This story also shows another facet of inflation: the amount currently paid is €13.61 a year. Effectively, that debt was killed by inflation over the years.
Inflation makes it harder for the current generation but also free future generations from your debts.
the view you are describing could be described as (or at least, i would describe as) "newtonian" interest/inflation, where modern thinking is more "einsteinian".
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.
I think a more nuanced take would simply be that the long tail of a perpetual bond is unlikely to be worth that much, which is why these days bonds with extremely long maturities aren’t issued.
I think I was taught that perpetuities were banned because of the legal/accounting woes they create in the future.
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 :)
Hm interesting. I think that would also explain why they make gift cards expire or lose value over time, even though, if anything, they should be paying you interest because you’re giving them a(n otherwise) free loan.
The catch is that the interest-free loan can be called in by you, the gift card holder, at any time - so they get less utility from any given amount of gift card balances than they would loans/corporate bonds of the same amount because they're always trying to be prepared to pay out some portion of those balances.
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.
Any large issuer of gift cards has an income stream from gift card breakage to the tune of a few percentage points of their outstanding gift card obligations each year.
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.
Most of that is irrelevant here. All they have to do is put in an interest bearing account, and pay out some amount less than they're earning. Furthermore, they will effectively owe you less than even the principle since they (on average) sell the goods for more than they cost. You're forgetting that this liability comes with an over-offsetting asset.
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.
The relatively short validity period of gift cards makes them more profitable for the issuer because a substantial minority of them are not redeemed before the expiry date.
Sure. That Party City gift card bought last week may not be honored today due to bankruptcy and certainly won’t be honored after the stores close in a couple months.
No, that argument applies to the owner of the gift card accounting for the fact that the gift card may not be used (and isn’t a great method assuming they intend to spend it and expect to get the full value).
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.
So, here’s the thing about 400-year bonds: they’re weird. Most sovereign entities don’t even last 200 years, so issuing one feels less like a financial plan and more like performance art. But sometimes these things actually make sense. Take Elsken Jorisdochter: she bought a bond for 1,200 guilders, got 75 guilders annually (tax-free, mind you), and after 16 years, it was repaid. Not bad.
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.
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
Can’t tell what exactly they think is in UF. Perhaps you mean the principle is in UF? That’s pretty meaningless though. The actual loan amount is converted to pesos when it’s finalized (the process can take months), and the APR is just some percentage of that.
Source: Live in Chile, have mortgage in Chile in pesos.
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.
The hole in the system, though, is fixed-rate loans over the long term, and the ability to refinance relatively-cheaply. If you buy a house when rates and inflation are low, then over the life of the loan you'll win on inflation. All you have to do is hang on to that low-interest loan. If you happen to buy when rates are high, then you refinance the next time they're low and hold that loan. It's the ability to (worst-case, "eventually") lock in a low rate for decades that lets you win from inflation in the long term. There are a lot of people that were holding onto real estate loans at ~2-4% throughout the pandemic monetary+housing inflation cycle that made out very well. They didn't have to predict it or time it, they just grabbed a low-rate loan some time back whenever they could, and then waited for the inevitable to eventually happen.
How is it much worse than other indirect taxes? At least it provides benefits that VAT or sales taxes don’t like allows central banks to stabilize the financial system and reduce the outfall from boom and bust cycles (which were much worse pre 1830s).
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
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..
> 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.
> 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?
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.
Let’s say you have an economy of 100,000 units of work done in a year and thus is backed by a fixed supply of $100,000
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
> Inflation benefits borrowers and penalizes lenders.
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.
> Inflation benefits borrowers and penalizes lenders.
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).
>> Final note, inflation helps encourage people to use their money and keep the economy moving.
> 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?
> Inflation makes it harder for the current generation
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?
"if your wages go up with inflation, and you store money in stocks/bonds that keep up with inflation"
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.
Why would expenses need to track less than inflation, if your wages are tracking with it? Expenses, by definition, track with inflation.
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."
There's such a thing as a personal inflation rate.
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.
If you get an annual cost of living adjustment, presumably it is ahead of cost half the year and behind the other half which averages out. Rent usually updates annually also. If all other debt payments are effectively decreasing, you’re just doing better.
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.
The interest is usually still more than inflation, they just make less money- and the alternatives for them are either cash, which loses more, or investments that are higher risk and more volatile.
Wages are a lagging indicator. Basically everyone who makes their money working and not off investments gets screwed roughly to the tune of the inflation rate. Eventually the economy reached equilibrium but in the intervening years everyone's discretionary spending gets redirected into the pockets of asset owners rather than quality of life improvements.
This is why being in low interest debt is so amazing. Take two people with the exact same job tracks, same appartments, family, interests, etc...
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.
I don’t think the 2-3x as much in 15 years time is likely to be true. When interest rates start out low there is much less scope for appreciation than when they start out high. So if you buy when mortgage rates are at 3% you can’t expect the big gains you get when mortgage rates fall.
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.
> My personal rule of thumb is that rents remain fairly stable as a proportion of earnings
This is the problem, because supply is artificially constrains if wages double (through efficiencies), rents increase to soak up the extra productivity.
That did happen to Boomers, but I wouldn't assume it will happen again. Over a long enough time period housing values must approximately track inflation, because there is an upper threshold of income percentage (certainly below 100%) people can afford to spend on housing. Currently, mortgage rates are about 2x what inflation has been over decades historically. Boomers mostly made money with regulatory capture- landowners were able to politically block housing construction during a time of increasing population, causing a short term anomaly where people were paying steadily increasingly high percentages of income on housing. Both that regulatory capture, and the population growth are disappearing now.
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.
Buying still has a ton of tax advantages and gives people access to an incredible amount of leverage that they wouldn't be able to get otherwise.
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.
It depends on when and where: All real estate investment is a bet on a specific location, and properties don't maintain themselves: In general, the land appreciates, while the house on top of it loses value.
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.
> In 15 years, those properties will be worth 2-3x as much
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).
>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.
Interest rates from 1971-1998 were higher than they are today[1].
It kind of happened to boomers, but it's wrong in a number of ways.
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.
People complain about inflation, which is very odd in the 2% era but understandable when talking about genuine hyperinflation. But, when talking about a four hundred year old bond, I would like people to think about all the population, political, technological and environmental changes that have happened across that period, look me in the eye, and say "yes, I expect every single item to have the same price that it did in 1624".
The banks offload the obligation to Fannie Mae and collect commissions and administrative fees. With respect to mortgages, they function essentially as sales agents for the government.
Indeed, the Netherlands at that time operated on a 'hard money' system. Coins were minted from gold, silver, and copper, with their value directly tied to the availability and intrinsic worth of these metals, naturally limiting the money supply. This is in contrast to modern fiat currency systems, where money derives its value from government decree rather than a physical commodity, allowing inflation through unrestricted money creation.
Inflation makes it harder for the current generation but also free future generations from your debts.