Referring to my post on drought insurance and the coming new financial order, Daniel Strauss Vasques alerts me to the fact that Argentina has recently issued some GDP-linked securities.
The payout to the Argentinian securities is complex it occurs only if Actual GDP exceeds "Base-Case GDP" and the growth rate of Actual GDP exceeds the growth rate of Base Case GDP. Base-Case GDP is just a particular projection of GDP which is fixed in advance. If these conditions are met then 5% of the difference between Actual and Base-Case GDP, called Excess GDP, is paid to the security holders in proportion to their holdings. Total payments are also subject to a cap. (Here is a very long PDF prospectus if you want further information).
The Argentinian securities are a good beginning but they are unnecessarily complex. It would be much better to establish a market in which anyone could buy or sell a simple security based on GDP, e.g. every unit of a US GDP Share would pay out 1 trillionth of US GDP.
Aside from allowing greater national and international risk-bearing, GDP Shares defined in this simple way would be very useful for decision markets. If GDP Shares started to decline as the prospects for a Democrat/Republican victory increased, for example, we would have ample grounds for rethinking our decision. Ultimately, we might use these markets to replace politics.
Comments are open.
One of the more bizarre programs in a long time. Would these not be
hostage to the decidedly non-GAAP standards of GDP accounting as well as to
the whims of economists and bureaucrats in making new definitions
of accounting categories?
Alex,
I realize I suggested only yesterday that these would be a good way to replace Congressional compensation. I think it would. However, I think we’re still a long way from convincing a large percentage of the population that (1) financial incentives work & are a good thing, and (2) GDP growth is an inherant good.
Not exactly a new idea:
“The Bank of San Giorgio issued, on behalf of the Republic of Genoa, placements of perpetual bonds, called luoghi, at a nominal value of 100 lira each. Their income was secured by specific taxes farmed out to the bank. The luoghi did not pay a fixed rate of interest [...] but paid dividends which depended on the amount of taxes collected after payment of the expenses of the bank,” write Sidney Homer and Richard Sylla in their book, A History of Interest Rates.
http://www.tcsdaily.com/article.aspx?id=072005A
This contract and prospectus has a terrible design. Additionally, the idea of GDP shares is useless too
how do you get access to an underlying for hedging purposes? Unless they are issued by a government,
they aren’t all that great. And there are serious issues of providing equity in the capital structure
of a country.
The best way to do this is to have an exchange for GDP futures much like interest rate futures and swaps
and then be able to build up a swap curve. Then you can issue structured notes or products that can be
bought by people with a view, or used as a macro hedge for various businesses much like commodity markets.
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