relatively poorer, but increasing employment in export industries.
Using Bearer Bonds would also be an option for the Greeks, as well as Portugal, Spain, even Italy. Perhaps even Slovakia and other members to the euro zone could find it beneficial to introduce domestic bearer bonds to reduce interest payments.
This could even be a good model for US states having problems, like CA or NY. It might well be politically easier to print bonds to cover the deficits, rather than raise taxes or reduce nominal benefits, until expected benefits balance with politically acceptable tax burdens.
Don’t Bearer Bonds makes sense in such a global bear market?