Monday, May 14, 2018

The Next New Thing in Finance — Bonds Linked Directly to the Economy

The Next New Thing in Finance — Bonds Linked Directly to the Economy

CreditRichard Borge
By Robert J. Shiller
When the next big recession comes, we’ll be much better off if governments have established a new kind of bond tied to the ups and downs of the economy.
In fact, just such a financial innovation is almost ready for the marketplace.
The investment vehicle, called a G.D.P.-linked bond because it is tied to fluctuations in a country’s gross domestic product, would be immensely valuable to cash-strapped governments when revenue fell and debt-service costs climbed. In those circumstances, payments on G.D.P.-linked bonds would decline. That’s because the bonds automatically reduce debt payments as the economy weakens, a boon to governments but not obviously a good thing for investors.
In boom times, on the other hand, investors would profit as national economies grow and payouts on the bonds increase. If G.D.P-linked bonds had been on the market, global investors could have cashed in on the rapid growth of China’s economy over the past few decades by buying the Chinese version of such bonds. This would not have been the same as investing in Chinese stocks, which would have represented a claim only on earnings of then-traded corporations based in China.
The idea behind these bonds may seem strange. But many financial innovations that are now commonplace also seemed strange at one time.
Consider the inflation-linked bonds known as Treasury Inflation Protected Securities, or T.I.P.S. They are standard, unexciting and very useful now. But that wasn’t always the case.
In 1996, John Y. Campbell of Harvard University and I wrote a research paper about these bonds, as well as an op-ed piece in The New York Times, in which we argued that they be established, something that finally took place in 1997. At the time, a Treasury official told me jokingly that the bonds should be sold to members of the American Economic Association because economists seemed to be the only people who were interested in them.
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Many people are interested in buying them now.
In December, T.I.P.S. accounted for 9 percent of the federal debt held by the public, or more than $1 trillion. While inflation is low now, people perceive that there remains a risk it could rise, which has sustained a strong market for those bonds.
I see a parallel with G.D.P.-linked bonds. Persuading people that we need such bonds is an uphill climb at the moment. No country has ever issued them (although there have been analogues in the form of warrants). And G.D.P.-linked bonds may be unappealing because, superficially, they, unlike T.I.P.S., seem to add risk to investor portfolios. But there is more to these proposed bonds than is immediately apparent.
Basically, once the market sets an appropriate price for G.D.P.-linked bonds, their benefits are straightforward.
From the Treasury’s standpoint, the bonds would be helpful in a major financial crisis, when economic growth, inflation and tax revenue fall but conventional debt stays burdensome. Without G.D.P.-linked bonds — or extraordinary intervention by government or multilateral institutions, as happened in the most recent global financial crisis — a nation can find itself at risk of default.
In a crisis like that, investors would suffer as bond payments declined. In expansions, however, investors would benefit. In the United States, for example, bondholders can probably expect strong long-term growth in gross domestic product, which has risen 3.2 percent a year in real dollars, or 6.1 percent in nominal dollars, since 1929. Foreign investors should want such bonds to diversify their holdings.
Purchases of G.D.P.-linked bonds by investors outside the United States would be good for the American government because foreigners would be assuming part of this country’s economic risks from all causes, including global warming.
Furthermore, if countries around the world issued G.D.P.-linked bonds, truly diversified global portfolios would be possible, allowing investors to share in risk and to benefit from growth. Modern finance tells us that this would lead to safer, not riskier portfolios.
Such arguments are gaining traction these days, with support for the bonds last year at the G20 Finance Ministers and Central Bank Governors, at the European Commission, and in recent meetings and working papers.
James Benford of the Bank of England, Jonathan Ostry of the International Monetary Fund and I have put together analyses from 20 experts on how to create G.D.P.-linked bonds.The results appear in a new open-source e-book, “Sovereign G.D.P.-Linked Bonds, Rationale and Design” available on the VoxEU website.
One section is a kind of cookbook with detailed instructions for how to build this new type of government bond. An ad hoc working group that included Allen and Overy, an international law firm based in London prepared specifications, which should be helpful for governments that want to create the bonds.
Some technical details still need to be worked out.
It is not clear, for example, how credit rating agencies would rate these new bonds. They do not rate equities today and might conclude that individual G.D.P.-linked bonds were too similar to stocks in their risk/return profiles to permit a bond rating.
One legal issue to be resolved is whether G.D.P.-linked bonds would come with provisions that allowed disputes to be settled by a vote of a supermajority of investors, who have come to expect this protection from so-called collective action clauses in other types of sovereign bonds.
There are also questions about the maturity structure of the bonds. At one extreme, they could be perpetual (unlike, say a 30-year bond, which is paid off in 30 years). My colleague Mark Kamstra of York University and I have proposed that national governments sell bonds called trills — trillionth shares in gross domestic product, on a perpetual basis.
Specifically, a trill would pay an annual dividend equal to one trillionth of that particular year’s G.D.P., and would do so without any end date. This would define the bonds in a transparent way, implying that they are natural extensions of stock markets, which are also perpetual. The trills would go even further because they encompass everything that goes on in an economy.
The remaining issues need not be major obstacles. In fact, an advanced country’s government could issue G.D.P.-linked bonds now, setting an example for others to follow. Eventually, a vibrant market for the bonds could exist worldwide.
Once that happens, we can use G.D.P.-linked bonds as diversification tools, providing another way to protect vulnerable people and governments against economic fluctuations. One day, we may well take these bonds for granted, as if they had always existed.
An earlier version of this article misstated the year John Y. Campbell and Robert J. Shiller wrote a research paper about inflation-linked bonds known as Treasury Inflation Protected Securities, or T.I.P.S. It was 1996, not 1966.
Robert J. Shiller is Sterling Professor of Economics at Yale.
A version of this article appears in print on , on Page BU4 of the New York edition with the headline: Bonds That Ride the Economy’s Ups and DownsOrder Reprints | Today’s Paper | Subscribe

“An unstoppable force is spreading across our natural landscapes": photographer Zhang Kechun

Zhang Kechun: Between the Mountains and Water
Work / Photography

“An unstoppable force is spreading across our natural landscapes": photographer Zhang Kechun

Zhang Kechun is a Chinese photographer based in Chengdu, a city located in the country’s southwest. Zhang spends his days working as a freelance designer, which gives the artist an opportunity to travel across the country on the lookout for new places to shoot. His latest series Between the Mountains and Water is a result of Zhang’s extensive travelling and features grand landscape shots of large, expansive mountain ranges and immense, concrete bridges. “Ten years ago, I spent three years shooting my last series Yellow River. After completing this project, I decided to continue looking for remarkable settings. Instead of shooting the river shore like I did in Yellow River, I ventured inland to look for impressive natural phenomena and man-built structures,” Zhang tells It’s Nice That.
China is currently undergoing high-speed technological, industrial and economic changes, which, in turn, prompted Zhang to reflect on the ever-changing relationship between individuals and their surrounding landscapes. “It feels as though a strong, destructive and unstoppable force is spreading across our natural landscapes. Under the circumstances, I consider myself to be very insignificant in comparison,” he says. These existential thoughts are reflected in Between the Mountains and Water. Zhang’s vast settings often include human figures which appear dwarfed by their spectacular surroundings. Zhang offers the viewer a refreshing and alternative perspective in an anthropocentric world that values the individual above all else.
“I was particularly influenced by Chinese paintings from the Song Dynasty as I really like the way they arranged and formatted their art,” Zhang says. This comes as little surprise; the Song Dynasty saw the rise of Shan Shui paintings – “shan” translates to mountain and “shui” to river. It was also during the Song Dynasty that artists started to place a greater importance on landscape paintings that depict humans as mere dots on the canvas. Similarly, Zhang’s remarkable landscape shots portray humans as tiny specks, easily overlooked in the vast, insurmountable landscapes. Zhang uses a large format camera and chooses predominantly cloudy days to shoot, which lends his photography a soft and dreamy tone.
During the course of his travels, Zhang looks for fellow travellers who appear particularly in tune with the surrounding nature. The photographer then proceeds to temporarily join them in their journey and get to know them before he presses the shutter. Zhang believes his best shots are a result of giving in to another person’s travels and with no particular destination in mind. “I believe that I can’t feel stronger or more in tune with myself than when I am lost and not thinking about the future. Great anxieties always lie ahead but they are likely to disappear tomorrow.”
Zhang Kechun: Between the Mountains and Water
Zhang Kechun: Between the Mountains and Water
Zhang Kechun: Between the Mountains and Water
Zhang Kechun: Between the Mountains and Water
Zhang Kechun: Between the Mountains and Water
Zhang Kechun: Between the Mountains and Water
Zhang Kechun: Between the Mountains and Water
Zhang Kechun: Between the Mountains and Water
Zhang Kechun: Between the Mountains and Water
Zhang Kechun: Between the Mountains and Water
Zhang Kechun: Between the Mountains and Water


The afternoon Whitney and I meet Grace VanderWaal, the 14-year-old, ukulele-toting singer-songwriter who, in 2016, rocketed to national stardom after winning "America's Got Talent," it is one of those early spring days — the kind where the very existence of sunshine tricks you into forgoing a sweater altogether. But it is cold, and Grace arrives to our Greenwich Village shoot bundled up in a buttery brown leather jacket that looks like it had been discovered in the depths of a vintage store. Indeed, the jacket is vintage — it once belonged to Grace's mom, as did the shoes she's wearing — as is so much of what Grace wears on a daily basis.
Grace has been famous for, give or take, about a year and a half, during which time she's grown five inches, a spurt that began during her summer on "AGT." "I already was growing out of my style, anyway, and I was literally growing out of it, too," she tells me as we stand in a sunny patch of Washington Mews. "I'd get the dress that I wanted to wear on the show, and then I'd put it back on and my mom was like, 'Whoa. It's wayshorter!'" That, understandably, was a problem.





She explains that between the ages of 12 and 14, since winning "AGT," signing with Columbia Records and releasing a debut album ("Just the Beginning," in Nov. 2017), her taste in clothing has changed, both on and off the stage. Grace has found a uniform in things like dresses, clip-on earrings and hats — some vintage, some sourced from retailers like Etsy and Urban Outfitters. Grace knows what she likes — she's a very self-assured 14-year-old, a trait of which 14-year-old me is extremely envious — and isn't afraid to experiment with trends or pieces that fall outside her comfort zone. 
This summer, Grace is hitting the road with Imagine Dragons on a 40-date tour across North America. (She has a brand-new dress for it, and she's very excited about it.) We spoke to Grace about all of that: how she shops for and wears clothes, where she sources style inspiration, thrifting for vintage yearbooks and more. Read on for our conversation.
Photo: Whitney Bauck/Fashionista
Photo: Whitney Bauck/Fashionista
Your schedule is jam-packed with travel, so where are the first places you go to shop when you have the time?
I like Etsy and Urban Outfitters, even though it's overpriced. I still like it.
What are some of your favorite things to get from Etsy? 
I get my dresses and earrings off of Etsy.
What kind of earrings do you like right now?
I like the big, circle clip-on ones.
Do you have your ears pierced? 
I do, but it's hard to find really cute vintage earrings that actually have the piercing; a lot of them are clips-ons. So I wear those a lot.
How would you describe your personal style, and when do you think you figured it out?
My personal style changes a lot. I like vintage things, but I also really like super-current things as well, like the straight-skirt trend right now, and, you know, those boots that are really in ... those shiny, patent leather ankle boots.
Photo: Whitney Bauck/Fashionista
Photo: Whitney Bauck/Fashionista
I was looking through your Instagram, and I like how you've been wearing a lot of hoodies — pieces that are a little more streetwear-inspired. How do you balance your style when you're performing with when you're just hanging?
Actually, I used to always struggle with performing outfits because I was always so confused. I always felt uncomfortable, like I looked out of place. But then, obviously, I can't go out in a shimmery leotard. I'm 14. [Laughs]
So, it was really hard for me to figure out what to wear on stage, and I only just recently figured it out. I can't wear stage outfits, but then also, I feel like I'm going to my 5th grade graduation. I just messed around with it. And then when you find that dress — for me, it's a dress — or outfit, or whatever, I just went off of that and got it in a different color, and then got another dress in the same style.
I finally found my thing that I feel comfortable with and that makes me look normal on stage. It's just a flowy dress and no shoes. I think you just have to do that, and have a lot of performances where you might think you don't look good on stage to find the right thing.
And weed out what doesn't work. 
Yeah, weed it out.
Like I said, I love your Instagram. 
Thank you!
Photo: Whitney Bauck/Fashionista
Photo: Whitney Bauck/Fashionista
Do you ever use Instagram to look for your own style inspiration?
I use Pinterest! I love Pinterest. I'm constantly on Pinterest.
For beauty inspiration, I really love Anna Karina. She's a French actress, and her hair and makeup and stuff, I always copy it.
Are you an impulse shopper or do you like to take some time to think about each purchase?
It depends on what ... Like Urban or something that's kind of pricey, I usually sleep on it for probably a couple days. I always put tons of stuff in my cart and then never buy it. I do that all the time.
I know, I do that, too.
But sometimes, I do buy it. And then if I go back a week later, there's stuff in the cart, and I'm like, "Ew, I can't believe I was going to buy that!" Then there's that one thing that I'm like, "Okay, it's been a month and I still really want this. I'm going to buy it."
I'm the same way. I'll think about things for, like, two months, and when I finally decide I'm ready to buy it, it's sold out.
Yeah, I used to buy all these things, random tops and random pants, just because I thought they were pretty, and they were pretty, but they didn't go with anything I had in my closet. And now what I do is try to buy things that are, maybe not matchy-matchy, but coordinate with each other. And then, after a while — because, you know, I've grown a ton...
Right! How tall are you now?
5'4", I think. After a while, your whole closet, everything, goes together and you can mix things. It's a great place to be.
When did you have your biggest growth spurt? Did that affect your style in any way?
I already was growing out of my style, anyway, and I was literally growing out of it, too. It kind of worked together. I started growing near the end of ["America's Got Talent"]. I was growing, like, an inch every week.
Photo: Whitney Bauck/Fashionista
Photo: Whitney Bauck/Fashionista
I remember when I was in seventh grade, I grew something crazy like three inches in a month.
Yeah! [Calls over to her mom, standing 20 feet away] Mom, what was it? How many inches did I grow in the summer, the doctor said? 
Five inches in the summer! And that was the summer of "AGT." Which was hard, because I'd get the dress that I wanted to wear on the show, and then I'd put it back on and my mom was like, "Whoa. It's way shorter!"
What's the last thing you bought?
The last thing that I bought was the dress that I'm planning on wearing for the Imagine Dragons tour. I'm so excited.
I usually get styled, but I just saw this. It was way cheaper than the other dresses I was thinking about borrowing. I'm like, okay, it's cheap, it looks great, I'm going to buy it. Even if I don't wear it for the tour, it's still a good thing to whip out for another performance.
Going back to your shopping habits: Etsy is generally very vintage-inspired. Do you do any vintage shopping?
Oh, yeah, a lot. But it's hard. I do most of my vintage shopping online because there are tons of really good vintage shops around me, but not really clothes-wise; it's, like, novelty stuff and decorations, and there's really no good clothes stores except online. Plus, I just love online shopping.
Also, I love vintage shopping for random stuff, like plates and stuff like that. I actually just went vintage shopping with my friends. We got these yearbooks, and it was really fun because we said who all the people were. The yearbook was from 1972 or something.
Photo: Whitney Bauck/Fashionista
Photo: Whitney Bauck/Fashionista
What thing have you had the longest that you still actively wear?
I lose so much. That's a hard question because I lose everything.
Oh, I actually wore it today, but I took it off because it didn't match my dress, but I have this beret. Remember a couple years back, I'd say four years ago, when everyone wore their berets on the back of their heads? Well, I did that — or, my sister did. So, she had it, and then gave it to me, and now it's in to wear it normally. Now I wear it normally, and I've had it for so long.
And this jacket is your mom's?
Yeah. I wear a lot of my mom's [pieces]. These shoes are my mom's, too. We have the same shoe size.
I'm jealous. That's awesome.
Yeah, she's not very happy about it, though. All of her stuff is slowly disappearing.
Homepage photo: Whitney Bauck/Fashionista