The United States Could "Buy" Greece (if Greeks Are Interested)

Here's a "crazy" idea, but it's so crazy it makes sense. The United States could "buy" Greece. It'd be the greatest deal in history for Greece and the greatest deal since the Alaska Purchase for the U.S.

Here's a broad outline of how that would work:

1. The President and Greek Prime Minister would hold a joint press conference announcing the offer, and a full "prospectus" would be published in both English and Greek for the people to consider.

2. Greece would hold a referendum to become a U.S. territory (and the U.S. would pass enabling legislation or, if necessary, a constitutional amendment) under the following terms.

3. The U.S. would offer to buy and bury all of Greece's public debt held by external governments and public institutions. The offer would be reasonable in the circumstances but represent a discount. The offer would be open for 60 days, take it or leave it.

4. Greece would convert to the U.S. dollar. The U.S. Federal Deposit Insurance Corporation would take over Greece's banks and insure all deposits up to FDIC limits. Euro-denominated accounts would be frozen as euro, insured within overall FDIC limits, and convertible when/if the depositor wishes, but no new euro could be added to those accounts.

5. As a U.S. territory Greece would enjoy immediate free trade to/from the U.S. European free trade would be up to Europe to decide.

6. Greeks would become U.S. citizens, though there would be a 5 year transition period with temporary policies that discourage people movement, probably via the tax code. European freedom of movement would be up to Europe to decide, though the U.S. would urge Europe to maintain residence rights for Greeks already in Europe and their immediate families.

7. Greece would have nonvoting representation in Congress and a Cabinet-level official in a new U.S. Department of Greek Recovery. Various transition policies would be set with strong protections for Greek language and culture, as examples. Tax policy would quickly converge, though the Greece would keep all U.S. federal tax revenues for at least 20 years.

8. The U.S. would be limited to opening one naval base and one land (joint Air Force and Army) base in Greece. Some current Greek military facilities would convert to territory/state National Guard facilities, and others would be closed.

9. After a period of 25 years but not more than 50 years, Greece would hold a statehood referendum, and the U.S. would be bound to honor the result. The vote would be between two irrevocable choices: statehood or independence. If no referendum is held within 50 years then Greece's U.S. territorial status would be automatically terminated, and Greece would become an independent nation again. In other words, permanent territorial status would not be an option. (Congress would also consider adopting the same 50 year transition clock for all other existing U.S. territories.)

Can Greece Keep the Euro and End Austerity? Perhaps So!

I've been trying to read and to listen carefully to what the Greek government has been writing and saying. This Greek government's public representations have so far matched its actions, so it's particularly important to listen.

Today, Greece's Foreign Minister, Nikos Kotzias, reportedly told China's Ambassador to Greece that Greece is not leaving the euro zone. (The press report used "euro zone" instead of "Eurozone.") Is that possible? It might be.

The key to understanding how a sovereign default could work within the euro, at least in theory, is that there are important, critical differences between the Eurozone (including European Central Bank support and the Eurosystem) and maintaining the euro as legal tender. There are two countries that adopted the euro as their medium of exchange without any monetary agreement or other coordination with the Eurozone: Montenegro and Kosovo. Their entire economies operate on the euro. In principle Greece could do the same. The Bank of Greece could legally maintain its Eurozone membership but, with an uncooperative European Central Bank, de facto operate as Montenegro and Kosovo do.

OK, without commenting on whether that outcome is desirable, is it possible? Probably. Even assuming an ECB that doesn't return the Bank of Greece's phone calls, there's no available mechanism for the ECB to prevent Greeks from using euro. Indeed, efforts to prevent the free exchange of euro would undermine the euro's status as global, convertible currency. Such efforts would also harm Montenegro and Kosovo.

The Bank of Greece has already adopted capital controls including withdrawal limits of 60 euro per day per depositor. A significant fraction of the Greek economy, perhaps a third, is already operating "in the black" and off the books, primarily on a euro cash and barter basis. Austerity-fueled and ECB-supported "bank jogs" have already done great damage to the Greek economy and its financial system. The Bank of Greece could, in principle, maintain capital controls and (probably) nationalize what's left of Greek banks. Moreover, there's no particular reason why Greeks in Greece need to have bank accounts in Greece, and many have already established accounts elsewhere in Europe.

The Greek government is already running a primary surplus, meaning that tax revenues (even with significant compliance problems) are supporting government services and benefits. When (not if) the Greek government defaults on its external debt it'll have more euro to keep. The Greek government won't be able to borrow more, but that's already true.

Could that be the plan, to tell the troika "piss off," run the Greek government on a neutral domestic cashflow basis (better than sending the surplus to the troika), and remain within the euro zone (lowercase) de facto, just as Kosovo and Montenegro do? It could be. Moreover, Greece could be on firm legal footing in doing all that. The troika and the ECB, on the other hand, might have several legal problems (at least) if they try to act maliciously. It's one thing to suspend support but quite another to go to war (metaphorically one hopes) against one of its members. They may be very, very angry, as foolish creditors often are, but I don't see how they legally retaliate against a sovereign in their midst.

Greece: What's Really Happening, What Matters

If you'd like to understand what's happening with Greece and its economic situation, here's a quick guide.

1. Before the 2008 Financial Crisis, Greece borrowed too much and European banks lent too much. This credit overextension problem was the direct result of a poorly designed Eurozone, a monetary union without fiscal union.

2. Government institutions bailed out the overextended banks, assuming the bad Greek (and many other bad) debts. That bailout was not handled particularly well.

3. Just as there was no way the banks could sustain those bad debts (hence the bailouts), equally there is no plausible (or even implausible) way the Greek government can repay all of its debts. Yet the government institutions substantially have not (and continue to refuse) to write off Greece's debts.

4. Greece's governments have tried to service that debt held by public institutions (and all other debt), but in the process the government created great misery and horrific economic depression in Greece. This set of self-defeating policies is called "austerity." Greek unemployment is now about 26% and Greek GDP fell by about the same percentage. Greater poverty and immiseration means it's even more impossible to pay off euro debt.

5. A new Greek government came to power on a promise to end austerity. That government negotiated with its external creditors (government institutions, i.e. the "troika") for months and failed to reach an agreement that included debt relief -- or indeed any material changes to the existing, counter-productive austerity policies. The troika offered more of the same: never-ending economic depression in Greece.

6. The Greek government refused more of the same and now seeks a public referendum backing its refusal. The Greek government will presumably stop servicing its external debt and will default on that debt. (As it should have done years ago in a negotiated but still deliberate way.) That's the only decision the Greek government can make, and it's a good one. Or at least it's the only realistic one. The math doesn't lie. There's just no way the debt is repayable. (Importantly it appears that the Greek government can and will continue servicing internally held debt, particularly the debt held by its domestic banks. It just isn't going to continue playing a mathematically impossible charade with the IMF, in particular.) On June 30 the Greek government owes $1.6 billion to the IMF, and the Greek government does not plan to make this payment. That's "default."

7. The European Central Bank (Mario Draghi, really) now has a decision to make. Will the ECB destroy the euro-based Greek banking system simply because another entity, the Greek government, is defaulting on its external debt? In the language of central bankers, will the ECB decide that Greek banks are facing a solvency problem instead of a liquidity problem because the IMF isn't getting paid? It's the ECB's decision to make, and it's a very strange one indeed, a decision Draghi has desperately wanted to avoid having to make. Central banks aren't usually in the habit of destroying their own banking systems, even partly. There are no precise analogies here, but this would be a bit like the U.S. Federal Reserve deciding to torpedo Alabama's banks if the Alabama state government stopped paying its bonds held by Wisconsin. Yet that's the "logic" of the Eurozone.

8. Of course the Greek government must prepare for the possibility the ECB will act to destroy Greece's banking system. The Bank of Greece (Greece's central bank) will bear most of the responsibility to protect and defend Greece's banking system. If the ECB does terminate Greek banks' access to Emergency Liquidity Assistance (ELA) then the Bank of Greece will likely have to respond in these three basic ways:

(a) Declare a bank holiday (that could last several days), keeping the banks closed;

(b) Introduce capital controls, meaning limits on withdrawals (particularly internationally);

(c) Possibly introduce a new currency, most probably a purely electronic one that operates via debit cards and smartphones.

Cyprus has recent experience with (a) and (b). There may also be another option:

(d) Request and obtain a loan from Russia to help keep Greece's banks capitalized. (The Russians have offered in part for geopolitical reasons.)

The Bank of Greece will probably also have to nationalize the banks, meaning to take equity (probably all of it) in those banks. That's a minor detail in terms of execution, but it's an important one for public governance.

9. If the ECB acts to destroy the Greek banking system, and the Bank of Greece is forced to respond to protect and defend Greece's banking system, there will be disruption and turmoil, and not only in Greece. However, with the key assumption that the Greek government and the Bank of Greece execute well -- the Greek government does have many smart people, fortunately -- the disruption will be relatively short lived. There are several countries that have followed this path, and they've recovered nicely. Iceland is arguably a useful, recent example, though Iceland always had its own currency and never joined the euro.

10. Greece will remain within the European Union and Schengen Area unless other European governments do something particularly stupid and perhaps even illegal. True, European policymakers have often acted stupidly in recent years, but I would not bet heavily on this particular form of stupidity on this occasion. Note that Norway and Iceland do perfectly well outside the European Union as members of the European Economic Area (EEA) with their own currencies, so Greece does not actually require EU membership to restore economic growth and prosperity. The only real advantage to EU v. EEA membership is the ability to influence policy within the EU, but since Greece hasn't been able to do that anyway, it doesn't matter.

11. In the hopefully unlikely event EU governments continue to act stupidly with respect to Greece's membership, EU leaders should bear in mind that Greece is housing many thousands of asylum seekers and refugees. There are costs to continuing policy stupidity.

12. EU policy leaders talk as if they are confident Greece's issues will not "blow back" to cause turmoil in the rest of the Eurozone. I wish I were so confident. The financial markets have shown a strong ability to sense "blood in the water" and attack, shark-like, the weak and the vulnerable. European public institutions will likely discover that this botched exercise is even more expensive than a negotiated, managed write-down and Greek economic recovery plan would have been. One of the ways Greece will be "expensive" is in Spain where that government is more likely to fall at the next election. One of the ways European leaders have been particularly out of touch and particularly stupid is in their tolerance (or obliviousness) to the pain and suffering of the unemployed amidst persistent economic depression. It's a human emergency, and the EU's inability to solve that emergency is its greatest, overarching failing.

In Praise of the Greek Government

I wrote about Greece's economic situation earlier this year. A few points:

1. Greece's government is acting reasonably, logically, sensibly. (See the Greek Finance Minister's latest verbatim statement, for example.) Unfortunately Greece is dealing with European ministers that are not. They're not even acting like good (or even average) bankers would.

2. To reiterate, the European Central Bank could act to destroy what's left of Greece's euro-based banking system or not, but make no mistake that it's the ECB that will be at fault if it does so. Blame where blame is due.

3. To reiterate, if the ECB destroys what's left of the Greek banking system then Greece's new currency (after a bank holiday) will be entirely electronic, primarily based on debit cards and smartphones. Greece will become Europe's first truly cashless society, and (ironically) the euro will become Greece's black market currency (in a hopefully shrinking black market). The Greek government won't even bother to mint new coins and print new bills. The transition will be tumultuous, of course, but after the dust settles it'll work quite well. Tax evasion and undeclared labor will become harder to pull off since all Greek currency transactions will be electronically recorded. The Greek government has some smart people who will make this work.

4. Greece will remain in the Schengen Area and in the European Union unless European governments somehow act in concert (and with unprecedented malice) to expel Greece. Blame where blame is due again. That'd be completely dumb from the point of view of Europe's self interest (and the European public interest), but see #1 above.

Rationalizing U.S. Currency for the 21st Century

U.S. cash currency has a couple problems that should be easy to solve:

1. Inflation has eroded the dollar's value, so the lowest denominations are less useful.

2. There are too many paper notes and not enough coins. Paper notes are more expensive to produce and to maintain, and coins are more useful for vending machines.

3. America's rich diversity is poorly represented.

One online campaign is pushing for Harriet Tubman to replace Andrew Jackson on the $20 bill. That'd be a good switch, though I have an even better idea. Here are the changes I'd make simultaneously:

A. Stop producing pennies. That takes Lincoln out of coin circulation, but he's still safe and secure on the $5 bill.

B. Stop producing $1 bills. That takes Washington out of bill circulation, but he's still safe and secure on the quarter.

C. Ramp up production of Kennedy half dollar and Sacajawea dollar coins.

D. Put Harriet Tubman on the $2 bill and ramp up its production. That takes Jefferson out of bill circulation, but he's still safe and secure (for a while) on the nickel.

E. Switch all paper currency to more colorful, Singapore-style polymer-based notes.

It'd be nice to stop producing the nickel, but either the quarter would have to be demoted to 20 cents or it would have to be yanked as well. And these are the coins with Jefferson and Washington. If any old white men belong on U.S. currency then they do. If you really want to pull the nickel then here's one way:

AA. Stop producing pennies, nickels, quarters, $1, and $2 bills.

BB. Introduce a new $2 Jefferson coin in a substantially different form factor.

CC. Ramp up production of the $1 Washington dollar coin, already produced as part of the presidential series, but with Sacajawea on the obverse. (Or put Washington on a new 20 cent coin, but that's a bit confusing.)

DD. Introduce a new $200 Harriet Tubman bill, probably (unfortunately) with a limited but regular production schedule.

Defending Against the Crazy Pilot Scenarios

There's strong evidence that the co-pilot aboard the Germanwings flight that crashed in the French Alps was, in a word, crazy. It appears he locked the post-9/11 reinforced cockpit door while the captain was using the toilet, and he also blocked the door override code as any cockpit occupant is allowed to do. The captain couldn't reenter the cockpit, and the co-pilot intentionally crashed the plane, killing himself and 149 others.

Exactly the same thing happened in 2013 in a murder-suicide crash in Africa that killed 33 people (including the perpetrator). And the same thing may have happened on at least three other occasions in the past several years.

Once is a fluke, but twice is a pattern. As my previous post described, aviation safety experts knew that the FAA's (and other regulators') orders to reinforce cockpit doors would result in more fatalities associated with crazy pilot scenarios. We're now seeing their unheeded warnings become real. And unfortunately copycat incidents are quite possible.

In the immediate aftermath of the Germanwings crash, airlines around the world are requiring that the cockpit always have two occupants, at all times (except when parked at the gate). Typically this would mean that when a pilot wants to step out to use the toilet a flight attendant would take his/her place. What this means in practice is that an 80 kilo crazy pilot now would have to incapacitate a 50 kilo flight attendant in order to commit murder-suicide.

While I appreciate the airlines' prompt change in operating practices, this change in policy will only help a little bit. The last line of defense will be, typically, a 50 kilo flight attendant with no knowledge of the switches and controls in the cockpit and no ability to pilot the airplane. If the crazy pilot wants to incapacitate that flight attendant, he/she will have the advantage of complete surprise. Maybe the airlines think differently, but I don't think this last line of defense is going to be much of a defense. Moreover, that flight attendant now has the opportunity to be the crazy one, and that's another, new risk.

What I think the regulators now need to do is not allow any occupant in the cockpit to disable the override code to open the door. According to press reports, on an Airbus A320 any knowledgeable cockpit occupant -- and the Germanwings co-pilot certainly was -- can block the override code from opening the door. That block lasts either 5 minutes or indefinitely -- press reports vary.

Why? I assume it's because the regulators were afraid that a crazy crewmember would open the door with the override code, storm the cockpit, incapacitate the pilots, and crash the plane. Well, yes, that's a possibility. But obviously there can be one or more crazy people in front of the door, in the cockpit.

There is an effective solution here, even if the regulators don't want to go back to pre-9/11 bashable (eventually) doors: a plane-wide alarm. That is, whenever the door is left open for a certain number of seconds, or whenever anybody uses the override code to open the door, a plane-wide alarm would sound. It could be a coded alarm that only the crew (and particularly knowledgeable passengers) understand, or it could be a general alarm that everybody understands ("Warning: Cockpit Door Open!"). But it would be an alarm that effectively declares, "We have a problem. Everybody work together now to save the plane." There should not be a 5 minute (or indefinite) block on the override code. That block should be about 10 seconds, during which time the door alarm sounds, plane-wide. It should not be possible to disable this particular alarm, though eventually it could stop sounding if the door is closed.

Let's hope the FAA and other regulators act more thoughtfully this time.

Is 9/11 Overreaction Now Killing Airline Passengers?

With the important caveat that press reports are sketchy and could be in error, there are reports that one of the two pilots of the Germanwings flight that crashed in the French Alps, killing 150 people, was locked out of the cockpit and couldn't get back in. If that's what happened, unfortunately this accident (and others like it, in the future) was predicted. Public officials may be learning a hard lesson: their overreaction could be killing (and will surely kill) people.

After the 9/11 terrorist attacks in the United States, public officials ordered the aviation community to improve security, understandably. Airline passengers around the world are now often taking their shoes off, removing laptops from bags, surrendering their large bottles of cologne and tubes of toothpaste that exceed liquid and gel limits, and so forth. Most of these "improvements" are annoying and costly but relatively harmless.

Public officials also ordered aircraft manufacturers and airlines to reinforce cockpit doors and to keep them locked as often as possible. They also ordered airlines to adopt protocols restricting passengers from lingering near the cockpit door and to block access to the door (using a beverage cart, for example) when a pilot needs to open the door, to visit the toilet for example.

All of these cockpit door measures rely on a critical underlying safety assumption that public officials probably did not fully comprehend or consider: both pilots must be infallible. If one pilot decides to strangle the other pilot, for example -- or simply lock the other pilot out of the cockpit while he's visiting the toilet -- then there's literally nothing anybody can do to save the airplane and the people aboard it. It simply doesn't matter if America's finest military pilot is sitting in seat 28C, ready to save the plane. Reinforced cockpit doors are remarkably effective in separating the passenger cabin from the cockpit, by design. However, the doors have no way of adjudicating whether the cabin occupants or the cockpit occupant are/is crazy or medically distressed.

In other words, after many decades working to eliminate single points of failure in aviation, with tremendous safety benefits in saving lives, the post-9/11 introduction of mandatory reinforced cockpit doors introduced a new single point of failure in the aviation safety system. If either pilot wants to commit murder-suicide, or if the one pilot left on duty simply has an incapacitating medical problem while the other pilot is visiting the toilet, the airplane is lost. These safety risks are thoroughly predictable, and many aviation experts predicted them.

What's also frustrating is that anybody logically analyzing 9/11, taking into account human behavior, would realize that that type of attack is extremely unlikely to happen again. The 9/11 attack taught passengers and flight crew that resisting attack, in the air, promptly and with massive force, is the only viable option. In fact, 9/11 taught that lesson so well, so effectively, so quickly that passengers and crew aboard United Airlines Flight 93, having heard the fate of other hijacked airliners that same morning, resolved to resist their hijackers. They did, and they saved probably hundreds of lives on the ground as UA93 crashed in rural Pennsylvania, far away from populated areas. They had a chance to save not only people on the ground but themselves, and they took it. Their sacrifice should have taught public officials that 9/11 simply will not happen again, certainly not that way.

But instead public officials overreacted in at least one area. They overruled many safety experts, and they ordered the installation of impenetrable cockpit doors. And thus they put the lives of all airline passengers and flight crew in the hands of a single point of failure, on every flight.

Fortunately most pilots don't commit murder-suicide, and fortunately most pilots don't have strokes or other incapacitating medical events while the other pilots are using the toilet. But a few will, and the reinforced cockpit door will effectively block the non-crazy and the healthy from preventing crashes and fatalities. That's exactly what might have happened aboard Germanwings 9525 and even possibly Malaysian Airlines 370. But if it didn't happen aboard those flights, it surely will happen at some point in the future.

Greece's Next Steps

The Greek government is running a primary surplus. That is, tax revenues exceed spending. That surplus is currently approaching a whopping 4.5% of Greek GDP.

Consequently the new Greek government could simply slow down or stop paying interest on their public debt. Nothing terribly bad would happen directly. The Greek government would find it even more difficult to borrow, but that's not actually a problem when you're running a budget surplus, and borrowing is already difficult.

So I think it likely that the new Greek government will take this step, preferably with the grudging acceptance of other European governments but without that acceptance if necessary. Grudging acceptance means the new Greek government slows down interest payments (with partial debt write-off), and non-acceptance means the new Greek government blows off much more (or even all of it). But those are the two choices.

With non-acceptance the ball then lands squarely in the European Central Bank's court. Greek banks depend on the ECB as the "lender of last resort," the institution that provides them with liquidity so that they can issue euro cash to nervous depositors steadily pulling their money out. (Note that the new Greek government is implicitly giving depositors space to pull their euro out, with the ECB's help, and that's what I'd be doing.) The ECB would have the technical ability to stop performing this vital role. Would it?

There's some legal question. Another problem is that, even today, a systemic failure among Greek banks probably would cause bank runs elsewhere in Europe. There's a lot of brave talk that the ECB could allow Greek banks to fail, but does anybody remember the same brave talk about allowing Lehman Brothers to fail? How did that work out?

I don't think the ECB will blow up the entire Greek banking sector, even now. If I'm wrong, though, then the Greek government simply declares a nationwide bank holiday much like Cyprus did, possibly nationalizing the banks in the process. When the government allows the banks to reopen there will either be severe withdrawal limits gradually relaxed or new drachma in those accounts, maybe even a new drachma crypto currency but, unlike the dreadful Bitcoin, with a monetarily sound inflation rate. It turns out that, nowadays, you don't actually have to issue paper bills and metal coins when you want to launch a new currency. Greeks have smartphones and EMV ("chip") ATM/debit cards, and that's all they need for their new drachma if it comes to that. A side benefit to making all physical cash transactions in Greece totally illegal is that tax evasion becomes more difficult.

Congratulations in advance to Greece on taking steps to end this austerity madness.

Bad Economics at the BBC

The BBC doesn't seem to understand basic economic theory. That's a shame.

As further evidence I point to this overwrought article penned (electroned?) by Linda Yueh, identified as the BBC's Chief Business Correspondent. She describes Japan's most recent data on aggregate household savings as constituting "another blow" to Prime Minister Abe. Japan's net aggregate household savings turned very slightly negative according to the data.

Ms. Yueh has gotten the story exactly backwards. First it's important to understand that saving is simply deferred consumption. Saving is neither virtuous nor sinful in and of itself. A young adult could easily be quite foolish to try to save instead of borrowing to invest in a university education, for example.

The Japanese Prime Minister's entire economic program is premised on trying to get businesses and consumers to spend more on present consumption. Consequently he'd be rightly pleased that Japanese households have shifted more of their future potential consumption to the present, because that consumption is needed now to pull the Japanese economy out of its doldrums, not 20 years from now. Yueh correctly reports the disappointment in household consumption data (also down), but the shift away from savings is fantastic news, not "another blow."

Moreover, why should old people save so much? That is, Japan has an aging population (as Yueh also points out), and older people really should spend more, now, on themselves, their children and grandchildren, on charities -- anything they like. That's quite reasonable and proper.

There might be some concern that declining net overall household savings could mean a shortage of capital, but that's not at all Japan's problem. Japan has been stuck at the zero lower bound for a couple decades. Investment capital is plentiful and cheap. Yueh's own reporting bears that out since she notes that Japanese corporate balance sheets are strong, i.e. they're sitting on lots of cash.

Anyway, Prime Minister Abe ought to be delighted that Japanese households are finally reducing their hoarding of cash. That particular part of the Japanese economic story is great news. It's too bad the BBC's Chief Business Correspondent didn't grasp that reality.

Boris Johnson: Another Wealthy, Cheap F**k

Boris Johnson, Mayor of London, was born in the United States and is thus a U.S. citizen. As with every country on the planet, citizens are subject to the laws of their state of citizenship no matter where they live. For example, it is illegal under U.S. law (the Foreign Corrupt Practices Act) for U.S. citizens to commit bribery.

Last month Mayor Johnson announced to the world that he was refusing to obey U.S. tax law, specifically that he was refusing to pay U.S. personal income tax on a portion of the net gains on the sale of his home in London. Reader comments posted to the linked article are brutal, and understandably so. They boil down to this central point: it's outrageous that Boris Johnson thinks he's above the law, that he thinks he can enjoy the rights and privileges of U.S. citizenship without also living up to its obligations. And it is outrageous. Johnson has a net worth of approximately $185 million according to press reports. He's one cheap f**k if he's refusing to pay a rather modest capital gains tax. (What is it with rich people nowadays? What, modest taxes and immense wealth that would have made Julius Caesar blush aren't enough?)

Let me explore the basic facts more fully to give readers a fuller idea of just how cheap and outrageous Johnson is.

First of all, Johnson is under no obligation to keep his U.S. citizenship. He could have terminated his U.S. citizenship as early as age 21 (now age 18). When he was 21 years of age it was free of charge to apply for a U.S. Certificate of Loss of Nationality (CLN). Now it costs as much as $2350, though that's just a bottle of mediocre whiskey to Boris Johnson. It does require two visits to a U.S. consulate or embassy, though conveniently there's one in London, the city where Johnson is mayor. Why two visits? In the first visit the consular officer explains the process and ramifications of terminating one's U.S. citizenship, including the fact it's irrevocable, and assesses whether the applicant is legally competent (not drunk, for example) and renouncing voluntarily. Then the applicant is sent home in order to allow time for careful consideration. In the second visit the consular officer verifies that the applicant won't be stateless after loss of U.S. citizenship, re-verifies competence and the voluntary nature of the act, and then completes the process. Then the deed is done. The U.S. government reported that 2,999 individuals in 2013 completed this very process and terminated their U.S. citizenships.

So why has Boris Johnson kept his U.S. citizenship? He's had about 29 years to terminate it, and it's about the same effort as getting a bunion removed but far less painful. I'll offer some more detailed, informed speculation on this question in a moment. Johnson has claimed it's difficult, but no, it really isn't (as many commenters have correctly pointed out). The bottom line, self-evident answer is this: Johnson maintains his U.S. citizenship because he values the rights and privileges associated with his U.S. citizenship. He just wants to complain about one of its obligations.

Let's take a look at that specific obligation. The United States requires its citizens (and its nationals, and its permanent residents) to pay personal income tax in certain circumstances. Approximately 6% of Americans residing outside the United States owe any U.S. income tax whatsoever. That's roughly 400,000 Americans (out of about 7 million), including (this year) Boris Johnson. Under U.S. tax law the United Kingdom gets paid first. However, the U.K. doesn't tax the gains on primary residences (as defined in the U.K. tax code), even if your primary residence is more lavish than Buckingham Palace. So, Johnson's U.K. tax rate on the sale of his primary residence is zero. Had it been something other than zero, the U.S. tax code would have given him full credit for the foreign tax, dollar for dollar.

But it was zero, so now Johnson is subject to the U.S. income tax on the sale of his home. However, the U.S. exempts the first $250,000 ($500,000 if he files a joint tax return with his spouse) of gains on the sale of his home. And, furthermore, those gains are net of costs. If Johnson spent a small fortune renovating his whiskey cabinet in his home, the cost of that renovation would likely be a cost that could be subtracted from his gains. If all that's not enough, the U.S. will also take into full consideration all his other foreign (presumably mostly U.K.) income taxes paid on all other passive income he received. If the U.K. taxed him above U.S. rates on his gains/dividends/interest from his other investments, the U.S. tax code gives him full credit for that differential. The U.S. tax code even lets him carry forward those excess foreign tax credits up to 10 years in the future (and up to one year in the past), to offset possible future (and past) U.S. income taxes on passive income.

Oh, but wait, there's more! The U.S. tax code also grants him an annual personal exemption, standard deduction, and (if he has dependents), further deductions and credits. If the gains on his home exceeded his limit, and if he couldn't offset them with excess foreign tax credits (even from other tax years), then he can fall back to his annual income exclusions/exemptions/deductions. And, if his spouse isn't a U.S. citizen but owned 50% of the home (as is typical), he has the option to file a separate tax return (without his non-citizen spouse, also typical) and thus only be responsible for 50% of the gains. If his non-citizen children owned shares in the home, that would further dilute his U.S. tax obligations. Indeed, any legitimate ownership interest dilutes his taxable share.

No, wait, there's even more! While he owned the home the U.S. tax code provided a generous mortgage interest deduction. At the very least this deduction most likely helped Johnson accumulate ("bank") foreign tax credits in the U.S., even if (as likely) he didn't owe any U.S. income tax. In other words, the U.S. tax code heavily subsidizes home loans. I don't remember Boris Johnson complaining about that.

For the record, the maximum U.S. capital gains tax rate for 2014 is 23.8%, including the Medicare surtax. Johnson owes something less than this percentage on his net gains. How much less depends on his exact circumstances, but it will be less. Unless he did not pay the tax owed on time, in which case he could owe interest and penalties.

And now we turn to more details on why Johnson maintains his U.S. citizenship: because it's probably a really good financial deal for the most important person in the world, Boris Johnson. In particular, an individual with a net worth of $185 million (or thereabouts) obviously has a lot of financial wealth to manage and to attempt to grow in internationally tax-efficient ways. As a U.S. citizen, Johnson enjoys privileged access to Wall Street and other U.S. financial accounts, some with U.S.-U.K. tax treaty protection. Unlike foreigners, he is not subject to mandatory 30% tax withholding on his U.S. financial accounts, and thus he does not have to (in effect) provide an interest-free loan to the IRS until his exact U.S. tax liability (if any) is determined.

Some commenters have speculated that Johnson would be subject to the U.S. exit tax if he renounces U.S. citizenship. It appears not. Johnson is living in his other country of citizenship, a citizenship he has held from birth, and he has not been a U.S. resident for 10 years or more within the past 15 years, thus (it appears) he would legally qualify for a full exit tax exception. For the record, if it applies the U.S. exit tax simply requires a "settling up" on the date of expatriation: mark-to-market of your worldwide assets, then standard U.S. capital gains tax rates applied to the calculated net gains. (Your cost basis is also reset, and typically you can credit your U.S. exit tax to your foreign tax return.) You must have a net worth of at least $2 million, or have paid about $150,000 or more in U.S. income tax for the past 5 years, in order to be considered for the exit tax. You also get a $680,000 exemption. For example, if your net worth is $3 million but the cost basis on that net worth is $2.5 million, when you renounce U.S. citizenship you won't owe a dime in exit tax because the net gain ($500,000) is less than your exemption ($680,000). All that is moot, though, because Johnson appears to qualify for a full exit tax exception.

As mentioned above, Johnson could terminate his U.S. citizenship for the price of $2350 and two visits to the U.S. embassy in London. His termination would not change anything that happened in the past in terms of his tax obligations, understandably, but if U.S. citizenship were such a terrible burden he has an easy, near-immediate out. The fact he hasn't within the past 29 years speaks volumes. In short, he's a cheap f**k.

What happens if Boris Johnson doesn't pay his U.S. taxes? As basic, routine steps the IRS could place tax leins against any assets he holds in the United States. The IRS could also order financial institutions that do business with him in the United States to begin mandatory tax withholding. Meanwhile, interest and penalties will accumulate. If those steps don't result in Johnson's compliance with his tax obligations then the IRS could escalate, asking the U.S. Department of Justice to issue an arrest warrant for criminal tax evasion. An outstanding arrest warrant would effectively bar Johnson from travel to the United States (including transit) and, no doubt on advice of his attorneys, from travel to any country that could conceivably extradite him to the United States for tax evasion. (That's a shorter list of countries than the number of countries with U.S. extradition treaties, but there is a list.) Johnson's tax compliance problems could also conceivably, negatively affect U.S.-U.K. relations, at least unofficially. The IRS could suddenly become somewhat less responsive in returning HMRC's phone calls regarding particular HMRC international tax fraud investigations, for example. So much of international relations relies on mutual trust and adherence to behavioral norms. Johnson is p*ssing where he shouldn't.

All of these hypothetical compliance escalations are just that, hypothetical. My prediction is that Johnson, if he hasn't already, will quietly pay his U.S. tax bill. I do not predict that he will terminate his U.S. citizenship. He's a cheap f**k, and that's why he won't.

Update: Boris paid his U.S. tax bill.