We are all worrying about the debt ceiling, even I; a Brit sitting in Dubai. Unlike the U.S. and Europe, Dubai is bustling with economic activity as I write.
Ironically Dubai has no income tax and pays its citizens out the equivalent of a dole; in effect it has negative taxation. Meanwhile it actually doesn’t have oil or gas.
Can the U.S. learn something from the Middle East at this historic moment?
I could talk about the problems of two huge twin deficits running out of control, with government debt at $200,000 a household, blah, blah, blah. We know the story, but is there a solution, right now to the debt ceiling? Is there a way to do a deal to carry on digging an even bigger financial hole?
A Sukuk offering would not raise the debt ceiling one cent and there already exists more than a $1 trillion of Sukuk in the world. A Sukuk is a bond that isn’t a bond, well not according to holy men anyway.
A Sharia-compliant Sukuk doesn’t involve borrowing or lending; otherwise it couldn’t be used as a financial instrument by the devout in the Middle East. Its non-debt debt, it’s borrowing and lending without borrowing or lending. Sukuk often involve a binding promise to repurchase certain assets and the "non-borrower" sometimes pays rent benchmarked to something like LIBOR.
Hurrah for religion and lawyers; this is what Obama needs, a way to borrow a ton of money that isn’t, on paper, borrowing money. There is no need for investment banks to invent a cunning new plan to fake solvency like they did for Greece--the Sukuk is an established financial vehicle. They can start the word processor up right away and get Sukuking the deficit right away. Sukuking the books is the answer.
Let’s face it, the trade balance is a negative $10,000 a year per family, the budget debt being rolled up by the government for each American family looks like something generated by a shopaholic (call it an extra $12,000 per household a year). Only a miracle can save America, so why not appeal to the accountancy standards of a higher power?
If a deal isn’t done for a raise in the debt ceiling really quickly, then Sharia-compliant bonds will seem like a very sane alternative compared to the choices that will be left for elected inmates of the world’s biggest financial asylum.
Even when they do sort out the acute problem of the ceiling, the U.S. is still on the brink of bankruptcy and will have to resort to dramatic measures to turn the deficit juggernauts around.
One way of another, the U.S. is likely to be well and truly Sukuked for years to come.
- government debt
- financial instrument
- investment banks
- the Middle East
- income tax