Sunday, January 17, 2010

Assignats for America!

"Corporations raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits. Governments should do something like this, too, and not just rely on debt. Borrowing a concept from corporate finance, governments could sell a new type of security that commits them to paying shares in national 'profit,' as measured by gross domestic product. ... Although GDP numbers still aren't perfect--they are subject to periodic revisions, for example--the basic problem has been largely solved. So why not issue shares in GDP now? Such securities might help assuage doubts that governments can sustain the deficit spending required to keep sagging economics stimulated and protected from the threat of a truly serious recession. In a recent pair of papers, my Canadian colleague Mark Kamstra at York University and I have proposed a solution. We'd like our countries to issue securities we call 'trills,' short for trillionths. ... Each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation's quarterly nominal GDP. ... Trills would be issued with the full faith and credit of the respective governments. ... There are indications that officials in China are starting to worry about threats to their huge investment n [US] debt from a possible outbreak of high inflation. The trills, tied to nominal GDP, would protect them. Right now, TIPS, ... are offering disappointingly low yields, which may have to be raised to attract more investment. ... The [US] government is highly unlikely to default on its debt, but even this remote possibility would be virtually eliminated by trills, becasue the government's dividend burden would automatically decline in tough times, when GDP declined. ... These imbalances--exempliifed by the massive Chinese holdings of [US] government debt--might not be so worrisome if the investments were financed better. ... Proposals for securities like trills have been aired many times over the years", my emphasis, Robert Schiller (RS) at the NYT, 27 December 2009, link:

RS is a Yale economics professor. I would normally say "big deal" to a proposal like this. A New York City CPA buddy of mine, suggested these type of securities 30 years ago! Trills appear to pay "interest", but pay nothing. As long as Uncle Sam (US) will not run a budget surplus, trills can't be "paid" in real terms. Anyone buying trills should remember, "interest is what the government promises to pay you to steal your principal". Trills look like an ideal security for Teresa Ghillarducci to stuff in people's IRAs without their consent. For their own good of course. I'm sure Argentina's Madame Kirchner will consider issuing trills. RS forgets "Miller-Modigliani" finance, i.e., investment and financing decisions are separable. No matter how US finances his debt, absent budget surpluses, it can't be paid. Will a trills owner get multiple votes? One vote per million trills? Will trill-owning foreigners vote? Will Saudi Arabia control our Congress more obviously than today? Trills facilitate deficit spending! RS said it! RS does not suggest US reduce spending. He is now another "house economist". Well RS, make it official and move to Princeton! "Full faith and credit"? Hahahahahaha. If TIPS yields are too low, tell Zimbabwe Ben (ZB). ZB could increase interest rates. Disagreeing RS, US will default on his debt. Explicitly, or through higher inflation. "Financed better"? Let's call Vampire Squid to sell trills and Moody's to rate them AAAA, quadruple A! Professor Fama, we need you. Try to kill trills. Trills remind me of France's assignats and mandats issued in the 1790s. They became worthless. Here's a link to an article about French inflation:


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Anonymous said...

From your excellent "Gilded Opinion" link...

"... It would be a great mistake to suppose that the statesmen of France, or the French people, were ignorant of the dangers in issuing irredeemable paper money.

No matter how skillfully the bright side of such a currency was exhibited, all thoughtful men in France remembered its dark side.

They knew too well, from that ruinous experience, seventy years before, in John Law's time, the difficulties and dangers of a currency not well based and controlled.

They had then learned how easy it is to issue it; how difficult it is to check its overissue; how seductively it leads to the absorption of the means of the workingmen and men of small fortunes; how heavily it falls on all those living on fixed incomes, salaries or wages; how securely it creates on the ruins of the prosperity of all men of meagre means a class of debauched speculators, the most injurious class that a nation can harbor,--more injurious, indeed, than professional criminals whom the law recognizes and can throttle; how it stimulates overproduction at first and leaves every industry flaccid afterward; how it breaks down thrift and develops political and social immorality.

All this France had been thoroughly taught by experience.

Many then living had felt the result of such an experiment--the issues of paper money under John Law, a man who to this day is acknowledged one of the most ingenious financiers the world has ever known; and there were then sitting in the National Assembly of France many who owed the poverty of their families to those issues of paper.

Hardly a man in the country who had not heard those who issued it cursed as the authors of the most frightful catastrophe France had then experienced.[6]..."

Pity that Zimbabwe Ben is merely a student of the Great Depression... rather than a student of the French Revolution...

Anonymous said...

More from Gilded Opinion...

"...The first result of this issue was apparently all that the most sanguine could desire: the treasury was at once greatly relieved; a portion of the public debt was paid; creditors were encouraged; credit revived; ordinary expenses were met, and, a considerable part of this paper money having thus been passed from the government into the hands of the people, trade increased and all difficulties seemed to vanish.

The anxieties of Necker, the prophecies of Maury and Cazal├Ęs seemed proven utterly futile.

And, indeed, it is quite possible that, if the national authorities had stopped with this issue, few of the financial evils which afterwards arose would have been severely felt; the four hundred millions of paper money then issued would have simply discharged the function of a similar amount of specie.

But soon there came another result: times grew less easy; by the end of September, within five months after the issue of the four hundred millions in assignats, the government had spent them and was again in distress.[12]

The old remedy immediately and naturally recurred to the minds of men.

Throughout the country began a cry for another issue of paper; thoughtful men then began to recall what their fathers had told them about the seductive path of paper-money issues in John Law's time, and to remember the prophecies that they themselves had heard in the debate on the first issue of assignats less than six months before.

At that time the opponents of paper had prophesied that, once on the downward path of inflation, the nation could not be restrained and that more issues would follow.

The supporters of the first issue had asserted that this was a calumny; that the people were now in control and that they could and would check these issues whenever they desired.

The condition of opinion in the Assembly was, therefore, chaotic: a few schemers and dreamers were loud and outspoken for paper money; many of the more shallow and easy-going were inclined to yield; the more thoughtful endeavored to breast the current..."

Independent Accountant said...

Giving ZB every benefit of the doubt, he is naive. See my 17 December 2008 post: I have long believed the US is in a pre-revolutionary state like 1780s France.