Thursday, December 19, 2013

"Robert Shiller's Favorite Financial Innovation: An IPO For The USA"

Issuing shares in a country's GDP.
It must be something in the air, Alphaville's Izabella Kaminska has been using the idea of a county's money as a call on the nation's productive capacity as part of the intellectual framework for her series on money.
And just as equity is a corporation's longest dated paper-hopefully perpetual-money is longer dated than a country's debt offerings.

All of which leads me to: "What's the difference between a bond and a trader?"
A bond matures.

From Forbes:
In Forbes’ “Love Only One” feature, we ask the biggest luminaries in different fields for their top picks in everything from stocks to gadgets. Here, we ask Robert Shiller, the Yale economist whose latest book is Finance and the Good Society, to pick his favorite financial innovation. A shorter version of his pick ran in the July 16, 2012, issue of Forbes Magazine.
By Robert J. Shiller
The governments of the world should issue shares in their GDPs, securities that pay to investors as dividends a specified fraction of GDP, in perpetuity (or until the government buys them back on the open market). Governments need to end their historic reliance on debt financing: governments issuing shares in GDP is analogous to corporations issuing equity.

My Canadian colleague Mark Kamstra and I propose issuing trillionth shares in GDP, and so to call these “Trills.” Last year, a U.S. Trill would have paid $15.09 in dividends, a Canadian Trill C$1.72. The dividends will change every year as GDP is announced, and predicting these changes will certainly interest investors, just as in the stock market. Governments can auction off Trills when current government debt comes due and needs to be refinanced, as part of a debt reduction program.

Substituting Trills for conventional debt helps deleverage the government, something whose importance has become very clear with the debt crisis in Europe.  The payments required of the government by the Trills is connected to the country’s ability to pay, measured by their GDP. Investors would likely tolerate very low dividend-price ratios, in expectation of future growth of GDP, and so governments could probably refinance their debt at much better rates today....MORE
HT: Marginal Revolution 

We are fans of the Professor. His academic work is based on a deep understanding of markets,
As I've said:
We're kind of fond of old Doc Shiller.
In addition to publishing "Irrational Exuberance" in March, 2000 with the NASDAQ hitting its all time closing high of 5048 (subsequent low 1114, how's a 78% decline grab ya?) he is the keeper of the Cowles Commission records.* From one of our Forecasting Equity Returns posts:
A subject near and dear to my heart. I may be the only person I've ever met who read every page of "The Cowles Commission's Common Stock Indexes 1871-1937".
[you must be a blast at parties -ed]
Here's his Yale homepage.
And  Irrational Exuberance.
Here's Common Stock Indexes...
....My favorite tidbit is the listing, among the pre-1871 industrials, of New York Guano.
Some things never change.
Here’s Yale’s (and my) gift:
It links to a big ‘ol hog of a PDF.
Here's "New York Guano".

In addition to Shiller several other Cowles associates have won Nobel prizes for research done while at the Cowles Commission.

These include Tjalling Koopmans, Kenneth Arrow, Gerard Debreu, James Tobin, Franco Modigliani, Herbert Simon, Lawrence Klein, Trygve Haavelmo and Harry Markowitz". -Marginal Revolution

See also Professor Cowen's "What do I think of the Cowles Commission?".