Here’s An Investment That Perfectly Tracks The Economy
Bonds that guarantee a yield based on GDP growth are an experiment worth trying, says our columnist. Here’s An Investment That Perfectly Tracks The Economy
There are endless exotic financial products indexed to almost anything you can think of. While it is easy to bet on politics, earthquakes or the weather, it’s virtually impossible to invest in the most basic thing of all: the economy.
That is starting to change as troubled governments inch toward bonds linked to gross domestic product. This week, Italy became the first developed country to include a GDP link in bonds—sort of. Unfortunately, it is a niche offering sold only to private investors, and the GDP link is merely a final loyalty bonus designed to encourage patriotic buyers.
The real breakthrough would come with a mainstream bond issue where either payments or the final value are tied to GDP, the ubiquitous measure used to estimate total economic activity. The attraction for Wall Street is that all those expensive economists paid to predict the economy would finally have a tradable instrument to put their predictions to work. As this year has again made obvious, the stock market isn’t the economy.
More prosaically, pension funds and others whose future costs are tied to parts of the economy not captured by stocks and bonds, such as salaries, would be better able to link their investments to their liabilities.
Governments should like it, too. It would be easier to justify spending in a recession if the national debt had just dropped. Countries whose bonds are treated as a credit risk—including Italy and the rest of the European periphery, but mainly emerging markets—would benefit by having less pressure on their debt in a crisis. This would allow them to avoid the austerity often demanded by lenders.
Italy’s issue helps to raise the profile, as it is Europe’s biggest debtor. But its GDP link is really a marketing device with the slogan: “Because Italy grows with you.” The GDP-linked bonus is paid only to those who buy and hold to maturity in 10 years, and is limited to 1% to 3%, tied to the average growth of the economy over the decade. Popular savings certificates sold by Portugal have a stronger connection to GDP, but aren’t bonds.
True GDP bonds would be quite different. At the very highest level they would be a form of insurance for governments against a drop in tax receipts. The private-sector buyers act as the insurer. To work, the buyers as a group need to be stronger than the government, and need not to be the taxpayers of the government. Your own taxpayers can’t insure your tax receipts, so the small investors who have piled into Italy’s new bonds are exactly the wrong customers.
Emerging markets that borrow in foreign currencies, and weak eurozone countries that can’t be sure of central-bank support, might want to pay up for the insurance. Big foreign institutions should be happy to provide that insurance, for a price. And speculators would get a pure instrument to bet on economic growth.
Robert Shiller of Yale University, who highlighted the benefits of GDP-linked investments back in 1993, thinks the bonds make sense even for the U.S. to protect against disaster. “The coronavirus is a reminder that catastrophes happen,” he said. “This is a time to think through GDP-linked bonds again.”
The catastrophe in question would have to be truly awful, though. U.S. Treasurys, British gilts and German bunds are typically more in demand in a recession, and the countries have, so far, been able to raise their debt levels without scaring investors.
A frequently raised obstacle to economy-linked bonds is that the GDP number itself is so uncertain. As Stephen Cecchetti of Brandeis University points out, GDP revisions can be big, and tend to be particularly big in crises—exactly when the bonds should be working their best.
In the final quarter of 2008, for example, the first estimate of 2008 fourth-quarter real GDP was a fall of 3.8% thanks to the Lehman crisis, revised to a drop of 6.3% by the “final” estimate in March 2009. Later revisions have concluded that in fact the fall was even bigger, at 8.4%.
“You want to know the truth, not some extremely noisy statistic that’s going to be revised,” said Prof. Cecchetti.
The compromise suggested in a book edited by Prof. Shiller and economists from the Bank of England and International Monetary Fund is to use the estimate for the change in GDP after six months and ignore subsequent revisions.
The danger is that it might turn out that the government has paid out far too much on the bonds if GDP is later revised down, or bondholders might feel conned if GDP is later revised up. Inflation-linked bonds solve this problem by the expedient of not revising headline inflation figures—and I suspect bondholders could get used to the idea of ignoring GDP revisions after the cutoff date, as long as they believed the statisticians weren’t biased.
Creating any new bond involves problems of liquidity, matching demand and the inherently conservative nature of finance ministries. But many have done it for green bonds, linked to environmental objectives, which have even bigger measurement and trust issues.
It’s time to experiment with proper GDP-linked bonds both to reduce government default risk and to create a market in the most obvious thing of all to invest in: economic growth.
Here’s An Investment That,Here’s An Investment That,Here’s An Investment That,Here’s An Investment That,Here’s An Investment That,Here’s An Investment That,Here’s An Investment That,Here’s An Investment That,Here’s An Investment That,Here’s An Investment That,Here’s An Investment That,Here’s An Investment That,
Fed, Treasury Disagreements Slowed Start of Main Street Lending Program
When A Texas Oil Boom Goes Busts
Trump Takes Cognitive Test And Can Identify A Rhino vs A Camel
Don’t Know How Much Stimulus Is Needed? Put It On Autopilot, Some Say
Colorado Police Chief Fires Three Officers Over Reenacted Chokehold Placed On Elijah Mcclain
Republicans Give Trump Labor Day Deadline To Turn Things Around. After That, He’s On His Own
Chapter 11 Business Bankruptcies Rose 26% In First Half of 2020
Chaotic Trump Administration Plus Russian Bounty Intelligence Equals Loss Of American Lives
Supreme Court Orders Restructuring of Consumer-Finance Watchdog
Reddit, Acting Against Hate Speech, Bans ‘The_Donald’ Subreddit
Class Action Lawsuit Alleges Visa Subsidiary Violated Privacy And Data Protections Of Venmo, Stripe, Square’s Cash App, Robinhood & More
Private Equity’s Trillion-Dollar Piggy Bank Holds Little For Struggling Companies (#GotBitcoin?)
TikTok Teens Overload Trump’s Online Store With Orders Only To Abandon Shopping Cart
Bill Gates Says Trump’s Lack Of Leadership Is Making Pandemic Picture ‘More Bleak Than I Would Have Expected’
Fed Stress Test Finds U.S. Banks Not Healthy Enough To Withstand “Few Quarters” Economic Downturn
Elizabeth Warren Was Right About Whacky Stockmarket Fundamentals (#GotBitcoin?)
Two Of The Latest High-Profile Trump Resignations
US Banks Have Seen A Record $2 Trillion Surge Of Deposits Since The Coronavirus Crisis Began
Trump Gets KPOP’d And Tic Toc’d As Teens Mobilized To Derail Trump’s Tulsa Rally
The Dangerous Secrets Our Working-From-Home Photos Reveal
New Decentralized Cybersecurity Solution Enables Passwordless Logins (#GotBitcoin?)
CIA’s ‘Lax’ Security Led To Massive Theft of Hacking Tools, Internal Report Finds
Signal Is A Truly Private Chat App Ideal For Protestors (#GotBitcoin?)
Maintain Your Privacy And Security During A Protest (#GotBitcoin?)
Borrower, Beware: Credit-Card Fraud Attempts Rise During The Coronavirus Crisis
Senate Vote Allows FBI Access To Your Browsing History Without A Warrant And What You Can Do About It
Report Says Chinese And Iranian Hackers Seek To Steal Coronavirus Research
28,000 GoDaddy Hosting Accounts Compromised
Some States Dabble In Online Voting, Weighing Pandemic Against Cybersecurity Concerns
Antonopoulos: Chainalysis Is Helping World’s Worst Dictators & Regimes (#GotBitcoin?)
Survey Shows Many BTC Holders Use Hardware Wallet, Have Backup Keys (#GotBitcoin?)
Blockfolio Quietly Patches Years-Old Security Hole That Exposed Source Code (#GotBitcoin?)
Apple iPhone May Be Vulnerable To Email (Mail) Hack
Gates Foundation, WHO And Wuhan Institute of Virology All Hacked!
Google Hack Requires That You Updated Chrome Browser Now To Version: 81.0.4044.113
Privacy-Oriented Browsers Gain Traction (#GotBitcoin?)
Can Blockchain Technology Counter US Anti-Message Encryption Bill? (#GotBitcoin?)
Chinese Military Turns To U.S. University To Conduct Covert Research
CIA Has Had Keys To Global Communication Encryption Since WWII
Hostile Spies Target U.S. With Cyber, Encryption, Big Data, Report Finds
Hackers Stole And Encrypted Data of 5 U.S. Law Firms, Demand 2 Crypto Ransoms
Ex-CIA Engineer Goes On Trial For Massive Leak
Multi One Password (Portable App)
After He Fell For A $40K Phone Scam, His Bank Offered To Help—If He Stayed Quiet (#GotBitcoin?)
Your PGP Key? Make Sure It’s Up To Date
Bezos’ Phone Allegedly Hacked By Account Associated With Crown Prince
Major Companies Shared Vulnerability Used In Travelex Cyberattack (#GotBitcoin?)
Microsoft Releases Patch To Patch Windows Flaw Detected By NSA
VPN Tier List 2020 (Comparison Table)
SEC Market-Surveillance Project Hits Snag Over Hacker Fears
Inside China’s Major US Corporate Hack
Twitter Bug Exposed Millions of User Phone Numbers
U.S. Cyber Officials Give Holiday Shopping Advice For Consumers
Is Cayla The Toy Doll A Domestic Spy?
Google’s “Project Nightingale” Faces Government Inquiry Over Patient Privacy.
Which Password Managers Have Been Hacked?
DNS Over HTTPS Increases User Privacy And Security By Preventing Eavesdropping And Manipulation
Russia Steps Up Efforts To Shield Its Hackers From Extradition To U.S.
Barr Revives Debate Over ‘Warrant-Proof’ Encryption (#GotBitcoin?)
Should Consumers Be Able To Sell Their Own Personal Data?
Doordash Says Security Breach Affected Millions Of People (#GotBitcoin?)
Fraudsters Used AI To Mimic CEO’s Voice In Unusual Cybercrime Case (#GotBitcoin?)
Pearson Hack Exposed Details on Thousands of U.S. Students (#GotBitcoin?)
Cyber Hack Got Access To Over 700,000 IRS Accounts (#GotBitcoin?)
Take A Road Trip With Hotel Hackers (#GotBitcoin?)
Hackers Prove The Insecurity Of Trump’s Border Security By Stealing Photos Of Travelers’ Faces (#GotBitcoin?)
Hackers Target Loyalty Rewards Programs (#GotBitcoin?)
Taxpayer Money Finances IRS “Star Trek” Parody (#GotBitcoin?)
IRS Fails To Prevent $1.6 Billion In Tax Identity Theft (#GotBitcoin?)
IRS Workers Who Failed To Pay Taxes Got Bonuses (#GotBitcoin?)
Trump DOJ Declines To Charge Lois Lerner In IRS Scandal (#GotBitcoin?)
DMV Hacked! Your Personal Records Are Now Being Transmitted To Croatia (#GotBitcoin?)
Poor Cyber Practices Plague The Pentagon (#GotBitcoin?)
Tensions Flare As Hackers Root Out Flaws In Voting Machines (#GotBitcoin?)
3-29-2019 FBI Retools To Counter Cyber Threats, 4-12-2019 Thousands Of FBI Personal Data Is Stolen (#GotBitcoin?)
Overseas Traders Face Charges For Hacking SEC’s Public Filings Site (#GotBitcoin?)
Group Hacks FBI Websites, Posts Personal Info On Agents. Trump Can’t Protect You! (#GotBitcoin?)
SEC Hack Proves Bitcoin Has Better Data Security (#GotBitcoin?)
Hackers Prove The Insecurity Of Trump’s Border Security By Stealing Photos Of Travelers’ Faces (#GotBitcoin?)
Our Facebook Page
Your Questions And Comments Are Greatly Appreciated.
Monty H. & Carolyn A.