Export Your National Debt!

Export Your National Debt!

Ganga Prasad G. Rao
http://myprofile.cos.com/gangar

To call it day-light robbery would be an understatement of the future century! I allude to the 10^n dollar debt that many nations, in particular the US, have racked up over the past decades - decades of profligate living, white elephant ‘investments’, unsustainable entitlements and unholy wars – and which have been unloaded upon the global capital markets to the detriment of the unsuspecting and prudent, diversified global citizen. And now, as the world economy comes to a grind with the spread of one economic malaise /financial contagion after another, the financialcrises induced by these debts have reduced the viability of several provident funds, be they insurance, pension, social security, or education. The looming deficits have threatened the macro-stability of nations, even their ability to pay (inflated) wages and bills, and reduced governments to hawking assets as collateral for additional debt to fund day-to-day governance. (It’s a mystery afflicted Western democracies even issue, in these troubled times, long bonds for yields of a measly few percent!).The trouble with debt servicing is that it reduces discretionary spending, the very basis of Keynesian economics. One can only wiggle so much when pushed in to a debt trap! No government has the audacity to undertake large investments, even if prudent in the long run that increase the debt burden while in the midst of a crisis. To compound the problem, any cutback in Government spending and wages as part of an Austerity program reduces Disposable Income, which puts the brakes on the entire Consumer economy - the roots that sustain Western Capitalism. Bottom line: Debt is a very real pain, unless you mean not to pay it!

Now there are as many plans to resolve the debt crisis as there are currencies in the world. A unified global currency (and Socialized Global Debt! Hey!, Didn’t we spill in the oceans, police your seas, trespass in to your ports and say hello to the sea-side nuclear installation of your US-AID subsidized nation with our billion dollar-apiece nuclear subs?). Better yet,capitalize the Global Heritage sites and Wilderness parks by dissolving the national debt as ‘WTP Capital’ to be paid inby generations of vacationers from across the seas.Outrageous? Then, hold your breath, here’s one that takes the cake! Export your debt! Export? You mean all $14 T..R..I..L..L..L..L..I..O..N of it? Yes, sell the debt, why even auction it away! Incredible? But there must be a catch. Sure, there is .... in fact, a very real, palpable, even a permanent‘earnings and lifestyle cost’ on the populace; yet the strategy is novel and no fantasy. It will shrink the debt almost overnight. But who will bell the cat,…I mean, buy the debt? and why? Wouldn’t that be akin to relieving Atlas off his burden to stake a slice of it?

Strange as it might seem, even an indebted nation is necessary to a globalized world in which nations must exploit their competitive advantage in international trade to sustain their economies.In nations with high capital cost due uncertainty in political terms and policy switches, the Industry might seek the certainty of an export quota to reduce the cost of capital of its investments and operations. Certainty in export revenues (and control over the time profile of exports) could substantially alleviate the necessity to hold large inventories and engage incostly hedges, and risk abatement strategies. If exports were that important to nations, wouldn’t they be eager to pursue it, even be willing to negotiate some? After all, who wouldn’t want to export to the US, the capital of profligate consumption? And what could be more ‘patriotic’ of exporters to the US than to buy off their national debt - not in their individual business capacity, but as a nation - in return for a guaranteed export market (a Guaranteed Export Quota, GEQ) over an entire decade or more? That, then, is one of the pillars upon which the strategy rests. It leverages the strategic shadow value that developing economies have for developing economies, to force them to buy in to debt obligations that are bundled with guaranteed, multi-year export quota rights at auctions in competition with other export-seeking nations. Nations seeking to export to the US on a long-term, guaranteed basis, would be required to buy and discharge some of that nation’s debt as well. Put another way, the US would be exploiting its ‘monopsony power’ as the major consuming nation, to pressure exporting nations in to sharing their export rentstoward the discharge of its national debt. Since many nations would compete in the auctions for the bundled debt-export quota, they would, in effect, be pricing the ‘bad’ in to the ‘good’. The bidding would reflect as much the competitiveness of exporting nations as it would their ability to leverage the export quotas to boost their domestic economy. Exporting nations would exploit their competitive advantage – whether from natural resources, concentration of factor endowments, spatial advantage,technological superiority, or some combination,to grow their economic pie from exporting high margin products under the GEQ, while paying off the bundled debts as well. Critically, the GEQ only specifies the total value of exports over the contracted period, and specifically not the timing, constitution of exports or the price of export goods, all of which are determined by participants in the export market.

As for the auctions, they are intended to elicit the maximum amount of US debt that ‘Exporting Nations’ would accept with their bid for the GEQ; the GEQs being hawked piecemeal with a fixed validity period: say $100B Export quota valid over 10 years. Thus, and for example, an Exporting Nation may bid $50B of debt obligations to secure the $100B GEQ. The initial auction rounds would be dominated by those nations with the macro-economic acumen to leverage the GEQs in to large GDP gains – sort of a large export-driven multiplier effect - and by nations producing and exporting high value, high- margin goods. Subsequent auction rounds would see successively lower bids for the bundled debt, implying lower margin exports, until the benefits of securing the GEQ do not compensate for the added burden of debt obligation. Following this 1st round auction war across nations, the Governments of winning ‘partner-nations’ could assign the GEQs strategically, or auction them in the 2nd round to industries and businesses at home. If the latter, then a portion of the rents from prospective export sales could be recovered upfront and applied to discharging the debt obligations. Industries bidding for multi-year export quota would bid for it much like they would for a license. The bidding would reveal, in part, their margins, their inter-temporal plans and discount rate/cost of capital. Businesses with a large margin or low cost of capital, and those with plans to exploit the quota in early years will likely bid higher than others. The GEQs will be fulfilled thru a Public-Private-Partnership Export-Oriented-Unit Joint-Venture vehicle, PPP EOU JV (with non-managerial, equity participation by the Government, and debt participation by ExIm Bank) with the more capital-efficient bidders, thus livening up the 2nd round auctions. Clearly then, the critical question is not whether they will buy the debt, but how they intend to leverage it.

The leveraging of the GEQ is the second pillar of this strategy. Understandably, a nation taking on (hundreds) of billionsin debt (and as much in export quota) would seek to generate twice that amount in profits and economic activity. That is no easy task; not even an assured outcome. In fact, it’d require some uncommon dexterity in economic and financial planning along with a large dose of foresight to pull it off. But if the GEQ - the guarantee being credible for obvious reasons -were considered, in effect, a ‘(to be earned) Receivable’ on the Revenue side of National Accounts of the bidding nation, the same could be used by its Government to sponsor the issue of Currency, Bonds, and Equityin amount equal the fresh investment funds necessary for Export-Oriented Units, EOU,to fulfill the export quotas. This ‘partner-nation’ would then discharge the debt obligations from export rents, from bond market ‘total returns’ (the bonds having been issued by the ExIm-Bank with the GEQ for collateral),equity dividends, and from larger tax revenues following expansion of the domestic economy. The exporting nation could further exploit the GEQ to structure its economic policies in an ‘Opposite Complement’ mode which would enable it toexploit exchange rate and export price-volume fluctuations to optimally manage both demand and inflation at home. In particular, if the exports were of the Consumer durable type, it’d be opportune to attune the interest rate regime in opposite phase with that of the debtor nation. Further, if the exporting nation aligned its consumer demand in line with the pattern of consumer demand in the debtor nation, that would further aid the exploitation of scale and scope economies at the EOUs – Be the ‘Lifestyle Followers‘ of the nation whose debt your exports discharge!

The question arises why these incentives do not obtain under the current system. After all, the US espouses and practices capitalism with free trade. Shouldn’t all economic opportunities have been exhausted so none remain to be exploited? The answer is manifold. First, capitalism did not anticipate a 14 Trillion debt. Second,a formal mechanism does not exist to exploit a ‘pareto opportunity’ that a combined GEQ-Debt bundle offers to the US and theexporting nations. Third, the multifarious cost-reducing and macro-planning benefits arising from the certainty of a large, extended export quota,that enable ‘exporting-nations’ to plan their economy around the ‘certain, but to be earned’ export windfall, has apparently not been fully appreciated. Besides, there is little natural incentive in the current system for a resource-rich nation to leverage its advantage with a technologically-endowed nation to offer an export package to an indebted nation in return for discharging its debt obligation.

It is but a natural incentive among the exporting nations owning an export quota to seek market power or otherwise overprice their exports. However, given the very real prospect of frontloading of exports and its price-dampening impact, and the macro-impacts of competition in the export market on exchange rates, it’d be prudent of exporting nations to play straight and maintain a justifiable exchange rate. In the context of the debt-bundled GEQ, exporting nations would also seek to export goods that are less capital-intensive so that the debt could be paid off with the minimum incremental capital on ground (or, conversely, the incremental GEQ capital could be put to maximum use).The US, on the other hand, obligated to import goods to a certain monetary value, would seek to limit its employment losses, and limit imports to those goods and services that were the least labor-intensive.

Equity impacts, especially upon the labor market, are foremost in the minds of political leaders. While the US would, as alluded above, seek to shield its workforce by limiting imports to the (locally) less labor-intensive goods and services, it’d would also find it advantageous to move some of its strategic (friendly) equity/sovereign debt investments in to the equity and debt markets of the ‘debt-partner’ nations in anticipation of the shift in production, following the GEQ 1st round auctions. As a complementary strategy,the debtor nation could also make unfriendly, speculatory investments in Currency markets to counter, on one hand, any diabolical market power strategies meant at cartelizing the export market, and on the other, to deny exchange rate manipulations aimed at gaining export advantage. The debtor nation would harvest the currency markets upon evidence of either cartelization or exchange rate manipulation. The ‘See Saw’ gains from playing the ‘within and across’ level-arbitrages and volatility across the ‘friendly’ and ‘unfriendly’ hedges could feed a proposed ‘service-sector wage match fund -or-social security match fund’ expressly for labor prospectively displaced by this policy.

Unfortunately, the proposed resolution to the debt crisis is neither unqualified, unconditional, nor universal. In fact, and to the contrary, this proposal is more a policy opportunity, an opportunity that must be explicitly and consciously tailored by combining economic advantages and bilateral policy synergies across trading nations. As with any policy, there are costs and benefits (and to both sides). For the US, the debt-bundled-with-GEQ policy implies an export of domestic production capacity, and an expansion of unemployment in sectors in which it isn’t internationally competitive. Whether the reduction in debt reduces long-bond yields (and medicare costs!) sufficiently to cover for the increase in unemployment (net of the ‘match-check compensation’) is a political question. As for exporting nations, the immediate cornucopia of a guaranteed export order is moderated by the realization exports would bring only normal returns due up-front harvesting of rents as 2nd tier auction premiums. The extraction of rents at each stage implies the exploitation of the factor with the most elastic supply. This implies exporters might cut corners in various ways incompatible with generally accepted labor and ESH standards. Thus, in the case of developing nations with a large workforce, labor exploitation and exploitation of the environment are likely outcomes.For this reason, it’d be preferable to adopt the PPP-EOU-JV export model. The necessity to toe the line in terms of consumer demand and macro policy too has a cost, albeit non-monetary.

$14 Trillion could mean several things: A Fiscal disaster, Christmas in a Neverland, a Policy maker’s delight, a workaholic Regulator’s champagne… and indeed a President’s nightmare! The proposal here is but a modest start on the long road to economic and policy sustainability; it should be evaluated against its ‘opportunity cost’ -the laissez faire.