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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.


Greece Doesn't Need You!

Greece doesn't need any of you! Greece's finance minister on Thursday denied a report citing the country's representative to the IMF as saying Athens would need a third bailout package. The euro weakened against the dollar on the report, which was later also denied by the official quoted in the article and came as international inspectors are mulling handing over the next tranche of Greece's second aid package. "The country's positions are formulated by the Prime Minister and the Finance Minister," Greek Finance Minister Yannis Stournaras told Reuters in response to the Dow Jones/Wall Street Journal report. The article quoted Thanos Catsambas, Alternate Executive Director at the IMF Executive Board representing Greece, as saying the country would need a third bailout from European creditors. It also reported Greece could not bridge a funding gap and had met only 22 percent of targets for the second bailout...Catsambas issued a statement saying the article included "at least three important inaccuracies". [Reuters]

The Smart Indexes Are Even Worse Than The Dumb Ones*

You may have heard that the Dow hit 13,000 today before subsiding to a shameful 12,965.69. You may not have heard this, or cared, because the Dow is for morons, being a price-weighted index of thirty semi-random companies that, gah, aren't even "industrial" any more.** There are alternative theories but those theories are wrong: Joe Weisenthal in defense of the Dow has been noting its very high correlation with other, broader, more sensible indexes. I see this as further undermining the Dow's legitimacy. If it's very different methodology were leading to some kind of meaningfully different result, then we could perhaps argue that it's adding value in some kind of way. But instead what's going on is that the Dow's creators are hand-picking which stocks to include in the index specifically with an eye toward constructing an index that mirrors the other, better indexes out there. Apple and Google, for example, aren't in the Dow and aren't doing to get in any time soon because their very high share prices would skew the index in weird ways. This just goes to show that the Dow's creators already "know" the right answer (from looking at the S&P 500 and the Wilshire 5000) and then are trying to assemble an index to create the predetermined result. Maybe! An alternative theory is maybe suggested by [Occam's razor and] this piece from the Journal this weekend about index funds that I just loved and so am now going to inflict on you at unnecessary length:


Greece Not Done Trying To Passive-Aggressively Blow Up Europe

Don't look now but Greece is still fiscally f@cked.