7 ms·

Serious question: Why is (bond) interest not adjusted for inflation (or deflation for that matter)? Very long timespans such as these really devalue any interes

by rbinv 11y ago

Serious question: Why is (bond) interest not adjusted for inflation (or deflation for that matter)? Very long timespans such as these really devalue any interest payments, do they not?

icebraining 11y ago
Some are: https://en.wikipedia.org/wiki/Inflation-indexed_bond https://en.wikipedia.org/wiki/Inflation-indexed_bond Back then, inflation was probably less of a problem for investors.
gahahaha 11y ago
It didn't use to matter much. Consistent inflation is a rather new phenomenon that basically only appeared after WWII. There was for example almost no inflation in Britain between 1814 and 1914. For the record, in case there still are Ron Paul fans/goldbugs out there: moderate inflation is generally considered a good thing by economists today and inflation is probably too low at the moment.
- msandford 11y ago
  Personally, as a reductionist, I like the idea that money is somehow permanent. Maybe economists like inflation, and perhaps it is "good" for the economy overall. But the idea that a dollar saved today can buy roughly the same amount of stuff in a decade or a century seems like a powerful idea to me. To me that seems like a goal that's worthy of pursuing because then money becomes a true abstraction that's not leaky. And because of the way my brain works, I see that as incredibly useful. Not having to always inflation adjust things, not having to do this or that, not having to worry about how much retirement you actually have versus how much you think you have, etc. I understand that for various reasons few other people want this, but that doesn't convince me personally otherwise. One person described money as "sweat, distilled" and I find that definition incredibly attractive. I recognize that plenty of people making money not by sweating but thinking or whatever, but I still find it an excellent description. And I can't see how devaluing a person's effort over time is a viable strategy for building a lasting civilization. I think it leads inevitably towards the kind of throwaway society we have here in the US and virtually guarantees that we won't build infrastructure of long lasting value like exists elsewhere in the world. Well built stuff can last for hundreds or thousands of years. I wish money was the same.
  - simonh 11y ago
    It might seem like a nice idea that cash stuffed in a mattress for a few decades would keep it's value, but that's not beneficial to society. Encouraging money to be invested in order to earn a premium, and stave off inflation, is a good thing overall because it puts wealth to work creating jobs and stimulating economic activity.
    - WoodenChair 11y ago
      You just argued that we need inflation to stave off inflation.
      - gahahaha 11y ago
        No he didn't. He argued that we need inflation to stop hoarding of money and make people spend their money and create activity in the economy. This is important because in the economy as a whole TotalSpending == TotalIncome
      - Dylan16807 11y ago
        No, that's not what that post says. I'll reword it for you: 'Encouraging money to be invested, by motivating people via inflation, is a good thing overall because it puts wealth to work creating jobs and stimulating economic activity.'
      - chucksmash 11y ago
        He said that as a society we benefit from inflation because as individuals we are forced to invest our funds so that individually we can avoid the effects of the inflation.
    - iopq 11y ago
      Except it is beneficial, because that cash inside the mattress will get spent eventually. Guess when it gets spent? During a financial crisis. If everyone had a little bit of cash in their mattress, the spending wouldn't go down as much and the crisis would have a limited impact.
  - 11y ago
- mikeyouse 11y ago
  There was a period of low inflation during that time frame but it temporary and isolated.. There were huge inflation swings before, during, and somewhat after that time.. http://imgur.com/HLfnO6R http://imgur.com/HLfnO6R
  - gahahaha 11y ago
    I think you'll observe that there are periods of inflation offset by periods of deflation, meaning that over time the value of money was somewhat more stable than your image implies.
stevepike 11y ago
Some are! TIPS (https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm https://www.treasurydirect.gov/indiv/products/prod_tips_glan...) are US government-issued inflation adjusted securities. You can also buy debt with coupons based off of other things (like LIBOR). Generally speaking though, bonds are fixed income securities and are not explicitly inflation adjusted. The price you'd pay to buy a given bond fluctuates in part based on market expectations of future inflation.
dragonwriter 11y ago
> Serious question: Why is (bond) interest not adjusted for inflation (or deflation for that matter)? Some bonds are, but with a moderate, low-volatility year-over-year inflation in the modern period its not that important (reasonably good inflation expectations exist and are factored into market prices), and before modern independent central banking -- governments weren't exactly inclined to surrender the power to monetize debt (when they were convinced to largely curtail that power, it was through independent central banking rather than through inflation-adjusting bond interest.) Inflation adjusting bond yield -- if done generally so that it significantly affect debt service costs -- also creates substantial incentives to systematically manipulate official inflation measures; if you don't trust the issuing government to manage inflation within a reasonably predictable range so that it can effectively be priced-in to the bond purchase, do you trust them to accurately measure inflation when they have a substantial near-term financial incentive not to? > Very long timespans such as these really devalue any interest payments, do they not? Well, sure, they reduce the real (though not nominal) value of the annual income from a perpetuity, and those over time the real (though not nominal) value of the bond itself. I'm not sure this is a bad thing inherently; why shouldn't bonds tend to have reduced real value over time?
- rbinv 11y ago
  Thanks for your input, makes sense. Why should the real bond value reduce over time, though? Sorry to answer your question with another question, but I don't really see a reason why they should. After all, isn't some degree of predictability/fixed value the point?
afiedler 11y ago
These types of bonds do exist. They are called "linkers" and many governments issue them. In the US, we have TIPS (Treasury Inflation Protected Securities) and some savings bonds that are linked to the CPI. One major issue with these is that the inflation adjustment typically lags by 6+ months, so they are not a good short-term hedge. But they are very popular.

by rbinv 11y ago

Serious question: Why is (bond) interest not adjusted for inflation (or deflation for that matter)? Very long timespans such as these really devalue any interest payments, do they not?

icebraining 11y ago

Some are: https://en.wikipedia.org/wiki/Inflation-indexed_bond https://en.wikipedia.org/wiki/Inflation-indexed_bond Back then, inflation was probably less of a problem for investors.

gahahaha 11y ago

It didn't use to matter much. Consistent inflation is a rather new phenomenon that basically only appeared after WWII. There was for example almost no inflation in Britain between 1814 and 1914. For the record, in case there still are Ron Paul fans/goldbugs out there: moderate inflation is generally considered a good thing by economists today and inflation is probably too low at the moment.

msandford 11y ago
Personally, as a reductionist, I like the idea that money is somehow permanent. Maybe economists like inflation, and perhaps it is "good" for the economy overall. But the idea that a dollar saved today can buy roughly the same amount of stuff in a decade or a century seems like a powerful idea to me. To me that seems like a goal that's worthy of pursuing because then money becomes a true abstraction that's not leaky. And because of the way my brain works, I see that as incredibly useful. Not having to always inflation adjust things, not having to do this or that, not having to worry about how much retirement you actually have versus how much you think you have, etc. I understand that for various reasons few other people want this, but that doesn't convince me personally otherwise. One person described money as "sweat, distilled" and I find that definition incredibly attractive. I recognize that plenty of people making money not by sweating but thinking or whatever, but I still find it an excellent description. And I can't see how devaluing a person's effort over time is a viable strategy for building a lasting civilization. I think it leads inevitably towards the kind of throwaway society we have here in the US and virtually guarantees that we won't build infrastructure of long lasting value like exists elsewhere in the world. Well built stuff can last for hundreds or thousands of years. I wish money was the same.
- simonh 11y ago
  It might seem like a nice idea that cash stuffed in a mattress for a few decades would keep it's value, but that's not beneficial to society. Encouraging money to be invested in order to earn a premium, and stave off inflation, is a good thing overall because it puts wealth to work creating jobs and stimulating economic activity.
  - WoodenChair 11y ago
    You just argued that we need inflation to stave off inflation.
    - gahahaha 11y ago
      No he didn't. He argued that we need inflation to stop hoarding of money and make people spend their money and create activity in the economy. This is important because in the economy as a whole TotalSpending == TotalIncome
    - Dylan16807 11y ago
      No, that's not what that post says. I'll reword it for you: 'Encouraging money to be invested, by motivating people via inflation, is a good thing overall because it puts wealth to work creating jobs and stimulating economic activity.'
    - chucksmash 11y ago
      He said that as a society we benefit from inflation because as individuals we are forced to invest our funds so that individually we can avoid the effects of the inflation.
  - iopq 11y ago
    Except it is beneficial, because that cash inside the mattress will get spent eventually. Guess when it gets spent? During a financial crisis. If everyone had a little bit of cash in their mattress, the spending wouldn't go down as much and the crisis would have a limited impact.
- 11y ago
mikeyouse 11y ago
There was a period of low inflation during that time frame but it temporary and isolated.. There were huge inflation swings before, during, and somewhat after that time.. http://imgur.com/HLfnO6R http://imgur.com/HLfnO6R
- gahahaha 11y ago
  I think you'll observe that there are periods of inflation offset by periods of deflation, meaning that over time the value of money was somewhat more stable than your image implies.

stevepike 11y ago

Some are! TIPS (https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm https://www.treasurydirect.gov/indiv/products/prod_tips_glan...) are US government-issued inflation adjusted securities. You can also buy debt with coupons based off of other things (like LIBOR). Generally speaking though, bonds are fixed income securities and are not explicitly inflation adjusted. The price you'd pay to buy a given bond fluctuates in part based on market expectations of future inflation.

dragonwriter 11y ago

> Serious question: Why is (bond) interest not adjusted for inflation (or deflation for that matter)? Some bonds are, but with a moderate, low-volatility year-over-year inflation in the modern period its not that important (reasonably good inflation expectations exist and are factored into market prices), and before modern independent central banking -- governments weren't exactly inclined to surrender the power to monetize debt (when they were convinced to largely curtail that power, it was through independent central banking rather than through inflation-adjusting bond interest.) Inflation adjusting bond yield -- if done generally so that it significantly affect debt service costs -- also creates substantial incentives to systematically manipulate official inflation measures; if you don't trust the issuing government to manage inflation within a reasonably predictable range so that it can effectively be priced-in to the bond purchase, do you trust them to accurately measure inflation when they have a substantial near-term financial incentive not to? > Very long timespans such as these really devalue any interest payments, do they not? Well, sure, they reduce the real (though not nominal) value of the annual income from a perpetuity, and those over time the real (though not nominal) value of the bond itself. I'm not sure this is a bad thing inherently; why shouldn't bonds tend to have reduced real value over time?

rbinv 11y ago
Thanks for your input, makes sense. Why should the real bond value reduce over time, though? Sorry to answer your question with another question, but I don't really see a reason why they should. After all, isn't some degree of predictability/fixed value the point?

afiedler 11y ago

These types of bonds do exist. They are called "linkers" and many governments issue them. In the US, we have TIPS (Treasury Inflation Protected Securities) and some savings bonds that are linked to the CPI. One major issue with these is that the inflation adjustment typically lags by 6+ months, so they are not a good short-term hedge. But they are very popular.