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Wealth bonds: a solution?

Nov 13 2013 07:21
*Edward Ingram
THE other day I was taking a walk with a neighbour and he was complaining that his savings for retirement were not safe. He was feeling so disturbed that he talked of emigrating. But the problem is worldwide.

The same evening I got a call on my email, asking me to talk with a UK insurance company. They wanted to know all about my ‘wealth bonds’.

Meantime I am still waiting for a South African company, a bank that showed some interest, to start talks.

A wealth bond is a bond, or savings account, that protects the wealth of the investor.

It can do this because it does not cost a borrower any wealth to repay the wealth that has been borrowed – only some interest on top.

The idea is similar to what Nobel Laureate Robert Shiller is now suggesting for government debt, and that is what I have been suggesting for well over a decade – a bond that is index-linked either to gross domestic product or to average incomes.

Having governments issue wealth bonds rather than fixed interest bonds would stabilise much of the rest of the economy and it would go a little way towards ensuring that most economic and financial crises that are generated internally, as opposed to being imported, can be avoided in future.

Saving Greece

Wealth bonds would not have been enough to balance the Greek budget, but it would have helped.

I recommended this for Greece the moment that crisis broke, and now Professor Shiller is saying it was a missed opportunity because fixed interest bonds have cost that nation an enormous amount of problems with its credit ratings and its government debt.

That is exactly what I wrote on my blog at that time.

Saving America

America also paid a heavy price for NOT using wealth bonds in the 1980s, when they were bringing down the rate of inflation. Taxpayers were paying for that at a rate which amounted to a few percentage points of GDP p a.



The above graph (trendline) shows the way the cost to US treasury developed from 1980 to 2010. It started at 9% p a in wealth transfer – the ‘true rate’ above the rate of average incomes growth, which is about nine times too much.

The blue line shows how the valuation of US Treasuries varied from year to year over the same period. People plan their pensions and pension contributions using these types of investments.

 ‘Plan’ is much too strong a word – they gamble, as do government treasuries.

Helping South Africa


Wealth bonds would take most of the interest rate and cost risk out of government borrowing, and that should increase any government’s credit rating and borrowing capacity while setting the economy up with significantly greater financial stability.

Holy Grail

“Financial stability” are the key words emanating from policy-makers and research departments at central banks all over the world today. This is regarded as the Holy Grail for sustainable real economic growth.

My theme is that this kind of financial stability for people’s savings and loans (and currencies) will combine to create that Holy Grail without the need for any significant interventions.

So it is important to note who can potentially issue wealth bonds.

Governments (treasury) and businesses can both issue wealth bonds as well as banks and any other borrower or lender that can find a willing borrower – in theory.

If they are index-linked to average incomes, wealth bonds can even be used to stabilise the cost of, and reduce the arrears rate for business and mortgage finance. My detailed researches show how this can be done.

Clearance needed

We just have to get regulatory clearance and the taxation model right for both. Then we can have defined benefit pensions with defined costs too – for everyone. Pensions are funded from income. Pensions pay out income. The market for safe financial services, linked to income, is almost unlimited.

Everyone wants this. Businesses need it and whole economies need it.

The main problem facing the providers is that world interest rates are too low. Wealth bonds may have to be sold at a premium, and borrowing made ultra-cheap, until we get back to normal.

 - Fin24

*This is a guest post by Edward Ingram, a leading specialist in mortgage finance and macro-economic design for sustainable growth who is involved in studies in macro-economic reforms.


 

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edward ingram  |  investments

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