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How to Finance Puerto Rico’s Independence

By: Frank Worley-Lopez - Jan 28, 2016, 9:10 am
Solving Puerto Rico's debt issues may require some out-of-the-box thinking
Solving Puerto Rico’s debt issues may require some out-of-the-box thinking. (@zesty_business)

Go big or go home, so the saying goes.

When discussing the idea of Puerto Rico’s independence, the question I get over and over is: “Where will the money come from?” While I have previously offered a few examples of economic plans, one idea that I’ve been keeping to myself for some time involves a new currency and the loathsome Federal Reserve.

First, a little bit on how money is made. In a simplistic nutshell, under the current Federal Reserve system, debt is created out of thin air and money is printed to fill the vacuum. In other words, the Federal Reserve issues debt for, say, US$1 trillion. The United States then “prints” that amount of money, and poof, money out of thin … debt.

Unlike your bank, the Fed can create new bank reserves, as well as money. The primary way the Fed does so is by buying and selling US Treasury securities on the open market.

For example, when the Fed buys $10 million of Treasury bills on the open market, it credits the selling banks’ reserve accounts for $10 million. Since the reserves didn’t come from another bank, one could say they were created out of “thin air.”

The initial expansion of deposits and reserves will lead to an expansion of 10 times $10 million, because each dollar of reserves will support roughly 10 times that amount in deposits. The United States then pays interest on some of that debt.

The National Center for Policy Analysis can provide you with more information on how the Fed creates money from debt.

Part of my proposals for Puerto Rico include the creation of a new currency for the new republic, the Taino dollar. This is an asset-based currency, one based on hard assets like gold and silver, but also stocks, bonds, and real estate … and initially debt.

So, as part of the treaty of recognition of the new country, I propose including Puerto Rico purchasing (with newly minted Taino dollars) US$1 trillion in US Treasuries at an interest rate of 3 percent, with the proviso that the United States would recognize the Taino dollar (T$) and that the US government would never have to pay back the principle of the bond issue.

This would give the United States a trillion dollars in money it won’t have to pay back, and it would give Puerto Rico roughly $30 billion per year in funds to operate its government. This is important because under the current commonwealth government the island gets a little over $20 billion per year, most in direct payments to individuals from programs like social security.

In theory, Puerto Rico would have one trillion Taino dollars (T$), but under this proposal, the island would be prohibited anything except what it received in interest rate payments, or about $30 billion per year.

The island currently holds $73 billion in debt. I further propose a complete refinancing of this debt through Congress under this deal. This would allow the island to make a single payment of $5 billion per year over a period of 14 and a half years, at which point the total debt would be paid off, and the island would get to spend the extra $5 billion per year.

That payment would be deducted from the interest payments automatically, so that local politicians wouldn’t be able to mess things up.

There would still be money left over for infrastructure improvement and to balance the current budget, so the island won’t have to borrow anymore money. I propose that Puerto Rico be prohibited from borrowing any money until the debt is completely paid off as part of the treaty.

The only downside I see in this idea is that it would discourage Puerto Rico from making the tough decisions it needs to make in order to put its fiscal house in order now. On the other hand, there is no reason why that couldn’t also be included in the plan, since the new country will have to develop a State Department and military, which would require at least some cuts and changes for efficiency.

This will make it easier for Congress to grant Puerto Rico independence, since upon implementation, the Congress will never again have to deal with Puerto Rico. All current programs funded by the US Congress would be funded by Puerto Rico’s interest payments and managed by Puerto Rico.

I am also fully aware that once again I am proposing something completely at odds with my own conservative/libertarian beliefs. That’s OK. I am all about getting things to work, and if anything, what I’m really saying here is: where there is a will, there is a way.

Today, in Puerto Rico, there is no political will to make the hard decisions to do what needs to be done to fix the island’s problems, but solutions abound.