Saturday, May 26, 2012

The Trill of it all

Finance and the Good Society author, Robert Shiller (click on the 'Watch this Program' icon at the right) has an idea whose time may have already come.  A new security tied to the growth of nominal gross domestic product (NGDP), called The Trill (for a trillionth of NGDP).

Essentially an equity in NGDP, it allows investors to share not only in corporate profits, but non-corporate business and labor productivity too;
Standard financial analysis suggests that Trills would provide the issuer, the U.S. government , with a budget-stabilizing, moderate cost debt instrument, and  investors with an asset that cannot be replicated with existing assets, allowing investors new portfolio diversification strategies that preserve high returns and lower volatility. Indeed the current financial crisis can be, at least in part, tied back to a shortage of counterparty-risk-free assets and fund manager’s thirst for high yield investments. The existence of a large float of Trills issued by the U.S. government could help ensure that this coincidence of factors is unlikely to ever appear again. The issuer and the investors in Trills would both stand to gain from Trills, another case of win-win through financial innovation and diversification. 
It would also be an answer to the unfunded liabilities of Social Security along the lines of a suggestion the late Milton Friedman made for replacing that program with government bonds given to current participants for their past Social Security taxes paid in.

Better still, it's practically a done deal;
There is a possibility that trills could be privately issued. Index-linked bonds, called MacroShares, have been issued under the auspices of the US company MacroMarkets LLC that could be a model for the private issuance of GDP-linked securities. The securities, whose structure is patented in the United States, are issued by a special entity whose charter dictates that it does nothing else, and invests their underlying assets according to specific rules. The rules state that shares are automatically issued and redeemed upon public demand in creation units only in pairs, one long the index, the other short the index, and the assets underlying the shares are invested in U.S. Treasury bills, so that the issuer cannot fail to index effectively. The long and short securities, when issued, trade separately on a stock exchange. MacroShares indexed to the S&P/Case-Shiller 10-City Home Price Index, with the ticker symbols UMM and DMM, are now traded on the New York Stock Exchange Arca. Such a structure could be applied to the issuance of trills in the United States, by substituting U.S. GDP for real estate price in the structure

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