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.
) 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
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
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
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
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.
A Cataclysm in Commercial Real Estate