GREEK WEALTH BONDS

GREEK UPDATE 19th July 2015

Well things have moved on and the IMF is not happy with the outcome re the amount of debt.

For my part, and I am not alone, I want to see an immediate end to austerity and the funds put aside used to that end.

They can be used to REDUCE VAT for one thing - on a temporary basis and see how that goes.

Collecting taxes that are due from people who find ways of avoiding taxes would help and would not slow the economy if as I suspect the avoiders are mostly wealthy people and who probably spend the money in other countries.

Reform of the pensions system was inevitable.

Other public hand-outs need to be curbed where they are excessive.

Once recovery begins the wealth bond idea can be introduced and excessive interest accumulated can be removed. See the earlier articles written below this one.

The invisible haircut will work and the repayment of what is left of 200% of GDP will likely melt to somewhere below 147% of GDP which the UK managed to repay after the war. It just took a few decades. As I said, suspend interest, keep the wealth. More wealth will not be repaid so don't waste time and confusion by adding interest payments to the Wealth Bonds. KISS - Keep It Simple Stupid!

The way froward there may also be helped by levying a small negative true rate of interest. That is what usually happens to big debts. It happens with fixed interest and inflation acting in partnership.

Feel free to pass these ideas to any key people in Europe.


Meantime go take a vacation in  Greece and get the rest of Europe to buy Greek exports and join you on their beaches. Their prices are low so that is a good way to get your tax money back - the money you lost lending to Greece via your government loans as a tax payer.

BREAKING NEWS - 9.44 a.m. CET 8.44 a.m. in London.
The deal is done but there are a lot of loose ends. What I am looking for is the fastest possible return to growth for Greece and the lowest possible drag on growth from debt servicing which is where the WEALTH BONDS may play a crucial role. See the essay below and the discussion at fin24. Link provided later.

The numbers involved in the Greek revenue and expenditure accounts are barely heard of - I have asked for them many times and got nothing. Therefore I am not able to go into any detail about how much needs to be done. 

KEY issues for me are:
Switching debt servicing costs to WEALTH BONDS so  that the money needed for servicing can be used to  revive  the Greek economy.
Immediate reform of the pensions system
NOT raising VAT
NOT capturing domestic Greek capital by privatization if that capital is then to exit GREECE. It is needed in Greece.
A serious effort should be made to import from Greece and to ensure that Greek incomes can begin to rise asap.

I will judge the outcome based upon these measures.

That said, Europe still has to address the cause of imbalances in European nations which are caused by having a single currency.
END BREAKING NEWS

A POSSIBLE WAY FORWARD FOR EUROPE
This is an edited version of a letter sent to a 'friend' in the ECB - The European Central Bank
It not only addresses the Greek situation. It addresses the world situation.

As seen by readers on www.fin24.com:on 12th July 2015
 

There is a lively debate on this essay if you want to read the comments coming in or to ask a question yourself. Go to this link at fin24 and scroll down to the comments.

Please note that I have been mulling over what might best help the Greek negotiations and this morning a difficulty that I was concerned about seems to have melted away. IT IS MORE THAN A BREAKTHROUGH for the ECB as I realised as I began to deal with the issues in detail..

BULL POINTS 
  • An invisible haircut, seen only by Greece.
  • A faster Greek recovery and ability to repay
  • An end to rescheduling and ever more bail out money
  • A revolution in Financial Stability building for the rest of the world
  • A huge boost to public confidence in world financial stability moving world economic recovery one step closer as they begin to understand how this works and start using the same concepts..
Worth thinking about.

AN INVISIBLE HAIRCUT MIGHT HELP
This is the outline. If you wish to help fine tune the wording, please ask and I will share the drafts.For now, this is it. NOTE for readers of this website my contact details are on the home page.

FLOATING RATE NOTES
Economists say that they prefer to call my Wealth Bonds Floating Rate Notes, FRNs.. Wealth Bonds would not be linked to LIBOR etc but to an index of National Average Earnings, NAE. The capital value would be linked to an index of NAE. The name Wealth Bonds has been adopted for political appeal and for public understanding. They preserve wealth - see the WEALTH BOND CONCEPT below.

EUROPEAN POLITICS
For Greek debt, so as to enable any visible haircut to be reduced, or eliminated, the interest rate coupon would be fixed at little or nothing. The idea is to preserve the current value of the debt, or in the event of a haircut, look at its starting value because the interest rate is currently very high. Take away all of the interest paid so far and maybe add back that part which preserves wealth. This will be politically OK.

The appeal of the bonds is that a case can be made that they will protect the value of the debt as seen by each lender (Germany, Italy etc and their citizens), because the index will be their own national index of NAE. So from their viewpoint the wealth lent will be preserved. Different lenders, Germany, France, etc will have different indices. This will be politically OK for each nation.

The appeal to the Greeks is that once their NAE begins to rise faster than those of the other nations, this will be a negative rate of interest - it will melt away some of the value of the debt. It is an invisible haircut, only visible to Greeks.

By making the interest coupon zero or nothing, the Greek recovery will  be accelerated. Indexation to NAE is automated re-scheduling - no more emergency re-scheduling meetings to bother European leaders.

A review of when the capital must start to be repaid will take place after a negotiated number of years and/or after a sufficient economic recovery has been made by Greece.

I suggest that the IMF index be made up of a mix of the indices adopted by the major European nations and the same for the ECB, and for private investors in Greek Bonds.

It would be helpful if Greeks stopped retiring in their 'adolescent' years and made a full contribution to Greece and of course if the Greek Government collected taxes. VAT is easy to  collect but will hit the poor whereas it is the wealthy that needs to pay. But those issues are beside the point of this memo.

THE WEALTH BOND CONCEPT - FOR END-USERS
Grandpa. 100 years ago Grandpa was wealthy and he set aside half a lifetime's earnings, around 20 NAE to be inherited by his grandchildren. Today those grandchildren stand to inherit only 1 NAE because Grandpa made the mistake of index-linking the debt to the wrong index. He chose the prices index, which rose an average of 3% p.a. less quickly than NAE.

THE GENERAL MARKET FOR WEALTH BONDS ISSUED BY ANYONE
  • Pension funds have to try to keep pace with NAE and annuities try to do do  the same. They cannot do this because there are no Floating Rate Notes linked to NAE.
  • Borrowers also have a problem because if their debt is in fixed interest and their incomes start to fall nationally, (including government borrowers), the debts get harder to repay. With wealth bonds everyone is in the same boat - borrowers and wealthy lenders. There should be no complaints except that new borrowing will cost a premium until NAE starts to rise again. Why? Because cash is better. It rises in value when NAE falls. A little inflation is better.
  • Wealth Bonds, (FRNs linked to NAE), can also be used to calibrate the level of risk in unit trusts and any other managed funds. The greater the content of Wealth Bonds in the fund the lower the investment risk. As people get older they have more savings and those savings need more protection. The market for wealth bonds is potentially huge.

CREATING FINANCIAL STABILITY
The wealth bond concept is another major reason to go this route. In a nutshell, central bankers are charged with finding a way to create financial stability - an elusive target which my research group has made great strides towards creating. Wealth Bonds are a key part of doing that. Not just for international lending but for all kinds of lending.

We have designed new contracts for housing using these bonds and new contracts for pensions and annuities. See other pages on this website. Governments borrowing in this way will kill most of the risk premium (if their ability to repay is safe,  and if not the risk premium gets reduced BY GUARANTEEING THE WEALTH ON THE PART THAT THEY ARE ABLE TO REPAY).. The key to reducing the risk premium has two parts:

#1 Making the repayments affordable
#2 Protecting the wealth that has been lent.

The risk to wealth is the key part of the risk premium when selling fixed interest bonds. It can be as low as 2% or as high as you like.

FINANCIAL STABILITY ISSUES
The market for wealth bonds is immature - actually it does not exist but it can be created if it is allowed to exist. Most contracts with citizen-end-users are written in money terms and they repay money capital and interest. However, if you replace these contracts to protect wealth and to make dividends (interest) and annuity payments rise in line with NAE at the domestic rate of NAE, everyone will live together in harmony in one united nation.. No one will be cheated by inflation. Nominal interest rates can be volatile or rising, but neither lenders nor borrowers will need to worry. Repayments of wealth will continue on schedule at an affordable rate. The market for wealth bonds is potentially huge. 

IT PROTECTS HOME BUYERS AND COMMERCIAL BORROWERS from devastating cash flow problems. The appeal is that they are called Wealth Bonds. The boost to confidence as interest rates and / or inflation rates rise will be highly significant. It is the way to go. It can eliminate a host of worries as QE ends and interest rates rise.

ILLUSTRATION
Do you need illustrations? What kind of illustrations?

One of our team is ex CEO of a financial conglomerate. He knows how important these ideas are and has said so for years. He knows the customer - the end user very well. He understands financial stability. That is why he is a member of our team..

Kind Regards,


Edward


UPDATE AND FURTHER NEW IDEAS
This is taken from what Edward just posted in the Rethinking Economic Discussion Group at LinkedIn today 15th July 2014. Discussion name:

Which nations are at risk?

EUROPE, CHINA, USA, for starters.

The journey to financial stability needs to beginin

The link given to this discussion for reading was http://macro-economic-design.blogspot.com/p/please-note-that-i-have-been-mulling_11.html page
 which is this page on this website. Click it and you will arive back right here!
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HERE ARE THE COMMENTS
  • My actuary friend wrote to me this comment:

    Nice read, its a good prescription ... and favoured by the fundamentals ... if the policymakers need a clear road map on implementation then you can play a big role.
    4 days ago
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  • Another asked me what if the Greek index of NAE falls instead of rising - at least at first?

    A good question. It needs an answer.

    First option - give Greece a hand and stop that from happening.
    Second option - Greek exit and devaluation. Devalue the debt by the same percentage amount. Make that the first but visible haircut. From there it will be easier to import lots from Greece.
    4 days ago
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  • Third option - let it go. Wait. Greek NAE will rise very fast when they get everything organised. Meantime ask for no repayments and no interest. The Greek currency will recover.
    4 days ago
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  • Edward, I wish ECB will take into consideration your suggestions. Wealth Bonds would be a useful tool provided that a solution to an economic problem is wanted which I tend to believe that is not true anymore.
    3 days ago

  • Sophia, thanks.

    I added some words to the last part of the article. These bonds could ease the way forward for the central banks of the advanced nations as they try to up interest rates. See The home page on that.

    Re your point it may be worth visiting the comments section ofhttp://www.fin24.com/Economy/For-Europe-a-possible-way-forward-20150711
    2 days ago
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  • Edward Ingram
    I have been updating my scripts for Greece and Europe. The essay published here:

    brought a few questions needing clarification. They have been given. I was going to write more content for readers but my computers are giving too much trouble right now.

    Please watch that space and the LATEST UPDATES page.

    To my mind the deal done is just a bat passing in the night. It is not going to work. But with a few new offers to restructure the deal it can be possible to produce reforms not just for the Greek financial framework but for that of Europe and other nations.

    If my computer allows I will try to give an outline in the next comment.
    1 hour ago
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  • Edward Ingram
    Yes reforms are essential to balance the budget and top of the list must be the government hand-outs in pensions and maybe other things which I do not know about because my work is a blueprint for any nation and not a study on Greece.

    BUt raising VAT is the fasted way to put a country into recession. THAT is not an acceptable way to go. Is it true that Greece collects less than 5% taxes due compared with 98% for the UK - by order of magnitude? The wealthy must have lots to pay multiplied by decades...and they are as much responsible as anyone else for the current situation. But that is not what I am offering as new concepts. They are not new concepts. and by the way, the government must have been complicit. Maybe they are the government, including those elected and those at the top of the wealth league but not elected.
    1 hour ago
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  • Edward Ingram
    Yes reforms are essential to balance the budget and top of the list must be the government hand-outs in pensions and maybe other things which I do not know about because my work is a blueprint for the financial framework needed for any nation and not a study on Greece.

    But raising VAT is the fasted way to put a country into recession. THAT is not an acceptable way to go.

    Is it true that Greece collects less than 5% taxes due compared with 98% for the UK - by order of magnitude? The wealthy must have lots to pay multiplied by decades...and they are as much responsible as anyone else for the current situation. But that is not what I am offering as new concepts. They are not new concepts. and by the way, the government must have been complicit. Maybe they are the government, including those elected and those at the top of the wealth league but not elected.

    I come in when the budget is set on course to balance. That is when we can do something useful. But we can also help it to get there by taking out stupid things that are done world-wide and are imposed on Greece.
    1 hour ago
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  • Edward Ingram
    First what is special about Wealth Bonds?

    The normal way of writing debt contracts is to specify that all of the interest must be paid. Interest has two roles - first to preserve the value of the debt. That can be rolled up. That done, the lenders are protected. If the lenders want to be repaid they need to stop adding interest to the debt. First get Greece to a position where it can repay. Then talk about capital repayments not interest. The IMF is of the opinion that at 200% of GDP it is not possible for the debt to be repaid. Well not if the present system is used anyway. The economy will never get started. Otherwise it be on the remainder.

    We should be screaming the words Keep it Simple Stupid!
    1 hour ago
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  • Edward Ingram
    Now if readers have read the example of Grandpa's fund of 20 NAE that deteriorated to 1 NAE hey will understand what I am going to say next. If you have not read that then please go to the web page and learn why economists that measure wealth in units of purchasing power are wrong to do so. 95% wrong in the example given.

    http://macro-economic-design.blogspot.com/p/please-note-that-i-have-been-mulling_11.html

    If you stand on Greek soil and look at the rate of growth of NAE of which Greece and be capable as it recovers and starts to catch up with the other nations in Europe (which is why we must start by letting the process happen), then NAE might grow over a period of years by 100%. Over the same number of years the NAE of Germany for example might grow 40%.

    The Greek will see the debt values in German Wealth bonds rise by 40% instead of the 100% that their own wealth bonds will increase by. So borrowing in German Wealth Bonds will save them the difference without repaying ANYTHING.

    Here we are assuming that Germans are happy to have their German wealth preserved by rising by 40%. They will not see any haircut. The Greeks will. Their 'Greek debt: GREEK NAE' ratio will fall as far as their debt to Germany is concerned.
    1 hour ago
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  • Edward Ingram
    What we are saying is that if Grandpa was German he would be happy to have a 40% raise in the value of his fund. But if he was Greek he would want a 100% raise in teh fund value. Preserving wealth is in this way just keeping pace with your fellow countrymen. If Greeks do well then they will view their responsibility to Germany to repay German Wealth as being much cheaper than repaying any wealth borrowed from Greeks.

    The risks are the same kind as any borrower that borrows in a foreign currency. Instead of risking a change in exchange rate, we are looking at borrowing in Euros and there is no exchange rate risk. But if you borrow in Wealth Bonds and those Wealth Bonds are not denominated in Greek NAE but in some other NAE which rises at a different rate than Greek NAE then there is a risk that Greek NAE will not rise as fast as the other NAE. That would be like having the other currency rose in value. The gamble here is that the Greek economy can grow faster because it is so depressed.
    53 minutes ago
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  • Edward Ingram
    If the lenders like Germany want to avoid a haircut then they should convert their Greek Bonds to German Wealth Bonds denominated in German NAE to preserve German wealth lent. Then they s to achieve in the first year or two, even if that takes a bit of money should make sure that Greece faces no more austerity. In any case that is the political reality - if a political explosion is to be avoided.
    52 minutes ago
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  • Edward Ingram
    GREXIT.

    There may be a way to have a GREXIT without Greece leaving the Euro Zone or the EU.

    A GREXIT is essentially allowing Greece to have its own currency and to manage its own currency and budgets, disastrous or not, without sinking the European Ship.

    But why stop them from quoting to foreigners in Euros? Why not have dual currencies? Pay wages and taxes locally in Drachmas and everything else to and from other nations in the EU in Euros?
    47 minutes ago
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  • Edward Ingram
    GREXIT.

    There may be a way to have a GREXIT without Greece leaving the Euro Zone or the EU.

    A GREXIT is essentially allowing Greece to have its own currency and to manage its own currency and budgets, disastrous or not, and being able to do so without sinking the European Ship or the stability fund.

    But why stop them from quoting all prices in the shops and all imports and exports to foreigners in Euros? Why not have dual currencies? Pay wages and taxes locally in Drachmas and everything else to and from other nations can be paid and received in the EU in Euros?

    The advantage of Euros is that only one chequebook is needed by all of the nations using it. The disadvantage is that sovereignty over one's own economy is lost. And that can be disastrous or at best, a drain on the more wealthy European nations. Is it so bad to need two chequebooks in order to have international trade made easy and to preserve one's own sovereignty?
    33 minutes ago
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  • Edward Ingram
    That said there are still problems. The manipulation of currency prices. The whole world has that problem. That too can be eliminated. but not whilst we allow the currency price to serve in two separate fiends of activity. One third of world GDP is exported. One third is imported. Some is imported to be exported after assembly as parts for example. Net of that maybe a half of the world's output depends upon the price of a currency.

    The price of currencies cannot serve their purpose and serve the world economy well whilst it is destabilised in this way. A solution is essential not just for the world's economies but for international relations and an end to currency manipulation. It can be done and is really a matter of having the right framework to make it happen automatically.
    23 minutes ago
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I am trying to throw light on how that may be done with references to other pages that have been published by the Macro-economic Design team. There are some attempts made on the www.fin24.com site - search that site for edward ingram or try the index here:
http://ingram-dropbox.blogspot.com/p/fin24-south-africas-leading-financial.html


6 comments:

Djamester Simarrmata said...

Eduard,
Mostly I agree with your proposal. Good job. I think the solution of the Greek debt should not end up in impoverishment of the Greek people. From the other side, the problem of prudential act should be on both side of lender and borrower. In the case of Greek, as borrower, I think the Greek side has been less prudential. But financial system stability is a global public goods, which means the whole world should pay attention to the issue. As a consequence, for the other side of the transaction, prudential act should be put in place: There should be prudential act from the lender side: is the borrower prospectively capable to return his loan? If not, do not give him the money he asks, because it could be a source of financial instability (going to default). This is an act of avoiding the financial instability, both side: borrower and lender should consider his/her contribution to the global financial stability, especially at the dimension of giving or offering loan to states.

BEN CARTER said...

Edward:

Gave the wealth bond scenario the once over and looked at the letter component as well. Given the EU buy-in from the 28 would it be wise to think the IMF would be more open to soothing this debt structure than the EU at this stage?

Edward Ingram said...

Dear Ben,

I must confess to not having visited my own website in recent months. Every effort is going into writing the book. Re the IMF, I have tried to get their attention but unlike the ECB they never write back. A waste of time writing to them.

Edward Ingram said...

Djamester,

Thanks for the observations. No disagreement here.

Ed

Djamester Simarrmata said...

Hi Ed,

Forget now about Greek. How is the real economic situation in the US?

Thanks,

Djamester

Edward Ingram said...

My email address is eingram@ingramsure.com as cited on the home page.
Happy to reply there.

Ed