Robert Shiller Has 1/1,000,000,000,000th Of Greece He'd Like To Sell You

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Here's a delightful idea that is also a nice piece of synergy. Apparently Yale economist and half-a-housing-index Robert Shiller has been floating this idea since 2009 but I just saw it today in a new Harvard Business Review piece (via Counterparties):

Corporations use a combination of debt and equity to finance their investments and operations. Nations, in contrast, rely exclusively on debt. When a nation’s economy stalls and its debt continues to grow—you may have noticed this happening a lot recently—disaster looms for the country’s taxpayers. This is why Europe is in turmoil right now. But things don’t have to work this way.

Here’s an audacious alternative: Countries should replace much of their existing national debt with shares of the “earnings” of their economies. This would allow them to better manage their financial obligations and could help prevent future financial crises. It might even lower countries’ borrowing costs in the long run.

The proposal is for something he calls "trills," which pay a dividend equal to one trillionth of GDP:

A Trill issued by the U.S. government, for instance, would have paid $13.22 in 2010, in four quarterly installments. The payoff in future years would vary, of course. If the economy surprised us on the upside, dividends would go up; if it slumped, dividends would fall. The market would determine the price of a Trill, which would be volatile. It would depend not only on the most recent dividend but also on investors’ expectations for the future, which can change minute to minute.

He thinks a U.S. trill would trade inside a 2% dividend yield, which strikes me as plausible.

There are two broad categories of things to think about this, and as it happened I was thinking about both of them yesterday.

1. Greece! This is why Shiller's back in the news with this idea and it makes sense ex ante - like he says, having your debt-service burden automatically go down, rather than up, when your economy tanks is a good thing, as I guess Paul Krugman will tell you.

Even ex post, though, it makes sense. We talked yesterday about misaligned incentives in the Greek situation: the official sector that is now calling the shots has a significant interest in the new Greek debt being repaid (both as the biggest creditor and as the overseer of the European banks that are also large and fragile creditors), but less of an incentive to push for a strong recovery if that delays debt payments. Those European banks - but not the official sector - will have ill-defined transferable GDP warrants representing what has to be a pretty small part of the expected value of their new, fixed-income bonds. Giving those banks, and hey maybe official sector too, a roughly equivalent expected value of Greek trills would create very different incentives. Shiller is probably right that trills are, at the margin, a good way to avert the likelihood of default - but they're probably a good way to clean up after default too.

2. Yesterday I described my investing strategy as "just fling your money at a pile of things that approximates the breakdown of world GDP and hope for the best." Robert Shiller has got my back:

The advantage of keeping shares equal to a perfect trillionth of the economy is that people will know exactly what they are getting: One-trillionth of a country is real and easy to understand. That kind of clarity encourages trust that governmental shenanigans will not compromise the obligation. An investor who bought one Trill from each country would have effectively invested in the entire world for a perfectly diversified portfolio.

Yeah! The longer 2009 paper is good reading but doesn't address what I think of when I read that which is: should we be at all worried about trills crowding out other investments*? People in the US who want to avoid credit risk buy Treasuries; people who want to participate in GDP growth are stuck taking on the risk of the enterprises that sort of stochastically create that GDP growth. Give them the counterparty quality of Treasuries and the upside of GDP growth and what's the point of, I don't know, lending to or investing in risky productive enterprises?

Give People Shares of GDP [HBR]
The Case for Trills: Giving the People and Their Pension Funds a Stake in the Wealth of the Nation [pdf]

* Instead, it addresses various other fun questions, including "what is the beta of a trill?" The answer is 0.25, and I feel like you could happily grow old thinking thoughts about that one little question and its answer.

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