The Trill Is Gone

Professor Robert Shiller floats the idea of national governments using equity financing. The idea would be to issue equity shares called trills, a one-trillionth equity stake in a national economy, that pay quarterly dividends that are tied to the gross national product.
Equity, however, is quite different from debt in that equity represents a legal claim on real assets. Debt is simply renting capital. When the renting is done, so is the cash flow. But equity is forever and with it comes a having a say in how the enterprise is run. So would trill holders get to vote in how the country is run?
I’m not so sure if that’s constitutional (but I could be persuaded that we need a new electorate). Or possibly these would represent a form of non-voting shares. Could the Iranians buy them on the open market? Shiller doesn’t say. Bear in mind that we would never let China buy, say, one of our major aerospace companies.
Shiller thinks that one trill could go for around $1,400 which would represent a yield of 1% based on its $14 dividend. This is, of course, completely insane. It would value the entire United States at $1.4 quadrillion. That comes to about $4.7 million for every person in the United States, including children.
How does that stack up against other studies? In the book, From Poverty to Prosperity, authors Arnold Kling and Nick Schultz include a chart on page 38 which lists per-capita wealth of different countries. For 2006, the U.S. is listed at $512,612 (the data is from the World Bank).
Shiller writes:

The Standard & Poor’s 500-stock index now has a dividend yield of 2.3 percent. The dividend yield on trills might be much lower, reflecting the substantially higher long-term growth rate of G.D.P. relative to S.& P. dividends — in real terms, 3.1 percent versus 1.1 percent a year, respectively, since 1957.

Shiller makes a few mistakes here. First, dividends are paid out of earnings. They’re not the whole thing. GDP is basically equivalent to national earnings. In other words, he’s saying that America’s P/E ratio could be around 100.
Secondly, there’s no economic reason why dividends need to continue to grow slower than GDP. That’s simply a preference of corporation’s payout ratio, which is often tied to tax policy. It all comes out of the same source. Corporate profits usually make about 10% of GDP. It fluctuates +/-2% or so but 10% seems to be the mean.
Plus, Shiller’s numbers are misleading. Dividends are unusually low right now thanks to the TARP restrictions and the recession. Looking at Shiller’s website we can see that real dividends grew by 2.23% annualized from 1945 to 2007 which encompasses a drop in payout ratios from about 80% to 40%.
The trill idea is basically to have a payout ratio of 100%, but simply calling this a dividend doesn’t mean it will be valued like a dividend. If the cash flow necessary for dividends grew by just 1.1%, then the dividend yield would be much higher than the S&P 500 not lower. Shiller gets it backward.
Finally, even if these trills were possible, they’re a terribly idea. The struggle in corporate financing is between equity and debt. The game isn’t hard to understand. You issue debt when yields are low and you sell stock when shares prices are high. It’s that simple. The U.S. benefits enormously by being the reserve currency of the world. Short-term yields are microscopic.
Put it this way: If you lend Uncle Sam $100 right now, at the current rates, you’ll make a profit of one penny in three months’ time. That’s a great deal for us. Once people stop lending us money, then we can sell off the Liberty Bell. Until then, we have no use for trills.
David Merkel and Robert Wenzel have more.

Posted by on December 26th, 2009 at 11:40 pm


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