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: http://www.usagold.com/gildedopinion/assignats.html.