Any Price to Save the Institutions?

AP Photo/J. Scott Applewhite

The post-pandemic world may be a brutal one. George Soros says the EU may not survive coronavirus crisis. Soros, 89, said the damage to the eurozone economy from the new coronavirus would last “longer than most people think” and likely prove fatal to the European Union if battered Italy falls away.

The hedge-fund veteran and chairman of Soros Fund Management LLC said perpetual bonds, used by the British to finance wars against Napoleon, would allow the European Union – itself created out of the ashes of World War Two – to survive.

“If the EU is unable to consider it now, it may not be able to survive the challenges it currently confronts,” Soros said in a transcript of a question-and-answer session emailed to reporters. “This is not a theoretical possibility; it may be the tragic reality.” …

He said the EU would have to maintain its ‘AAA’ credit rating to issue such debt – and thus have to have tax-raising powers to cover the cost of the bonds – so suggested it could simply authorise the taxes rather than imposing them.

“There is a solution,” said Soros. “The taxes only have to be authorized; they don’t need to be implemented.”

These perpetual bonds are called consols “Consols… was a name given to certain government debt issues in the form of perpetual bonds, redeemable at the option of the government.” The CNBC describes why Soros thinks consols can shore up the faltering EU project.

George Soros suggested Europe should issue debt that would never have to be paid back as a way to finance the costs of the Covid-19 crisis.

As the European Union faces the deepest economic crisis since the Great Depression, the billionaire investor said the 27-nation group should issue “Perpetual Bonds” — meaning the principal amount would never be repaid, only the annual interest payments.They are also known as consols.

“A 1 trillion-euro bond would cost 5 billion euros a year, assuming an interest rate of 0.5%. The consols would not need to be sold all at once; they could be issued in tranches and they would be snatched up by long-term investors like life insurance companies,” Soros said in an interview with the Dutch newspaper De Telegraaf published Friday.

Under this plan, “the only mutual obligation is the payment of the annual interest, which is negligible,” Soros said.

But “negligible interest” in the short term requires considerable faith in the EU project in the long term. Otherwise, there would be no EU to settle the score. Since all debt is a charge on the future, even if one accepts Paul Krugman’s argument that “debt is money we owe to ourselves,” there must be a future ourselves to pay what today’s ourselves borrow.

That assumes something not in evidence: a guarantee of the EU’s tomorrow. What the virus did, like a stress test, was expose the institutional failures, demographic weakness and hollowed-out economics — the sick man beneath the suave exterior of Brussels. Soros’s consols plan postulates what it doubts: the continued viability of the European Union whose demise it seeks to prevent. If the EU’s only hope of life is to issue perpetual bonds to save itself, how can it expect negligible interest? The life insurance premiums of an ailing institution should go up rather than down.

The same problem faces the U.S. and China but in a different form. While there is less risk the U.S. and China will dissolve compared to the EU, both seem excessively willing to burden tomorrow to feed today’s sacred cows.

The Chinese government has found itself in a tough spot. After years of trying to clamp down on the nation’s high level of debt, it is now being forced to watch it balloon again to rescue its coronavirus-stricken economy. But to make sure the extra borrowing does not become a feature of government finances, Beijing is using an accounting sleight of hand to keep a new bond issue “off budget” – and not a part of deficit spending. …

“Even if officially the special bonds are accounted for differently from traditional methods, it does not change the fact that the government is borrowing money.”

But if Soros can float console, why can’t Beijing issue its special bonds? In the U.S. the priorities are the same: it is to keep the music going at all costs. “Former Vice President Joe Biden’s plan to raise taxes on corporations and wealthy households would increase federal revenue by $4 trillion over the next decade, according to a new analysis by the nonpartisan Tax Policy Center.”

While Wall Street may view Biden as more moderate than self-declared democratic socialist Sen. Bernie Sanders, investors would still face dramatic tax increases under his proposals.

The biggest tax increase on households would be the application of the payroll tax to income over $400,000. That provision alone would raise $962 billion over a decade, TPC found…

“The proposal is very progressive,” said Gordon Mermin, senior research associate at TPC. …

Still, the price tag on Biden’s plan is sure to be dwarfed by Sanders’ sweeping proposals to impose new taxes on the wealthy. The nonpartisan Penn Wharton Budget Model estimates Sanders’ wealth tax alone could raise as much as $3.3 trillion. That proposal would impose a new tax of up to 8% on households with a net worth of more than $32 million.

That would bail out today’s government programs at the expense of tomorrow’s taxpayers. The trade-off is brutally simple. The longer the lockdown lasts the more Today must borrow from Tomorrow, which may take a long time since “no one is safe until everyone is safe.” Should we worry how long the lockdown lasts given Krugman’s assurance that “debt is money we owe to ourselves”? Krugman’s adage is, alas, misleadingly imprecise. Debt is money we owe to our children—who are a different ourselves from ourselves.

To complicate matters, the big borrowers of the world happen to be out of children. Perhaps the one thing America has going for it is a relatively healthy demography, for both China and Europe are facing a population collapse. “Chinese academics recently delivered a stark warning to the country’s leaders: China is facing its most precipitous decline in population in decades, setting the stage for potential demographic, economic and even political crises in the near future.” As for Europe, the burden of shrinking numbers on the young may be crushing.

The total number of the older population is projected to increase greatly within the coming decades, with rising proportions of the post-war baby-boom generations reaching retirement. This will cause a high burden on the working age population as they provide for the increasing number of the older population

One of the great ironies of modern politics is that “progressive” old men who style themselves the Party of the Future may think they have a credit line with it. But Tomorrow is not without recourse. Since risk is uncertainty attached to the future cash flows, the more the bureaucratic status quo depends on Tomorrow the greater present risk rises and the more uncertain the sustenance of institutional empires becomes. If the EU is reduced to dependence on consols, China’s mandarins on special bonds, and the U.S. federal government on tax increases, then things are not safe no matter what the people on TV say.

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