Addicted to Public Debt

After ten years of the lowest interest rates in recorded human history, how do we break the worldwide addiction to leverage? 

The Need to Deal with Public Debt: Many countries in the West are within a hair's breadth of insolvency. The next recession could put them over the brink - picture ten to twenty countries in the position of Greece, where creditors dictate public policy. 

If everyone is in trouble at the same time, there may be no one who can act as a lender of last resort to limit the damage in the next downturn - welcome to The Great Depression, Redux. 

Here are a few ideas for how we may be able to deal with this....

a) All Indebted Countries Run Surpluses: Surpluses and paying off debt must become the norm. If not, then those countries that continue on the road to financial ruin may be barred from the relief outlined below. 

Note - Keynes is not the answer for Keynes run amok. And yes, in an era when Keynes is King, I know that suggesting surpluses would widely be considered absolute madness. "Fool!! How can an economy run if it is not based in large part on perpetual borrowing from the future!?  

b) Intra-Country Debt Forgiveness: Where public debt of one country is held by private and public institutions and individuals in another country, and where the public and private institutions and individuals in that second country hold public debt issued by that first country, these countries should each forgive the debt of the other until one country holds no debt in the other. This could wipe out trillions of dollars worth of debt, worldwide. 

Yes, I realize that thus would be a massive gift to the less credit-worthy countries from the more credit-worthy ones - consider Germany and Italy swapping debt where German debt is obviously far more valuable. If the alternative is default - and it is - I would suggest this should be palatable, especially if running a surplus is a condition for this type of relief.

A swap like this would require the acquisition of public debt in private hands. OK, this would not simply wipe out debt! 

Rather than pay these debt holders outright, they could be issued perpetual bonds of their home country with coupon rates equal to the rates on the bonds that they would have been paid on the debt they were forced to give up, but with no requirement to pay the base principal amount owing on the bonds....see immediately below. 

c) Conversion to Perpetual Bonds: Even with a swap as proposed above, it is likely that for many nations their existing debt is so large that it cannot be paid. The only option for dealing with this, other than mass default, is to convert part or all existing government debt to "perpetual bonds", where governments will pay the coupon rates of interest yearly, but will not have to pay the principal until they have the financial wherewithal to do so. 

The fact is that there is no intention to pay the principal on almost all pubic sector debt now anyway. This scheme would accurately reflect the current political/financial situation and formalize the fact that when bonds come due, countries just issue more bonds and borrow more cash to pay for them. Instead of doing that, we should accept that governments will not have to pay at all, as long as the interest is paid. The effect of this should be to partially address the unhealthy cycle of borrowing only in order to cover past debts.

d) New Debt: Run balance budgets!? OK, many countries will not be able to move to surpluses in the short run. Any new borrowing should therefore be internal only. If your people are willing borrow from themselves for a short while, then fair enough. 

e) That Other Option: Or...we could just default on all debt everywhere, and start again! This was the norm every fifty years in the Middle Ages. 

What could possibly go wrong?