Handshake Accounting

Part of the bulletin series of articles.

Summary

• Nearly all Commonwealth foreign earnings end the year held by the federal Government, which in 2063 had a surplus of ✦60 billion.
• Even though these earnings are made by bureaus and firms, which usually operate independently, they must return what they do not reinvest to the state.
• While households in the domestic market hold no savings at all, the state spends much less than it raises, and so it can and does lend its surplus overseas.
• The question then is how the Vekllei state handles a foreign portfolio that grows faster than it can be used, and to what extent it spends it.

Read more: Finance and Fiscal Architecture

The question of lending in the Commonwealth is hypothetical, since no person in the domestic market is able to borrow the Commonwealth’s surplus. Despite this, government-owned and public corporations that interact with foreign currencies earn large revenues, and the Commonwealth has the world’s second-largest foreign currency reserves. The practice of lending these reserves overseas is known as Handshake Accounting, and dates from unbanking, when the Commonwealth honoured its foreign obligations to protect its reputation for reliability abroad.

There are many parts of the economy, government-owned and otherwise, that produce value but have no expectation of holding a surplus. Most of these lie exclusively within the national domestic market, where households have not held savings since unbanking and have nothing to invest. Others, like bureaus and industrial firms that export overseas, are expected to reinvest what their plans require and hand whatever is left to the state as collection known as a “sweep.”¹ Most such firms end the year with nothing in hand, since ✦ balances expire regularly and cannot accumulate.

In this context, the state collects what remains, and consequently holds the whole of the country’s external surplus. This includes the income from its own portfolio, which earns about ✦36 billion in the base year on a stock of ✦1,200 billion, or enough to pay for nearly five years of imports.² As such, Commonwealth export money essentially “trickles down” through a series of claimants in a set fashion, in the following order:

1. Payment of the hydrocarbon royalty, federal contribution and export permit fee to the state (essentially a tax).
2. Payment of ground rent to the Public, and of payouts to foreign holders of Blue Bonds and other claims.
3. Reinvestment by the firm according to its own plan, including the import credits it keeps for equipment.
4. Transfer of the remaining surplus to the state as the sweep, and investment overseas of whatever the state does not spend.

Because the state is the last claimant, a fall in exports reduces what the sovereign fund receives and basically nothing else – a 40 per cent fall in the international oil price would cost it about ✦40 billion a year, but the actual lived experience of Commonwealth people would remain unchanged. In this sense, Commonwealth society is well insulated from the global economy. The sovereign fund is analogous to a national wealth fund overseas, and is managed mostly by the Commonwealth Bank on behalf of the Treasury. In the event the fund grows at a faster rate than the state is effectively able to use it (as it is expected to early next century), the fund rule can direct the excess capital towards import entitlements for residents (like the holiday allowance and emigration stipend) or toward the Veletian Impex Bank and its lending to developing countries. It may also simply be left in foreign assets or investments and kept out of the internal market entirely.