GDP-Linked Securities

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.

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