Wednesday, December 30, 2009

Shares in national GDP?

Robert Shiller has long advocated issuing shares that have claims on a country's GDP. I have blogged earlier about Prof Shiller's proposal to issue paired macro securities (up-macro and down-macro) on the GDP of a country, with its value determined by the expected revenue streams or economic growth potential of that country, and paying out dividends in proportion to the performance of the country's GDP.

In a slight variation from the macros, along with Mark Kamstra, Shiller recently proposed that a country could issue sovereign securities called "trills", that commits them to paying shares with a coupon payment tied to the country's profit measured by its current dollar GDP. He describes trills thus,

"Each trill would represent one-trillionth of the country’s GDP. And each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation’s quarterly nominal GDP."

Trills issued with the full faith and credit of the respective governments would be a major new source of government funding and its dividend payouts would reflect the performance of the country's GDP. The value of the trills itself would depend on the expected dividend payouts, and would fluctuate depending on the changes in the country's future growth prospects. Financing government expenditures with trills would also play a role in stabilizing budget imbalances, since coupon payments fall in a recession with declining tax revenues.

Prof Shiller argues that trills could play a major role in remedying the imbalances in global capital flows. He writes,

"People who expect strong economic growth in a country would bid up the price of a claim on its GDP, creating a cheap source of funding for the issuing government. So a country with good investment prospects gets the resources at a low current cost. There would be no need for central bank machinations to try to correct global imbalances."

He also claims that trills, tied to nominal GDP, could protect its holders from erosion in value due to inflation, and thereby add a new dimension to portfolio diversification strategies, even as it enables them to partake a share in the country's GDP growth

"Now TIPS, or Treasury Inflation-Protected Securities, are offering disappointingly low yields, which may have to be raised to attract more investment. Trills, even at an ultralow dividend yield, would seem more exciting as an inflation-protected prospect, because they represent a share in future economic growth."

Shiller and Kamstra have proposed trills for both the United States and Canadian governments, and feel that there would be a lively appetite for it from institutional investors, public and private pension funds, as well as the individual investor.

However, trills, while attractive to indebted governments now, are likely to face some serious objections, especially given their perpetuity nature. David Merkel raises some of the issues here. Given the continuous actual and information shocks that an economy is likely to be exposed to, trills can be expected to be extremely volatile and thereby adding to the market volatility. As Merkel argues, the danger is that irresponsible governments will mindlessly issue trills to meet their immediate (and often revenue expenditure) needs and the future generations will end up making the perpetual annuity payments.

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