Can countries issue equity? Greece is making a stab at it, giving its bondholders GDP warrants which start paying out "in the event the Republic's nominal GDP exceeds a defined threshold". Chances are, the market won't give the warrants much value; they're more symbolic, really, of Greece's good faith...
This was a bad idea when Jonathan Ford proposed it in August 2009, it was a bad idea when Shiller wrote about it in December of that year, and it's an even worse idea now, because Shiller's decided to kick it up another five notches or so: "Greece's real GDP fell 7.4% in 2010. If its Trills were leveraged substantially—say, five to one—then the dividend paid on them would have fallen by about 40%. This would have done much to mitigate the crisis, making it easier for Greek taxpayers to bear."
This is almost literally incomprehensible. I spent a long time on the phone today with Shiller's co-author Mark Kamstra, and even he had no real idea what Shiller was talking about here... while Trills are designed to respond to news about the economy, in fact they would be an incredibly noisy and volatile instrument reacting mainly to changes in long-term interest rates... But what if I'm wrong and Kamstra's right, and economic news is more important than discount rates? At that point, measuring GDP accurately becomes extremely important... Except, you really can't measure GDP to within that degree of accuracy...
The only people welcoming GDP bonds with open arms would be in futures markets, where traders love volatility and try to make lots of money off it. Which, of course, is the whole reason that Shiller is pushing this idea so aggressively. Shiller is a principal in a company called MacroMarkets, which exists to create "innovative financial instruments to facilitate investment and risk management" — a/k/a volatile new derivatives.
Felix – you misrepresent me, and I am disappointed. I did not speak of Bob’s experience with macro markets, I did not speak definitely on some of Bob’s ideas because I do not speak for him, not because I have “no real idea what Shiller was talking about here” and your implication that Bob’s monetary interests drive him only reveal a cynic’s perception of the world, and is no substitute for actual understanding of this effort.
Posted by MarkKamstra
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