Externality Resolution Within a Nominal Paradigm - A New Chapter in FV Finance
Externality Resolution Within a Nominal Paradigm - A New Chapter in FV Finance
GangaPrasad Rao
Energy, Environmental and Mineral Economics
gprasadrao@hotmail.com
gprao64.blogspot.com
gprasadrao.blogspot.com
Foreword and Disclaimer: This blog broaches a novel extension to a previous blog that proposed a dual SGDP-NGDP Bond-based mechanism to operate the nation’s economy and optimize annual budgets. It applies principles of FV Finance to solve externalities associated with uncontrolled nominal expansions funded with NSI monetization. It offers an integrated answer to resolve nominal externalities on one hand, and ‘create’ FV Gold Capital for IPO-based incremental expansion of the economy.
The Author makes no claims as regards the robustness of the proposed design, or the effectiveness of indicated outcomes.
Introduction
In previous blogs1, I broached the concept of navigating the macro-economy by leveraging dual ‘SGDP - NGDP Bonds’ as guides to obtain balanced, socio-economic growth. The concept applies at the national level and offers a dynamic, if unbalanced, Nominal-Real framework in which Societal preferences take precedence over environmental externalities caused by the Nominal economic expansion. This extension expands upon the internalization of externalities potentially caused by the issue and monetization of Nominal Sectoral Interests, NSIs, that obtain from the ‘NGDP FV Mirror Annexe’ market. The suggested mechanism induces appropriate incentives to minimize and/or abate sectoral externalities, and integrates the Gold and IPO markets with the SGDP-NGDP dual Bond market, thus obtaining a dynamic, balancing and schumpeterian mechanism to guide the socio-economy.
Let’s initiate the discussion with NGDP Bonds. These formulaically-priced, privately-traded Bonds, have as arguments those factors that materially, financially, monetarily, and quantitatively determine the Nominal GDP of the jurisdiction. Participants in the NGDP Bond market are also issued an ‘NGDP Bond FV Mirror-Sector Disaggregate Decomposate PVFV’ of NGDP Bonds in the form of Nominal Sectoral Interests, NSIs, proportional in number sectoral weights in the computation of NGDP. These NSIs, interpreted as potential sectoral GDP, would be traded in the expectation of monetizing them in to Nominal liquidity issued by the Central Banker2. NSI Aggregators could choose between incremental NGDP Bonds, or the incremental liquidity obtained from NSI monetization. The issue of NSI-linked monetization engenders externalities, and tilts the economy to the right. It is hence essential that such monetization be balanced with issue of externality-abating instruments. In this context, it is fortuitous that one may issue Mirror Bond Liquidity opposite NSI monetization liquidity to fund externality-abating activities.
Sectoral Real Gold Bonds
Consider then, an environmental finance strategy, in which the ‘Industry KG-Regulatory Institution’, fearing a nominal exacerbation originating in Central Bank’s NSI monetization and consequent unsustainable nominal expansion, and in his role as the Monetization Sponsor, issues an equal and balancing amount of Sector Real Gold Bonds3to ‘Real’ interests - Environmental organizations, or a ‘Sector Ombudsman’. These Sector Real Gold Bonds would be issued to Real Interests by the Regulatory Institution in exchange for the receipt of ‘Social FV-Democracy FV’ Gold from the Mint against ‘Real NSI Monetization Mirror-Nominal OB:OC Mirror Liquidity’ sourced from the Central Bank’s NSI Nominal monetization. (The Mint could either choose to hold on to the NSI Monetization Mirror Liquidity, or, given its social mandate, seek an equivalent number of SGDP Bonds in kind). In turn, the Regulatory Institution would apportion a share of that Mint FV Gold to PV Bullion market4, and lien the rest as ‘Collateral FV Gold’ that serves Sectoral Real Gold Bonds. Of the share assigned the PV Bullion market, the Regulatory Institution would auction FV Mint Gold with a PV-Reserve price. The mechanism leaches the FV imbued in Mint FV Gold in the initial auction rounds5, and reduces Mint FV Gold retained by the Regulatory institution at the reserve price to mere PV Gold participated in the Bullion, albeit through a Gold Hedge instrument. This hedged Mint Gold would be invested in the Bullion, ie, invested in a Gold-derivative instrument which correlates negatively with current, or expected PV Gold prices, and reflects the Real investor’s intention to pro-actively minimize unsustainability-fuelled inflation in long-run Gold prices. The Administrator of Sectoral Real Gold Bonds would trade actively in PV Gold Volatility through the derivative hedge instrument, and apply gains obtained therefrom to fund FV-conformable activities suggested, or as enforced upon by Collateral FV Gold Administrator6.
In this manner, Sectoral Real Gold Bonds would be issued the Environmental organization, or, the Sector Ombudsman, to balance the (non-pecuniary) socio-economic externalities associated with nominal sectoral activity engendered by the issue and monetization of Sector NSIs. Formulaically-linked to Sectoral Environmental Quality Index, EQIs7, these Sectoral Real Gold Bonds would be traded against similar instruments representing competing sectors for the EQI-expressed, sustainability properties that are verifiable in the PV, and which are FV-imbued in the attached Collateral FV Gold. Bonds would appreciate for pro-active, Collateral Administrator-mediated resolution of sectoral nominal externalities that increment EQIs, experience Volatility for variation of EQI across sectors, for perceived, or factual changes to the size of the underlying FV Gold Collateral, and deprecate for cumulation of sectoral externalities. Denoting appreciation in the price of Sectoral Real Gold Bonds by AppSRG, Bond Volatility by VSRG, and the size of FV Gold Collateral as QColl, one could write expressions for Bond Appreciation and Volatility as:
AppSRGi = PAppSRGi(EQIi, PSRGj)
VSRGi = VSRGi (QColl, PGold, EQIi/EQIj), and hence,
PSRGi = SRGBond AppSRGi -OE ZS- SRG Bond VSRG = PSRGi(EQIi, EQIj, PSRGj, QColl, PGold)
Guided by EQI-determined formulaic pricing and Volatility bands, Bonds would trade around expectational excesses and speculative errors around them. Over their lifetime, the Bond Administrator, having enhanced Sector-specific EQI, would offer the Collateral underlying the Sectoral Real Gold Bonds as ‘Social FV-Env. FV-Democracy FV-Nominal Advantage ZS FV8’ Gold Capital to the ‘IPO Annexe FV Gold’ market at a premium over PV-Gold prices toward their re-constitution of firm capital.
Consider a Business sector pursuing its fortunes in a perfect world as opposed to an imperfect world with externalities. In a perfect world with no externalities, Nominal PV Gold prices would inflate minimally, if at all, and be universally and equally-priced across all sectors. Conversely, PV Gold prices would inflate significantly in imperfect, externality-prone societies9. Now consider Sector-specific Liened-Collateral FV Gold attached to Sector-specific Real Gold Bonds. FV Gold, though denied Unsustainability-linked long-run inflation in PV Gold prices, is the beneficiary of Sustainability-linked Volatility returns as obtained from the share of Mint FV-Gold placed residually in PV-Gold markets, (ie, Mint FV Gold placed as PV-Gold at near-market, ‘reserve’ prices). Such PV Gold obtains post the FV-leaching auction rounds of FV Gold parcels at supra-threshold prices. Essentially, auctions held at the Gold Exchange, discount, redux and transfer the ‘Social Enjoy FV-Democracy Pareto FV’-imbued Mint FV Gold as ‘Private Vacation PV’ and ‘Political Largesse BV’ to high Nominal bidders in the initial rounds, thus reducing the auctioned FV Gold, (and any remainder at the reserve price), to mere PV Gold. The Collateral Administrator, holding the un-auctioned portion of downgraded Mint FV-reduced, PV Gold, would trade the same in Volatility, and pro-actively fund and direct environmental remediation with Volatility gains to increment Sectoral EQI. EQI-augmented, the Collateral FV Gold upgrades to ‘Social Enjoy FV-Sustainable Environment FV-Democracy Pareto FV- Nominal Advantage ZS FV’ Gold Capital – FV Capital that offers assurance of superior nominal returns, a sustainable environment- and people-friendly, democratic society, and due which it commands a premium over PV Gold.
Your Collateral FV Gold, My FV Gold Capital: The Story from the IPO Market
The incentive faced by the Sector Real Gold Administrators to supply Collateral-served FV Gold Capital at a premium to current PV Gold prices, would be buttressed by the demand for Sustainable (Collateral-served) FV Gold Capital from the IPO market. The IPO market, constituted of firms awaiting their entry in to the public equity market, represents a source of Capital demand for Sector Collateral FV Gold post its Collateral obligations. Prospective IPO firms, seeking to maximize their issue floor price and subsequent business prospects, would buffer their FV-PV Equity capital, PV-BV Sovereign Bonds, (or EV-EV Corporate Bond Capital) with Collateral-served, nominally-advantaged, socially-conformable, externality-cleansed, Sustainability Capital- FV Gold Capital10, 11, 12. Constituting prospective IPO firms with such Gold capital imbued with ‘Environmental Sustainability PV’ and ‘FV Opportunity Advantage Nodes’13, enhances their financial and business diligences, adds to expected survival in the contentious post-IPO period, and facilitates flexible, even a polarizing business strategy that permits of FV-ZS-PV arbitration/exchange/attenuation of Local and RoW opportunities and risks by leaning on the cross-sectional and time-series properties of (FV) Gold globally14. Supplementing the existing Capital structure of firms with Sustainable ‘FV Buffer Gold’ permits for an incrementally-polarized, right-leaning economy that opens fresh nominal opportunities to IPO firms, while permitting a Collateral Gold-mediated ‘End EV -ToBe Start’ balancing resolution in the Real society - Nominal economy. Thus, and given a ready market for the Liened Collateral FV Gold as FV Capital in IPO-listed firms, Sector Real Gold Bond Administrators15would administer their Real Bonds in EQI competition with other sectors, and seek incrementally higher premium for their Sector-specific Collateral FV Gold by pro-actively funding EQI-augmenting environmental remediation, thus and in the process, securing endogenous and across-sector externality resolution.
As alluded above, attributes and capabilities imbued in Capital FV Gold obtain a higher IPO floor price by leveraging FV Capital-secured nominal competitive advantages, lengthening survival horizons, and the reliability of earning growth, while ensuring social bonhomie. The increment in floor/issue price of IPO shares implies a ‘net back’ premium on Collateral FV Gold attached to, and supplied by Sector Real Gold Bonds16. IPO firms would need a mechanism to evaluate the Sustainability associated with Collateral FV Gold attached to Sector Real Gold Bonds. If these Bonds, issued for Sector j, were traded publicly, and priced as PSRGj,in competition with similar sectoral bonds toward a pre-agreed sustainability standard as measured by an Environmental Quality Index, EQI, then PSRGjwould be an implicit, albeit direct measure of the imbued Sustainability in the Collateral FV Gold attached to Real Gold Bonds of Sector j. In other words, the price of Sector Real Gold Bonds would be a measure of environmental sustainability imbued within the underlying Collateral FV Gold (to achieve which the Gold accepted an Opportunity Cost in PV Gold market returns). The FV premium obtained over PV Gold prices from prospective IPO firm, would then relate directly, whether linearly or otherwise, to PSRGj, thus incentivizing Sector Real Bond and Collateral Administrators to focus on externality resolution
The transfer of FV Gold from the Sector Bond Collateral to prospective IPO firms would imply a partial redux/withdrawal/redemption of the attached Sector Real Gold Bonds from bondholders compensated at the EQI-linked, traded Bond price, PSRGj; the Sector Real Gold Bond Administrator (or, the Collateral FV Gold Administrator) being advantaged with the FV premium-enhanced PV price of Collateral Gold discovered in the IPO Private Annexe Market17– a Private market where IPOs from different sectors compete for Collateral FV Gold attached to differently priced Sector Real Gold Bonds with varying EQI. Better yet, the Sector Collateral FV Gold could be exchanged for a premium-internalized equivalent amount of sustainable IPO FV Shares issued Sectoral Real Gold Bondholders against their Bond holdings, thus avoiding a PV-stepdown of Sustainable Gold Capital FV, and ensuring a pareto between Sector Real Gold Bondholders and the schumpeterian IPO market. Constituted of ‘Nominal Corporate Bond EVEV18: (Real Gold TS Local Bakey-Aural Local ITZSCS19RoW Adjust20-Aural RoW BV) : Nominal Equity FVPV’ Capital, new IPO firms would resolve their growth-seeking, competition-induced, unsustainable polar nominal strategies by adjusting through the inter-temporal and cross-sectional reach of Sustainability Gold, thus ensuring an incrementally sustainable nominal expansion. The competition for EQI-enhanced, sustainable Collateral FV-Gold as a means to secure higher IPO Issual prices, ensures cross-sectoral progress toward environmental sustainability through the instrument of Sectoral Real Gold Bonds. In this manner, Sector Real Gold Bondholders, would have contributed to the attainment of an externality-cleansed Sector economy, and also be holders of shares in sustainable IPOs (across Sectors), even as the economy surges nominally with NSI monetization.
The FV Premium over PV Gold prices obtained by ‘Collateral FV Gold-Sustainability FV Gold-IPO FV Capital’ over traded PV Gold prices - would respond to both supply and demand factors in the Bond market and the IPO Private Annexe FV Gold market. Should Sector Associations choose to enhance EQI by pro-actively engaging in externality abatement activities, the premium associated with the attached Collateral FV Gold would increment to reflect the enhanced value of Collateral Gold in its prospective role as ‘Sustainable IPO Capital FV’. A high demand for Sector Real Gold Bonds, by raising PSRG, would induce a focus on raising EQI, if only to retain Bond prices at higher levels. In times of a multitude of IPOs, prospective IPO candidate firms would bid up Collateral FV Gold prices, implying again, that Bond Administrators direct their efforts to raise EQI (and thus, Bond prices) in consonance with the elevated premiums on Collateral FV Gold. A transfer of Sector Collateral FV Gold over to the IPO market would either induce Bond Administrators to redeem Bonds to keep prices up, accept a fall in Bond prices, or, make conscious efforts at further incrementing EQI to compensate for the fall in Bond prices due loss of Collateral Cover. Thus, whether for supply or demand reasons, an increment in Sectoral EQI would translate in to an increment in Bond prices, and to an expansion of the premium over PV prices associated with Sectoral FV Gold in its prospective role as IPO FV Capital. In turn, this implies a strong incentive originating from diverse sources to increment EQI, and attain rapid progress toward sectoral environmental sustainability to balance NSI-monetization-related externalities.
Discussion
The sovereign, political and fiduciary stakes involved in administering the nation’s course across decades calls for an integrated, dual SGDP-NGDP Bond-based approach. Such mechanism is preferable to simplistic growth-based models for likelihood of achieving multiple socio-economic goals in an integrated manner. Nominal Sectoral Interests, NSIs, much like the PGDP, are expectational entities, that offer a means to anticipate sectoral economic growth, and constitute a basis for the Central Banker to monetize and issue nominal liquidity. NSIs, due their incremental nominal character, have the potential to induce externalities by stoking uncontrolled nominal growth. It is, hence, necessary to anticipate, and provide for a remedial mechanism to attenuate the same. Formulaically-linked to EQI, and publicly-traded Sector Real Bonds issued to Real Interests against Collaterallized Mint FV Gold, offer a balancing resolution. These Bonds, and the prospective shadow value of Collateral FV in the IPO market, are both calibrated in EQIs – indices that comprehensively survey, quantify and track sectoral environmental externalities. Designed to induce competition amongst and across Sectors, Sectoral Real Gold Bonds are an effective mechanism to remedy past and nominal externalities associated with NSI-monetized, anticipated economic growth. Concomitantly, the gain in Sectoral EQI enlarges the value of SRG Bond Collateral FV Gold in its prospective role as FV Capital for IPO-listed firms. Collateral-served FV Gold Capital offers nominal advantage, incremental stability, value and returns to IPO firms, for which reason such Gold would find many bidders offering a premium over Nominal PV Gold in the proposed IPO Private Annexe Gold market. The design, both, funds IPOs with NSI-monetized liquidity, and provides for a Bond-based balancing resolution, thus ensuring the nominal economy expands incrementally in a balanced way that preserves long-run socio-economic sustainability. Between the Sectoral Real Gold Bonds, the Mint Collateral FV Gold, and IPO firms, the proposed design obtains anticipatory remedial resolution for nominal excesses that might engender for NSI-based liquidity led nominal expansions. The design offers an efficient means to obtain marginal, cross-sectoral abatement of environmental externalities while concomitantly enhancing the sustainability of IPO markets. This proposal, read together with the earlier blogged manuscript, is recommended to policy-makers, Central Bankers, Bond markets, Gold, and IPO markets, as an over-arching social-economic-monetary paradigm to bring about a dynamic, schumpeterian economy that links the (Real) Bond market, PV&FV Gold, and the IPO market, and offers a means to analytically obtain optimal budget allocations while securing externality-efficient sector economies, and a socio-environmentally balanced society.
Would rather read the pdf? Here it is: FV Finance, Part II
1�Refer blog: ‘Cause Bond-based Political Cycle Government, NGDP Optimization and Budgeting’ at gprao64.blogspot.com
2�Monetization of the FV imbued in NSIs permits the member either a monetary lumpsum from the issue of incremental liquidity by the Central Banker, or, an equivalent, incremental issue of NGDP bonds.
3�Note, that issuing PV Nominal Bonds instead of Real Bonds, could even exacerbate the sustainability imbalance.
4�Transferring Mint-stamped FV Gold to the PV Bullion market (through an FV-leaching Auction mechanism coordinated by the Gold Exchange in which the Seller retains FV Gold downgraded to PV Gold below a certain threshold price) obtains an immediate Nominal PV Monetize to the Regulatory Institution. The resources so harvested could then be applied to initiate remedial environmental activities requiring a lumpsum PV investment. (The stepdown of ‘Social FV-Democracy FV Gold’ to ‘Societal Serve FV-Political PV Gold’ obtains a residual on ‘FV Social Bonhomie’ and ‘FV Democracy’ that are distributed (among Auction participants?) in the ZS of ‘RoW Havala LowKey Fractal’ as ‘Private Vacation (Now) PV’ and ‘Political Largesse Bakey BV’?)
5�An Auction of a Group FV in PV markets generally endows those with high PV bids with most of the FV, as it is a pareto outcome between the Group and the high bidders.
6�Liened Collateral Gold earns an FV-return not from long-run inflation in Bullion Gold prices, but by sampling the Nominal firm space for sub-aural indiligences, resolving sector indiligences among member firms (excluding prospective IPO firms), and leveraging aural TS-CS properties to advance real, long, social causes ignored by the nominal economy. These attributes and tasks transform and transfer the ‘Long Unsustainability Inflate 2 EffV -ZS- Short Sustainability Volatility Foo PV’ gains, that accrues the Bullion share of Mint FV Gold, over to Sector Bond Collateral FV Gold which represents a repository of ‘(Sector) Sustainability Cause FV-AO OC-CC Sustainability Appreciation 2 FV Diligence Monetize PV Key-OE-(Bakey) CC Indiligence Exploit Lumpsum 2 PV?’. Put differently, Sector Lien Collateral FV Gold, when held back from earning PV returns originating in Long Unsustainability Gold Inflation, and instead fed with gains from Aural Sustainability-linked short Volatility, turns in to (Sector) Capital FV Gold when those Volatility gains are applied to secure environmental and social FV pursuits at the direction of the Collateral Administrator. Firms that constitute their capital of such Capital FV Gold may exploit the characteristics and attributes, as well as surveyed indiligences recorded in to the Collateral Gold FV Repository in the pursuit of their business, thus bringing about a sustainable sector in the long-run.
7�With an EQI-graduated, sub-aural long-return that ensures financial closure of the Bond.
8�The ‘Nominal Advantage ZS’ obtains due the Collateral Gold surveying sector indiligences and applying them to the benefit of IPO firm that bids it the highest.
9�Gold PV inflation is a direct, mirror consequence of FV Sustainability depreciation. The more sustainable and more efficient the nominal machinery in hastening the future to the present, the smaller the discount rate, and the lesser the PV inflation of Gold. That is, one could almost correlate the efficiency-determined implicit rate of discounting of FV to PV to the long-run inflation in Gold prices.
10�PV-Gold, the inflation-compensated repository of all unsustainabilities, is a specifically inappropriate form of firm capital to hold.
11�The mix of Sectoral Collateral Capital (and its weight in the Capital structure) would, logically, follow from the particular business niche that firms seek. Dove-tailing the sectoral source of FV Gold Capital with the particular business niches of prospective IPO firms, would, likely, obtain a further symphony of objectives and outcomes. For example, an IPO firm in the IT Sector that intends to serve the Transport and Steel sectors, would source Sectoral Gold from those Sectors, beyond the IT sector. Such constitution suggests the further possibility of dynamic, post-IPO re-constitution of Capital to adapt to changing threats and opportunities. Firms would, at various intervals, reconstitute the source-mix of their FV Gold capital through the ‘IPO FV Gold Annexe Exchange’ to suit emerging threats and opportunities.
12�IPO candidate firms would ascertain their prospects by admixing Collateral FV Gold from various Sectoral Real Gold Bonds in varying amounts against Equities and Nominal Bonds to test their business growth strategies, and obtain the highest floor/issue price for their IPO (in What-if Sessions participated in by Anchor Investors and Bankers-Financiers). Quite likely, the more nascent the business niche, the less regulations covering it, sharper the risk-reward trade-off, and the larger the prospect for rents and market share. Hence, firms in emergent businesses might well seek significant amounts of Sustainable FV Gold to constitute their Capital structure. Conversely, and as a business sector matures, firms settle in to socially-acceptable, regulated niches, and can afford to shrink their holdings of Sustainable FV Gold Capital.
13�A logical construct that obtains from the Sector indiligences recorded in Collateral FV Gold.
14�Gold, as a very stable, virtually indestructible asset that retains value across generations and cultures, could, de facto, be deemed an ‘Aural Benchmark-Aural Diligence’-augmented Monetary Carrier of sustainable financial value– an inter-temporal monetary medium of forward demonetization of PV to FV, and backward monetization of FV to PV. The Aural Benchmark-Diligence could be imagined to be an ethereal efficiency standard that cuts across contexts and geographies, Time and Space, thus permitting a fluid financial medium of temporal and spatial, even inter-life exchange. Collateral FV Gold, held by Sectoral Real Gold Bonds, survey the cross-section, pick out instances of diligence conformance and non-conformance, sift solutions, events, outcomes and various other socio-economic aspects in to a (Time and Context-knotted) ranked list, the supra-aural of which is transferred to the ‘Next’, which is conditionally enforced upon at the margin by the Aural benchmark. Thus imagined, the society adopts supra-aural mechanisms and outcomes above the Aural threshold of Efficiency and Equity, and secures the progress of human society across generations.
15�More correctly, the Administrators of Collateral FV Gold that cover the Sector Real Gold Bonds. These Collateral Administrators would be incentivized with an ‘FV Lumpsum Share’ of the final proceeds from the sale or transfer of ‘Collateral Served FV Gold’ as FV Capital over to prospective IPO firms. Thus incentivized, they’d expedite sustainability-directed efforts to increment the value of Collateral FV Gold, (as well as ‘populate’ the Collateral Gold with records of sector indiligences, and other sector and Administrator-specific ‘strategic information’), their FV Share, while raising the price of Sector Real Gold Bonds (and securing shares of premium IPOs for Bondholders).
16�That net-back price on Collateral FV Gold implies a premium over the prevailing price of PV Gold (and hence, effectively, an ‘FV PV Monetization Multiple’. That monetization premium over the PV price would, in turn, imply a Sustainability-sourced ‘step return’ for the period the FV Gold was held in Collateral (as opposed to earning Unsustainability-sourced, long-run ‘inflation returns’ embodied in the PV point price of Gold). See Figure.
17� In some sense, the ‘IPO Private Real PV Hedge-FV Gold Repository’ is the mirror opposite of ‘Bullion Public Nominal PV Gold Repository’
18�Or, Real PVBV Sovereign Bonds
19�Inter-temporal – Zero Sum – Cross Section
20�ie, an aural inter-temporal cross-sectional adjustment mechanism that offers a Bakey-BV to those who accommodate the nominal polar strategies of the IPO firm.
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