Saturday, December 26, 2009

A Way to Share in a Nation’s Growth

A Way to Share in a Nation’s Growth, by Robert J. Shiller, Commentary, NY Times:

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. ... Such securities might help assuage doubts that governments can sustain the deficit spending required to keep sagging economies stimulated... In a recent pair of papers, my Canadian colleague Mark Kamstra ... and I have proposed a solution. We’d like our countries to issue securities that we call “trills,” short for trillionths. ...

Each trill would ... pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation’s quarterly nominal G.D.P. If substantial markets could be established..., trills would be a major new source of government funding. Trills would be issued with the full faith and credit of the respective governments. ... The market price of trills would fluctuate, reflecting the changing prospects for future G.D.P. growth, just as the market price of stocks reflects the changing prospects for future earnings growth. There is no complexity here. It is all plain-vanilla financing, though unconventional by today’s standards.

There are indications that officials in China are starting to worry about threats to their huge investment in United States debt from a possible outbreak of high inflation. The trills, tied to nominal G.D.P., would protect them. Right now TIPS, or Treasury Inflation-Protected Securities, are offering disappointingly low yields... 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.
The United States government is highly unlikely to default on its debt, but even this remote possibility would be virtually eliminated by trills, because the government’s dividend burden would automatically decline in tough times, when G.D.P. declined. ...

In fact, issuing shares in G.D.P. might even be viewed as a policy that systematically rectifies a wide array of imbalances in capital flows. People who expect strong economic growth in a country would bid up the price of a claim on its G.D.P., 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. ...

Someday, China might issue shares in its G.D.P..., and international investors who would love to participate in its economic miracle might put a very high price on them. That could help secure international financing of future growth without relying on the enormous government and enterprise saving that is now suppressing China’s standard of living.

Proposals for securities like trills have been aired many times over the years. ... So far, these proposals have gone unheeded. But the current environment may be more suitable for them.

Continue Reading