This should be my last post on Trills.? Let me begin it by suggesting that we sell all of our national parks (and other land owned by the US Government) to the Saudis in exchange for forgiveness of our debts.? Wait, we could do better.? Disney could create theme parks, even on the national mall, making being American far more fun than the stuffy Smithsonian.
What’s that you say?? We are selling our patrimony?? How dare we sell our precious resources to exploiters/foreigners?? Uh, times are tough, and much as we make paper promises, eventually something hard and enduring has to back them up.
I feel the same way about Trills.? If the US Government ever were to sell trills, it would be the same as selling away a share in the take from the IRS in perpetuity.? Selling shares in the IRS, ridiculous, right?? Well, that is what a trill is — selling a share of the IRS.
Imagine that the US Government taxes at 20% of GDP, and then they sell Trills equal to 1% of GDP.? Initially, the US? Government would get a flood of cash, but would have given up 5% of their income stream.? If we had angels running our government, focusing on long-term projects, I would not object so much, but we spend in the present and neglect the future.
A government that issues Trills reduces its flexibility.? Initially not so, they get a lot of cash in, and don’t have to put a lot out.? The US government at present has explicitly issued debt with a market value around 75% of GDP.?? Implicitly, the funding shortfall when you add in the excess liabilities from the entitlements is 400% of GDP.
To keep things simple, let’s assume that the initial yield of Shiller’s trill is correct (1%), not only for small amounts of issuance, but large amounts.? That is probably a bad assumption in this case, after all, the proportion of Treasury issues out past 20 years is a small minority of Treasury issuance, and even with existing demand, the yield curve is quite steep.? Trills, being perpetual bonds with a growing coupon, are longer than any fixed income instrument that I have ever seen, so if they were issued in large amounts, who knows what the initial yields would be?
(Note to potential investors: if trills ever see the light of day, they could be an interesting buy, but I would let the first few auctions pass until the curve gets satiated and the initial coupon rises to a higher level, i.e., the price falls for all trills. You might even wait for the government to announce the last trills auction to buy.? One thing about trills — every issuance will raise additional doubts about ever being paid back.? They would be more valuable when the government says it won’t create any more of them.)
So, back to the application, imagine the US government auctioning off $11 Trillion (yes, with a “Tr”, not a “B”) of trills to retire the explicit debt.? Assume that the 1% initial coupon holds — we have now walled off 0.75% of GDP as a permanent expense in the Federal budget — keeping the numbers simple, that would be 3.75% of all Federal revenues in perpetuity.? Doesn’t sound like much, but we replace the existing debt with a exponentially growing stream where debt service is initially $110 billion.? That could help balance the budget at present, but at a cost to all future generations, until the US shall be no more.
Now, the 1% initial coupon would not hold for such large issuance.? Say the coupon ends up being 2%.? Now 7.5% of Federal revenues are dedicated to debt service in perpetuity, and 1.5% of GDP.
This would become addictive to the US Government — trills raise a lot of money relative to their initial cashflows, and they have no rollover risk.? Now imagine the US issuing a present value of $70 Trillion in trills (5x current GDP) over the next 30 years to roll over existing debt, take care of all the unfunded liabilities, and cover all of the structural deficit for the next 10 years.? At my assumed coupon of 2%, that would wall off 10% of GDP in perpetuity, or half of Federal revenues to pay for the sins of the past.? The bad human proverb recorded in the Bible might return to common parlance, “The fathers have eaten sour grapes, and the children’s teeth are set on edge.”? (Note: at/near the exile of Judah, some complained they were being punished for the sins their forbears committed, and not their own sins.? God corrects the proverb, saying that people are punished for their own sins.)
Potentially, trills are a heavy burden to place on all future generations for the fiscal profligacy of the last 80 years.? I would rather not see trills see the light of day as a result.? It would postpone the eventual day of reckoning where the US Government would have to slim down dramatically, and live within its budget.? Trills would make the US government more reckless, not more cost conscious.
But, if trills are to be issued, let some more desperate entity issue them first, like Greece or California, and then let the rest of us watch the consequences.? They would provide help in the short run, at a likely cost of a bigger failure later, with more damage to creditors, and the general economy.
This should be my last piece on this, though one final thought tugs at me — the derivatives market that would grow up around trills would be a hoot.? GDP futures and options, stripping coupons to create discount trills and income trusts.? The investment bankers would have a field day, with the cheap cost of burdening all future generations, who I am sure will remember Dr. Shiller warmly.
As I posted here, trills sound like an echo to an era seen at the dusk of the Ottoman Empire:
The crisis had two distinct financial consequences: the sale of the khedive’s shares in the Suez canal to the British government (for ?4m, famously ad?vanced to Disraeli by the Rothschilds) and the hypothecation of certain Ottoman tax revenues for debt service under the auspices of an international Administration of the Ottoman Public Debt, on which European bondholders were represented. The critical point is that the debt crisis necessitated the sale or transfer of Middle Eastern revenue streams to Eur?opeans.
[..]
In Disraeli’s day, the debt crisis turned out to have political as well as financial implications, presaging a reduction not just in income but also in sovereignty.
In the case of Egypt, what began with asset sales continued with the creation of a foreign commission to manage the public debt, the installation of an “international” government and finally, in 1882, to British military intervention and the country’s transformation into a de facto colony. In the case of Turkey, the debt crisis was followed by the sultan’s abdication and Russian military intervention, which dealt a lethal blow to the Ottoman position in the Balkans.
Sorry – too many pastes in my last comment. Please edit as you see fit.
ok, so make them callable at 110% of par after 10 years.
Cam — I hope my edit is to your liking.
q — I like it.
I think trills make a heck of a lot of sense if the government plans to default. 🙂
A few quick points.
There’s no way to pay off a trill except by running a budget surplus or by issuing conventional debt, thus negating the need for trills.
There might also be a slight risk premium due to the uncertainty of each coupon payment. It might be small but even a small amount comes of out taxpayers’ wallets.
The Q3 GDP for 1983 has been revised 10 times since it first came out. The last time was in 2009. Imagine the headache for trills.
I keep coming back to your point that trills would be worth an infinite amount. I think that’s exactly right. For the borrower, trills are irrational. The US Treasury can get the exact same thing for less.
Eddy Elfenbein says “I keep coming back to your point that trills would be worth an infinite amount. I think that?s exactly right.”
If trills are unbounded in value then why wouldn’t stocks also be unbounded in value? If you are coming up with an infinite value it’s because you are using the wrong discount rate.
David Merkel says “A government that issues Trills reduces its flexibility.”
But it’s flexibility that comes at a cost. Part of the reason our politicians are so irresponsible is precisely because they can run seigniorage if they get in a bind. Perhaps a little issuance of trills would help enforce a little more budgetary discipline.
The commitment underlying issuance of Trills is very transparent. If the govt had outstandings of Trills with an annual commitment equal to 1% of NGDP, then we know that the government has to raise, every year, more than 1% of GDP from the populace to pay it down. If the govt currently had outstanding nominal bonds equal to 10% of NGDP, what share of future NGDP is needed to finance it? It depends…