8 ms·

> In the 17th century, people sometimes issued perpetual debt. But it is very rare that there is an uninterrupted history when governments or other entities hav

> In the 17th century, people sometimes issued perpetual debt. But it is very rare that there is an uninterrupted history when governments or other entities have not defaulted on those debts. Ever see those banking website ads or financial planning brochures that tell you that you can become a millionaire by the time you retire if you sock away just $75 a month through the magic of compound interest? The math checks out, but the longer the time horizon the more likely it is that wars, bankruptcies, currency devaluations, revolutions, government confiscations, hyperinflationary periods, and other economic cataclysms will wipe out your investment.

coliveira 6y ago
The biggest threat to interest compounding is inflation. Every time you see someone saying that by saving $X each month you can get $1M in 50 years, the question to answer is: what's gonna be the real value of $1M 50 years from now?
- cheriot 6y ago
  Only because you're talking about a bond with fixed payments. Operating companies (stocks) handle inflation better because they can raise prices.
  - coliveira 6y ago
    But with companies you're not dealing with interest compounding, you're dealing with a company's growth prospects, which are largely unrelated to interest rates.
    - cheriot 6y ago
      I've not seen a context where people where strict about saying compound interest is exclusive to interest payments. Reinvested dividends and reinvested earnings also compound.
      - coliveira 6y ago
        You'll have a hard time finding companies that pay decent dividends and at the same time have high growth prospects.
        cinntaile 6y ago
        He isn't saying that you'd have both at the same time. He's saying that high company growth is also compounding. And reinvesting dividends is yet another form.
    - deleted 6y ago
      [deleted]
- markvdb 6y ago
  This bond still yielding is an anomaly though. Instability will often manifest as inflation, but not always. Any idea which current countries have not experienced revolution, hyperinflation, annexation, and more intense events than just low or moderate inflation? https://upload.wikimedia.org/wikipedia/en/8/88/The_Hanke_Krus_Hyperinflation_Table.pdf https://upload.wikimedia.org/wikipedia/en/8/88/The_Hanke_Kru... is a good starting point. I started making a list of countries where you could reasonably be expected to have lost all your monetary savings at some point in the last 100 years. Not a full list yet, but quite impressive already. It's at https://imgur.com/a/gczjp4y https://imgur.com/a/gczjp4y .
  - cinntaile 6y ago
    This would be even better if the cause as well as the time period for each country was included as well.
dmurray 6y ago
Around the developed world, interest rates are at a historic low over the last 20 years or so. The EU borrows at 0%. Argentina issued a 100-year bond at 8%, for God's sake. One way to tell this story is that investors have unprecedented trust in global stability. They rate the risk of wars, bankruptcies, revolutions, etc extremely low. There are other interpretations: you can say that central banks keep interest rates artificially low through control of the money supply, or compel investors to buy government bonds at artificially high prices, and both are reasonable arguments. But treating a price as a function of both supply and demand, I think there's a lot of truth in the "peaceful, stable" interpretation.
- lumost 6y ago
  Given rising debt loads, this view seems myopic. Presumably if the balance of foreign debt outweighs the risks of walking away from it - countries will eventually walk away from it. It may simply be that revolution or other political instability will be required prior to countries walking away from the debt. I’d doubt any major power could or would fight a debt war in the 21st century.
- nradov 6y ago
  It's not that investors have trust, it's just that there's no alternative.
  - dmurray 6y ago
    People say this, but I didn't consider it worthy of being mentioned as a serious reason. You can invest in stocks or commodities or real estate or these days cryptocurrencies. They all have great historic returns but some people and some institutions instead lend their billions to the world's governments at such low prices. You can't say with a straight face that there are no other plausible investments. You could tell the opposite story: bonds continue to be popular and pricy because the world fears instability: that any other asset class may be in a bubble and about to lose all its value. But even then, investors are saying that though companies and industries may rise and fall, the countries will survive and pay their debts.
thaumasiotes 6y ago
> Ever see those banking website ads or financial planning brochures that tell you that you can become a millionaire by the time you retire if you sock away just $75 a month through the magic of compound interest? The math checks out, but the longer the time horizon... Those flyers depend on a high-interest environment. At 1% annual interest (0.083% monthly interest), accumulating $1,000,000 by saving $75 / month would take just over 3,000 months, or 250 years. Your deposits would only total about $225,000 over that time, so the "magic" of compound interest is still apparent, but it doesn't make for a compelling sales pitch. "Quintuple¹ your money in just 250 years! ¹ Almost."
- justinsaccount 6y ago
  You just need to freeze yourself for 1,000 years.. https://www.youtube.com/watch?v=g9Z4d5EOjGs&t=27s https://www.youtube.com/watch?v=g9Z4d5EOjGs&t=27s
- llampx 6y ago
  Well they've gone from using their savings accounts in the calculations to just putting everything into the stock market, usually the S&P 500. Its a win-win - they get to charge higher transaction fees and management fees if its their own product, and the recent bull market makes the customer think they're going to get 7% returns forever. Just as long as they don't need to withdraw their money during a recession.
  - sokoloff 6y ago
    The worst-ever 20-year return for the S&P 500 index was +6.4% per year. It’s not the recent bull markets convincing investors that 7% returns will come forever. It’s a long history of such returns. https://www.thebalance.com/rolling-index-returns-4061795 https://www.thebalance.com/rolling-index-returns-4061795
    - jaredtn 6y ago
      That data looks at January 1979 to present. I believe ever includes the rest of the 20th century as well... There was certainly a negative return over 20-year periods including the Great Depression. And negative real returns during the 1970s stagflation.
cheriot 6y ago
When was the last time a single cataclysm affected every financial market at the same time? We have a greater ability to diversify now than anyone did 100 years ago.
- oceanghost 6y ago
  A year ago?
  - cheriot 6y ago
    It's not a cataclysm when markets recover in 6 months. OP is talking about getting wiped out.
    - oceanghost 6y ago
      Just wait for the (hyper?)inflation.
- nradov 6y ago
  In practice diversification has actually gotten harder for most investors. The correlation coefficient between all major asset classes during periods of high volatility has increased across the board. Investors have had to move into riskier illiquid assets in pursuit of uncorrelated returns.
  - cheriot 6y ago
    The events OP is talking about are not normal market fluctuations: > wars, bankruptcies, currency devaluations, revolutions, government confiscations, hyperinflationary periods, and other economic cataclysms Those are primarily political risks. Not independent events, of course, but very different than correlations between asset classes.
    - nradov 6y ago
      So what? Regardless of the cause, the point is that there will be occasional "black swan" events when all major asset classes fall together and diversification becomes less effective.
thescriptkiddie 6y ago
I'm not sure that math actually checks out. By my math, you'd need to save more like $600 a month starting at age 22 to accumulate $1 million by age 65 (assuming 5% annual returns after inflation).

coliveira 6y ago

The biggest threat to interest compounding is inflation. Every time you see someone saying that by saving $X each month you can get $1M in 50 years, the question to answer is: what's gonna be the real value of $1M 50 years from now?

cheriot 6y ago
Only because you're talking about a bond with fixed payments. Operating companies (stocks) handle inflation better because they can raise prices.
- coliveira 6y ago
  But with companies you're not dealing with interest compounding, you're dealing with a company's growth prospects, which are largely unrelated to interest rates.
  - cheriot 6y ago
    I've not seen a context where people where strict about saying compound interest is exclusive to interest payments. Reinvested dividends and reinvested earnings also compound.
    - coliveira 6y ago
      You'll have a hard time finding companies that pay decent dividends and at the same time have high growth prospects.
      - cinntaile 6y ago
        He isn't saying that you'd have both at the same time. He's saying that high company growth is also compounding. And reinvesting dividends is yet another form.
  - deleted 6y ago
    [deleted]
markvdb 6y ago
This bond still yielding is an anomaly though. Instability will often manifest as inflation, but not always. Any idea which current countries have not experienced revolution, hyperinflation, annexation, and more intense events than just low or moderate inflation? https://upload.wikimedia.org/wikipedia/en/8/88/The_Hanke_Krus_Hyperinflation_Table.pdf https://upload.wikimedia.org/wikipedia/en/8/88/The_Hanke_Kru... is a good starting point. I started making a list of countries where you could reasonably be expected to have lost all your monetary savings at some point in the last 100 years. Not a full list yet, but quite impressive already. It's at https://imgur.com/a/gczjp4y https://imgur.com/a/gczjp4y .
- cinntaile 6y ago
  This would be even better if the cause as well as the time period for each country was included as well.

dmurray 6y ago

Around the developed world, interest rates are at a historic low over the last 20 years or so. The EU borrows at 0%. Argentina issued a 100-year bond at 8%, for God's sake. One way to tell this story is that investors have unprecedented trust in global stability. They rate the risk of wars, bankruptcies, revolutions, etc extremely low. There are other interpretations: you can say that central banks keep interest rates artificially low through control of the money supply, or compel investors to buy government bonds at artificially high prices, and both are reasonable arguments. But treating a price as a function of both supply and demand, I think there's a lot of truth in the "peaceful, stable" interpretation.

lumost 6y ago
Given rising debt loads, this view seems myopic. Presumably if the balance of foreign debt outweighs the risks of walking away from it - countries will eventually walk away from it. It may simply be that revolution or other political instability will be required prior to countries walking away from the debt. I’d doubt any major power could or would fight a debt war in the 21st century.
nradov 6y ago
It's not that investors have trust, it's just that there's no alternative.
- dmurray 6y ago
  People say this, but I didn't consider it worthy of being mentioned as a serious reason. You can invest in stocks or commodities or real estate or these days cryptocurrencies. They all have great historic returns but some people and some institutions instead lend their billions to the world's governments at such low prices. You can't say with a straight face that there are no other plausible investments. You could tell the opposite story: bonds continue to be popular and pricy because the world fears instability: that any other asset class may be in a bubble and about to lose all its value. But even then, investors are saying that though companies and industries may rise and fall, the countries will survive and pay their debts.

thaumasiotes 6y ago

> Ever see those banking website ads or financial planning brochures that tell you that you can become a millionaire by the time you retire if you sock away just $75 a month through the magic of compound interest? The math checks out, but the longer the time horizon... Those flyers depend on a high-interest environment. At 1% annual interest (0.083% monthly interest), accumulating $1,000,000 by saving $75 / month would take just over 3,000 months, or 250 years. Your deposits would only total about $225,000 over that time, so the "magic" of compound interest is still apparent, but it doesn't make for a compelling sales pitch. "Quintuple¹ your money in just 250 years! ¹ Almost."

justinsaccount 6y ago
You just need to freeze yourself for 1,000 years.. https://www.youtube.com/watch?v=g9Z4d5EOjGs&t=27s https://www.youtube.com/watch?v=g9Z4d5EOjGs&t=27s
llampx 6y ago
Well they've gone from using their savings accounts in the calculations to just putting everything into the stock market, usually the S&P 500. Its a win-win - they get to charge higher transaction fees and management fees if its their own product, and the recent bull market makes the customer think they're going to get 7% returns forever. Just as long as they don't need to withdraw their money during a recession.
- sokoloff 6y ago
  The worst-ever 20-year return for the S&P 500 index was +6.4% per year. It’s not the recent bull markets convincing investors that 7% returns will come forever. It’s a long history of such returns. https://www.thebalance.com/rolling-index-returns-4061795 https://www.thebalance.com/rolling-index-returns-4061795
  - jaredtn 6y ago
    That data looks at January 1979 to present. I believe ever includes the rest of the 20th century as well... There was certainly a negative return over 20-year periods including the Great Depression. And negative real returns during the 1970s stagflation.

cheriot 6y ago

When was the last time a single cataclysm affected every financial market at the same time? We have a greater ability to diversify now than anyone did 100 years ago.

oceanghost 6y ago
A year ago?
- cheriot 6y ago
  It's not a cataclysm when markets recover in 6 months. OP is talking about getting wiped out.
  - oceanghost 6y ago
    Just wait for the (hyper?)inflation.
nradov 6y ago
In practice diversification has actually gotten harder for most investors. The correlation coefficient between all major asset classes during periods of high volatility has increased across the board. Investors have had to move into riskier illiquid assets in pursuit of uncorrelated returns.
- cheriot 6y ago
  The events OP is talking about are not normal market fluctuations: > wars, bankruptcies, currency devaluations, revolutions, government confiscations, hyperinflationary periods, and other economic cataclysms Those are primarily political risks. Not independent events, of course, but very different than correlations between asset classes.
  - nradov 6y ago
    So what? Regardless of the cause, the point is that there will be occasional "black swan" events when all major asset classes fall together and diversification becomes less effective.

thescriptkiddie 6y ago

I'm not sure that math actually checks out. By my math, you'd need to save more like $600 a month starting at age 22 to accumulate $1 million by age 65 (assuming 5% annual returns after inflation).