Happy 400th birthday to the world’s oldest bond
ft.com
ft.com
Inflation makes it harder for the current generation but also free future generations from your debts.
the interest rate of a bond isn't just "liquidity/the time value of money", it also contains expectations for future inflation rates. However, we never know the future, so inflation risk cannot be eliminated/hedged by any means, so being "wrong" about the future might harm or reward you.
furthermore, by portfolio theory, you would have needed to reinvest all the interest received from this bond immediately upon receipt as part of your evaluation of the performance of the bond (which, that being difficult to do is why we evaluate bonds at "present value"). All those past interest payments made would have been reinvested at prevailing (e.g. so-called "inflationary") rates and might have done extraordinarily well.
If you include all factors, this bond might have been the best investment she could have made, and it would be wrong to describe it as somehow "ravaged by inflation"; with nothing any better to do with her savings, it's the idea that money is somehow "fixed" and potentially permanent unless "eroded" that we should see as damaged, not the value of this bond.
As an example, the reason that coupons (like $1 off a box of Wheaties) or refunds (good for 1 airline ticket) and similar "financial instruments" have expiration dates on them is because it is required by accounting rules. When those items are issued, companies need to put them on their books as liabilities, and having to keep around an ever increasing accumulation of liabilities for many years would give a "wrong" picture of the financial health of the entity, when the purpose of books is to give a "right" picture.
(your take is not more nuanced, it acknowledges this practicality aspect. to extend the newtonian/einsteinian analogy, you're advocating ignoring the ∆x² term as the lim ∆x→0 version of the calculus derivative rather than the approach taken by analysis :)
This is why they're treated as a liability in the company books. You can guess or bet that all of your outstanding gift card balances won't be redeemed at once, but there's really nothing preventing that from happening and causing cashflow problems for the company. And there's lots of overhead involved in tracking many many thousands of small balances on cards into perpetuity.
Much easier to encourage people to spend the gift cards and get your financing from proper, predictable business loans or bonds.
Then, if they have any wiggle room, they can get a further increase by buying back a bond of higher yield sooner, modulated by expected cash flows.
>Much easier to encourage people to spend the gift cards and get your financing from proper, predictable business loans or bonds.
That doesn't follow at all. The longer the gift card goes without being spent, the more free money they get. There's no net benefit to the goods being called sooner.
Imagine a business where people give you cash and don’t ask for 5% or so of it back. Meanwhile your use of that cash is regulated with a feather (compared to a bank or other deposit-taker) and you can earn some yield while you wait for people to ask for their money back.
Gift cards are very lucrative at scale.
https://www.ftc.gov/news-events/news/press-releases/2010/11/...
What I’m talking about is the provider of the gift card writing off some portion of the liability of gift cards they have sold that people will never spend because they forget about them and lose them and so forth.
But this wasn’t just finance for finance’s sake. The bond funded flood protections for the dangerous, waterlogged land where she and her family lived. It kept her community safe. Yet all people talk about is, “Wow, she bought a really old bond!” No, she made a real investment in her family and neighbors’ future. The 400-year part? That’s just the headline.
It's not obvious to me that this is the case- if your wages go up with inflation, and you store money in stocks/bonds that keep up with inflation- doesn't it also just make any debt you have gradually reduce overtime?
But give one of them $2,000,000 in mortgage debt at 3.0% interest on 3 properties that are rented out, and don't have the other have anything.
In 15 years, those properties will be worth 2-3x as much, and the debt will still be 2,000,000. This is what happened to boomers even though they don't realize it. Its not that houses are some amazing investment, its that no one will give you 7figure loans at 3% interest to buy stocks with money you don't have, but they will do it for a property.
When I run the numbers where I live based on current market rates buying a home is predicted to be a big money loser over time vs renting and investing the difference. Renting lets you buy into housing with the prices and tax rates of when the owners bought them decades ago.
For what it's worth, I don't disagree with you, and I think renting makes more sense than buying right now for the first time in decades, but it's just by a hair.
Interest rates from 1971-1998 were higher than they are today[1].
My personal rule of thumb is that rents remain fairly stable as a proportion of earnings under balanced supply and prices are then a function of rents / mortgage rates.
Over the past 15 years median household income has gone from $50k to $80k while mortgage rates more than halved from 6.5% in 2006 to 3.1% in 2021. Most of that 2-3x increase is from the fall in rates.
This is the problem, because supply is artificially constrains if wages double (through efficiencies), rents increase to soak up the extra productivity.
You're extrapolating the last 15 years onto the next 15 years. The last 15 years came on the heels of a historic decline in real estate prices that occurred just prior to that period (2008-2010).
1. Interest rates were in the teens when they bought their houses. However they may have only paid $50k for a house in the 80s.
2. Most only bought their own house and didn't have many other investments. My parents for example had an investment property in the 90s, but were an exception.
3. House values have gone up because building regulations and zoning have become so onerous that supply hasn't kept up with demand. I believe this will continue and house prices will continue to beat inflation in many jurisdictions.
It’s really a war bubble, which will pop, with pretty devastating impact.
If you bought a house 15 years ago large parts of north St Louis, chances are you lost money, even without accounting for said home maintenance. They one I live in didn't go up 50% in 15 years. A lot of commercial investments? Ravaged.
So while it's true that it's possible to leverage yourself more in real estate, and that said leverage is even tax advantaged, assuming that the line will go up faster than anything else in a risk-adjusted way is a very risky position to take.
This depends on at least four premises:
a) that your wages at least track with inflation
b) that your expenses (not debt) track less than inflation
c) that you can buy into stocks/bonds before the inflation AND they track at least with inflation
If any of those are untrue, your conclusion falls apart.
If all three are untrue, your expenses are growing faster than your wages and the little you have left over is now buying already-inflated assets.. which we've seen play out once in recent times.
With (c) stock prices are generally tied to the underlying value of a company which is protection from losing value due to inflation except in rare cases where the inflation directly harms the business model. Assuming the inflation continues to increase over time, you just buy the stocks as soon as you get the money, there is no need to do it "before the inflation" or any sense in which stocks can be "already inflated."
CPIH in the UK for example includes the cost of housing but the weighting of housing is effectively an average of a teenager, a mid life family and a pensioner. It comes out at like 20% weight which is well under what most people spend on housing.
Because wages don't go up in real time so you get robbed of the difference for the duration.
You make $3. Rent costs $1. You have $2 leftover to improve your life, pay down debt, whatever.
You make $3. Rent is now $1.50. You have $.50 leftover
Your wage goes up to $3.50. Rent is now $2. You have $.50 leftover.
Repeat a bunch of times.
Your wage goes up $.50 again. Rent stops rising in price. You have $1 leftover.
See how the inflation robs you of $.50 multiplied by the duration?
Inflation doubles everything
You make $6, rent costs $2, you owe $300, it takes 75 to repay debt
The person so wealthy they lent you money loses out, you gain.
It only feels psychologically worse when you notice food prices going up steadily and you have slightly less left over than you did last month. People will still be mad about that even if actually ahead.
Inflation benefits borrowers and penalizes lenders.
I would posit that younger people tend to be borrowers and older people tend to be lenders (bond owners).
That said, it's not clear what you meant by "the current generation."
Final note, inflation helps encourage people to use their money and keep the economy moving.
Short term thinking in itself is damaging.
But then thinking something is "worth more" because it costs more dollars a year from now is deceptive.. how much did its value increase vs the dollar decrease?
But it's convenient for tax authorities as you're taxed on the gains, regardless of the why/how it changed.
You have missed the point.
Inflation encourages activity because your money is worth less a year from now. Better to get something for it, or invest it.
You do enough work for 1/100th of the economy and receive $1000. You keep this in a box and do nothing for years.
In years time the work done in the economy is 1 million units, but money hasn’t changed. Your $1000 can no purchase 1:100th of the economy you haven’t built, or 1,000 units of work
You receive 900 units of work for free.
That’s immoral.
You’re gonna need to back this up with some reasoning. That’s exactly how every asset works when demand outpaces supply.
The government offers inflation protected securities, matching inflation plus some usually minimal interest.
They use it to fund programs, pay salaries, etc.
That also means that costs are increasing, which may have the opposite effect
That occurs after the primary beneficiaries of inflation (those who receive freshly printed dollars) take their cut.
> Final note, inflation helps encourage people to use their money and keep the economy moving.
This is just something people say. Programming equivalent of a factory class. Sure, it makes sense given Java’s language design, but when you realize the underlying design is awful and (at least for the modern US economy) out to hurt you, you look at things a little differently.
Inflation is just the rate which the population will accept without revolting. Constant inflation is not good nor needed, but we’d have to change a lot of our monetary policy in a way that results in a much smaller wealth gap (and military).
> This is just something people say.
Do you keep your savings under a mattress? Or do you put it someplace where the money can do work in the economy, like a bank account or bonds or stocks?
Reality is that the bank just indexes your loan with inflation, so you have to pay more.
Inflation is just a hidden tax on everyone - and people should protest against it. Great way of the rich (who are heavily invested in assets, not cash) and government (who gets cash inflows from the central bank - and central bank makes money by printing money) to screw the poor.
Also if we look back price stability under the gold standard is a myth. Prices might have been broadly similar in 1800 and 1900 but there were some massive ups and downs in between that lasted decades. Predictable and stable inflation seems like a much smaller issue
It obviously does on the macro level.
On the individual level perhaps not so much. Unless you have a lot of debt as quite a few people tend to do. Then it also has obvious benefits.
Pre inflation standard bond yields were around 4-5%. Combine that with longterm deflation over several decades (e.g. late 1800s) and then consider how severely screwed you are if you have a mortgage on your farm..
How does that follow? The only reason I can afford a house is because the interest rate is near zero. At a 5% rate I’d be priced out of the market, and pay 2x more money eventually.
Only if the debt is not pegged to inflation
In Chile at least, you can get a loan in “UF”, which is an inflation-adjusted equivalent of the underlying currency. The value of UF changes with inflation (almost always going up). So the loan will just keep getting more expensive
Most mortgages there are in UF
??
On this recent Reddit post in /r/Chile someone asks “does anyone know if there is a bank which offers mortgages in pesos instead of UF?”
The answers all pretty much say they don’t even exist, or if the poster finds one to please let them know
https://www.reddit.com/r/chile/comments/1ep21lq/hipotecario_...
It looks like Chileans have never seen a mortgage _not_ in UF
Source: Live in Chile, have mortgage in Chile in pesos.
Credit markets don't work without inflation and none of this progress in the last 400 years happens without credit markets.
The age of this bond and the march out of the dark ages is not unrelated.
And that’s right. If I do $100 of adding up numbers in 1950 that’s likely worth millionths of a cent in 2025.
It sounds like a pittance now but 400 years of a compounding pittance could be a lot of money.
Edit: with an annual contribution of €13.61 and a real rate of return of 3%, 400 years of annual compounding would be over €7 million. With a rate of 4% it would be €280 million.
Reminds of Futurama with billionaire Philip J Fry after unintentionally leaving 93 cents in the bank for 1000 years.
93 cents would turn into approximately $17.88 trillion with compound interest of 3% over 1000 years.
93 cents would turn into approximately $4.28 billion with compound interest of 2% over 1000 years.
93 cents would turn into approximately $19,482.22 with compound interest of 1% over 1000 years.
Merry Christmas!
Clearly not, since all the answers were incorrect; two of them by an order of magnitude:
* 0.93((1.03)^1000) is 6.393E12, not 1.788E13
* 0.93((1.02)^1000) is 3.7E8, not 4.28E9
* 0.93*((1.01)^1000) is 19,492, not 19,482
...on a whim, I just tried asking ChatGPT "What would 93 cents accumulate to over 1000 years with 3% compound interest?", and the answer (179.74) was staggeringly wrong because it thought that 1.03^1000 was approximately 193.48.
How timely that https://news.ycombinator.com/item?id=42484937 was posted today.
I doubt anyone reading this will believe me, today is the second day I have ever tried using an LLM. Talk about a backfire.
I hope my message didn't come across at too unpleasantly confrontational - I'm not annoyed at _you_, but rather at the over-reliance of these hallucination machines in our industry which is supposed to prize hard data and accuracy. I'm glad I was able to help someone gain a bit of reasonable skepticism for them!
All the very best to you and yours for this holiday season!
[1]: https://www.investor.gov/financial-tools-calculators/calcula...
Calculating the total return given an annual average rate of return is the easy part here. The idea that you can easily invest in a diversified basket of assets and receive a fairly safe x% a year is a relatively recent one. I'm not sure what assets you could invest in 400 years that would even be guaranteed to exist today.
400 years -> 280M
That gives you a perspective on how insane a billion dollars is. Also wild that any single individual can own that much (and some a lot more!)
Nobody owns a billion dollars except governments.
"Billionaires" usually have ownership of business interests that could theoretically be sold for a billion dollars, but that they generally do not want to sell (because they would rather own and often run the business.).
This is inaccurate; it was 5%:
> According to its original terms, the bond would pay 5% interest in perpetuity, although the interest rate was reduced to 3.5% and then 2.5% during the 18th century. [1]
From the article, it looks like the original interest on this one was 6.25% (75/1200) though.
But AFAIK it gives you free entrance in the zoo...
https://www.finanzen.net/aktien/zoologischer_garten_berlin_1...
"The Legal Entity Identifier (LEI) is a reference code — like a bar code — used across markets and jurisdictions to uniquely identify a legally distinct entity that engages in a financial transaction."
What I love about this is how in just the last 20 years, a lot of work has been done to jettison bearer bonds from existence in jurisdictions across the globe, and cause the “registration” of any existing bearer bonds so that they couldnt be grandfathered in
But no sooner than this advancement in global geopolitical hegemony was developed and leveraged, the crypto market reinvented bearer bonds and they work even better
"Never sell consols" was good advice in the Jane Austen era.
[1] https://uk.finance.yahoo.com/news/uk-says-redeem-post-world-...
By the way, if you take the 1,200 Gilder and invest it in an investment vehicle at 4% compounding and wait 400 years, it's worth $7,807,589,396.13 This woman basically traded almost $8 Billion of future return for a total of $5,444 including that principal that is returned at maturity. Ouch.
I don't think this investment was anywhere as dire as you paint it as. Especially in a world where monetary inflation was very different... currency debasement didn't typically happen that quickly.
Plus we don't know what other investments Elsken Jorisdochter owned; this was probably a small part of her assets.
Finally, I'm not very convinced by the "400 years at 4% compounding" hypothetical -- could you actually buy an investment with that return at that date which was a safe non-risky one? And if you could, should you as a person with a lifespan much less than 400 years really prefer it over something which gives you a guaranteed income within your life?
"heritable annuity" is the perpetual interest. "until repayment" threw me off.
75/1200 = 6.25% though.
Where does the 2.5% interest rate quoted in the article come from?
It is confusingly written, but what it means by repayment in the above paragraph is not "until you get your 1200 guilders back in these 75-guilder installments", its meaning is clarified by the next paragraph,
> On such conditions that I or my successors [unreadable] of the aforesaid Leckendijck may, at any time when it pleases us, extinguish, repay, and buy back the said annuity in full at once and not in parts or fractions with the sum of one thousand two hundred Carolus guilders
which explains how the board can get itself out of this obligation: by paying the original principal of 1200 guilders back.
Something like a foreign exchange market cannot help determine this right?
In theory, could the exchange rate for $1 be made equal to 1,200 carolus guilders? (Effectively, making the bonds worthless)
https://en.wikipedia.org/wiki/2016_Indian_banknote_demonetis...
If you want to treat it like a completely separate coin, you'd have to buy historical carolus guilders in auctions. They seem to be worth about €1500 [0], although the same amount of gold can be bought for only €240.
When the Dutch florin was introduced there would have been an agreed (or imposed) exchange rate. Looks like that was 1:1.
Later when the Euro was adopted there was an exchange rate for that too.
To get to USD use the floating exchange rate of the open market.
Curious why the board never paid back the original principal at any point in time over the past 400 years?
If the current annual interest of 2.5% cited in the article is €13.61, that would make 1200 guilders €544.40.
Did they just forget to? Did they figure the bond would eventually disappear? Or did they at some point think it was really cool to have a piece of "living history" and want to keep the world record alive for oldest active bond? If so... when?
Ofcourse it worked the other way too. Entire armies of paid mercenaries could just take the money and run into the night.
The paper argues that lenders (or at least Genoese lenders who provided at least 2/3 of short terms loans) were able to work as a bloc with sufficient power to compel the King to eventually resume payments. As you pointed out, the King is mainly lending money to pay for armies. Being cut-off from credit is the same thing as being cut off from his army.
An interesting point that this paper makes at the end is that in a pre-modern context, lenders would have understood that sometimes... shit happens. They understood what the mechanisms a King would have for generating revenue, and that these revenue streams were not stable (taxation and silver shipments from the New World in Philippe's case), and that a King could in deep default "in good faith" and still be a "good enough" financial situation in subsequent years. That is in fact why the King even needed to borrow money from them to begin with.
https://www.bde.es/f/webpi/SES/seminars/2009/files/sie0927.p...
Not quite. Its criminal code inherits directly from that of the 1871 Reich (including quite notoriously Paragraphs 175 and 218).
But it is correct to say that its constitution inherits only back to 1919, and it never maintained any pretense of connection to the Holy Roman Empire.
Moving such a document is extremely risky and a lot of work so not worth it in almost any case short of the PR bump/curiousity of having the "world's oldest bond"
I say that as someone whose grandfather was a slave.