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Sovereign debt is only risk-free relative to the issuing government's continued existence. The historical average duration of empires, republics, dynasties, an

Sovereign debt is only risk-free relative to the issuing government's continued existence. The historical average duration of empires, republics, dynasties, and monarchies is 349 years. The assumptions we make about financial markets in the developed world seem to completely ignore political factors, as if issuing governments or unions that exist today will always exist - as if history has somehow ended. When you buy a 30y US Treasury bond at auction, you are getting paid 3.13% to assume that between years 231 and 261, representing 8.6% of the average lifespan of empires, no existentially threatening political upheaval will occur in the United States. Seeing the political division of the populace in the 2016 election, I wonder if this is a prudent assumption.

dmurray 9y ago
You get paid 3.13% every year. So you are getting paid closer to 94% for making that assumption. Plus you get some of the 94% paid out early, so if you were wrong about there being no terrible upheaval, you still got something out of it (hopefully you didn't reinvest the interest in more Treasuries, or keep it in cash). So even when you put it like that - the odds don't seem too bad.
xvedejas 9y ago
I also wonder if this is a prudent assumption. Existential threat is really hard to measure. If we want to know the average lifespan of a modern republic that has existed for about 250 years already, we don't have many data points to compare to. Here are ones that may count: - San Marino has been a republic for over 1000 years - The Netherlands was a republic from 1581 until 1806 - Switzerland has been a republic since 1648 - Paraguay, Chile, Argentina, and a dozen other Latin American countries have been republics continuously for over 150 years. Not without their share of upheaval, but even in the case of Venezuela I don't know that you can argue that the country stopped existing in sudden crisis. And that's all I can find, for "modern" republics >= 150 years old at present or at cessation. The next closest is France, which is also still a republic. We don't have too much data but I would listen to an argument that modern republics seem to be unusually long-lived compared to more traditional government types. With no better information available, you can choose either to trust the examples we have, or to adopt the doomsday prepper mentality. When trust is cheaper, it's not any surprise to me that people trust the government to continue existing.
candiodari 9y ago
The US is <50 years from it's last large default (moving off the Gold standard). This is more than most European nations. And for nonpayment risk you obviously count the time between large defaults. Whether the person/company/country/empire/dynasty/... "dies" or not is irrelevant. Private companies, mostly because they have no such choice, actually do better than states.

dmurray 9y ago

You get paid 3.13% every year. So you are getting paid closer to 94% for making that assumption. Plus you get some of the 94% paid out early, so if you were wrong about there being no terrible upheaval, you still got something out of it (hopefully you didn't reinvest the interest in more Treasuries, or keep it in cash). So even when you put it like that - the odds don't seem too bad.

xvedejas 9y ago

I also wonder if this is a prudent assumption. Existential threat is really hard to measure. If we want to know the average lifespan of a modern republic that has existed for about 250 years already, we don't have many data points to compare to. Here are ones that may count: - San Marino has been a republic for over 1000 years - The Netherlands was a republic from 1581 until 1806 - Switzerland has been a republic since 1648 - Paraguay, Chile, Argentina, and a dozen other Latin American countries have been republics continuously for over 150 years. Not without their share of upheaval, but even in the case of Venezuela I don't know that you can argue that the country stopped existing in sudden crisis. And that's all I can find, for "modern" republics >= 150 years old at present or at cessation. The next closest is France, which is also still a republic. We don't have too much data but I would listen to an argument that modern republics seem to be unusually long-lived compared to more traditional government types. With no better information available, you can choose either to trust the examples we have, or to adopt the doomsday prepper mentality. When trust is cheaper, it's not any surprise to me that people trust the government to continue existing.

candiodari 9y ago

The US is <50 years from it's last large default (moving off the Gold standard). This is more than most European nations. And for nonpayment risk you obviously count the time between large defaults. Whether the person/company/country/empire/dynasty/... "dies" or not is irrelevant. Private companies, mostly because they have no such choice, actually do better than states.