4 ms·

yeah sure, i wonder though if interest is a necessary feature of credit. the interest is charged to cover the demand, the risk, and inflation. with government,

• candiodari 9y ago
  In the case of government, everything is weighted against the lender. For instance, what the US government did in 1971 ? Government: "We are going to pay X in gold for every one of Y you have", Investors: "Okay, pay up", Government: "We were going to pay but instead confiscate all of it" ... That's supposed to be the most reliable government on the planet (and it wasn't the first time it did that, and it won't be the last). The sad truth is that when you calculate things out, bonds by large corporations (average of S&P500) are in fact more reliable than bonds by the US government, and whilst I haven't checked, I strongly suspect bonds by every other government. Mostly because corporations can't just choose to cancel contracts and bonds, and therefore don't. So they're mispriced. In reality the risk of the US government is, given the published default risk, A2 or A3 rating at best, and should therefore carry interest rates lower-bounded by that grade, or about 4%. And of course the "risk-free" interest rate should be added to that, to make something like 5.5% or so. That is, of course, only for Federal bonds. Actual interest rates are something like 1%, mostly because the "independent" government agency called the FED "chose" to buy government bonds at that rate. So you see, the government has already done a great deal of what you're saying, and lowered the interest rate it's paying a great deal, in a very unfair way. Essentially, in the long term, and assuming the previous century will be similar to the next, you should expect to lose something like 40-60% of the money you lend the US government (because of the next default). And if you reinvest dividends, or keep the proceeds in dollars, of course, 100%. The issue is that if you don't give people any incentive to be economically productive (because that's exactly what interest rates at 0% do) then ... they won't be.
  • cam_l 9y ago
    oh sure, agree government is not perfectly reliable, as you point out. you are probably right about mispricing.. of course government bond is less likely to disappear altogether than any one corporation. and the bonds are just used to leverage further lending. the rate doesn't matter as much as the published (low) market risk. but anyway, the gp was discussing issues with government taking or holding debt indefinitely. I was just pointing out that government can use it's power and position to nullify the political issue of interest on debt that you rightly brought up. from the lender point of view that is not a great deal, but I don't see why interest needs to be an integral part of government debt.. as it can, and as we seem to agree, mitigate the risk, demand and inflation factors I mentioned. through fair means or foul. and if the market declines the offer, the government can increase the supply of money.