No. of Recommendations: 0
I watch governments struggle with their finances all the time, and I'm wondering why no government has tried this strategy:

1. Issue a bond, backed by the proceeds of the investment.
2. Put the revenue generated by the bond sale into the S&P 500 (or similar buy-and-hold blue-chip portfolio).
3. Use the dividend stream from the investment to pay off the bond.
4. Repeat.

Given a fairly reasonable assumption that a government could get a 65 basis point spread between the rate on their bond and the current dividend yield of the S&P 500 (1.85%), and given that those dividends grow at about 5% annually (long-term historical average is more like 5.88%), the debt should be fully repaid in about 30 years without selling a single share of the initial stock purchase. After that, all dividend yields would become a free revenue stream for the government.

Depending on how aggressively they chose to pursue this strategy, a state could become self-financing without any taxation within a few generations, and could do so without increasing taxes at all in the process. It's a pure arbitrage based on shouldering the time risk of the market.

So, why hasn't a single municipality or state (or government, for that matter) tried this approach?
Print the post  

Announcements

When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.