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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. In

by gip 2y ago

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.

mitthrowaway2 2y ago
Doesn't that depend on which generation collects payments on the bond, and which makes the payments?
fsckboy 2y ago
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.
- moomin 2y ago
  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.
  - fsckboy 2y ago
    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 :)
    - SilasX 2y ago
      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.
      - deleted 2y ago
        [deleted]
      - sethhochberg 2y ago
        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.
Mistletoe 2y ago
I would assume that bond was made in an era of low or no inflation. The yield of 2.5% would barely cover our current levels of desired inflation.
- olalonde 2y ago
  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.
_yb2s 2y ago
> 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?
- flyingpenguin 2y ago
  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.
  - _yb2s 2y ago
    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.
    - rrrrrrrrrrrryan 2y 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.
drdec 2y ago
> Inflation makes it harder for the current generation Inflation benefits borrowers and penalizes lenders. I would posit that younger people tend to be borrowers and older people tend to be lenders (bond owners). That said, it's not clear what you meant by "the current generation." Final note, inflation helps encourage people to use their money and keep the economy moving.
- caseysoftware 2y ago
  > 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.
  - deleted 2y ago
    [deleted]
  - drdec 2y ago
    > 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.
    - chgs 2y ago
      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 You receive 900 units of work for free. That’s immoral.
nico 2y ago
> also free future generations from your debts Only if the debt is not pegged to inflation 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 Most mortgages there are in UF
- jandrese 2y ago
  Debtors see hyperinflation in neighboring countries and start getting nervous.
- tvaughan 2y ago
  Rents are in UF. I’ve never seen a mortgage in UF. Some savings accounts also pay “interest” in UF.
  - nico 2y ago
    > I’ve never seen a mortgage in UF ?? On this recent Reddit post in /r/Chile someone asks “does anyone know if there is a bank which offers mortgages in pesos instead of UF?” The answers all pretty much say they don’t even exist, or if the poster finds one to please let them know https://www.reddit.com/r/chile/comments/1ep21lq/hipotecario_en_pesos/ https://www.reddit.com/r/chile/comments/1ep21lq/hipotecario_... It looks like Chileans have never seen a mortgage _not_ in UF
    - tvaughan 2y ago
      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.
rvba 2y ago
The banks nowadays know very well to index your debt with inflation
- Spooky23 2y ago
  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.
  - rvba 2y ago
    Your view is very USA centric. In many places the loans are not unloaded.
    - Spooky23 2y ago
      Fair point!
asah 2y ago
survivor bias: bonds paying interest rates above inflation get paid off and replaced ("called"), leaving the bonds paying under the inflation rate.
pjc50 2y ago
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".
- shadowerm 2y ago
  It is worse than that though. Credit markets don't work without inflation and none of this progress in the last 400 years happens without credit markets. The age of this bond and the march out of the dark ages is not unrelated.
chgs 2y ago
Inflation means we value work done in the future more than now. And that’s right. If I do $100 of adding up numbers in 1950 that’s likely worth millionths of a cent in 2025.

by gip 2y ago

mitthrowaway2 2y ago

Doesn't that depend on which generation collects payments on the bond, and which makes the payments?

fsckboy 2y ago

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.

moomin 2y ago
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.
- fsckboy 2y ago
  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 :)
  - SilasX 2y ago
    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.
    - deleted 2y ago
      [deleted]
    - sethhochberg 2y ago
      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.

Mistletoe 2y ago

I would assume that bond was made in an era of low or no inflation. The yield of 2.5% would barely cover our current levels of desired inflation.

olalonde 2y ago
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.

_yb2s 2y ago

> 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?

flyingpenguin 2y ago
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.
- _yb2s 2y ago
  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.
  - rrrrrrrrrrrryan 2y 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.

drdec 2y ago

> Inflation makes it harder for the current generation Inflation benefits borrowers and penalizes lenders. I would posit that younger people tend to be borrowers and older people tend to be lenders (bond owners). That said, it's not clear what you meant by "the current generation." Final note, inflation helps encourage people to use their money and keep the economy moving.

caseysoftware 2y ago
> 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.
- deleted 2y ago
  [deleted]
- drdec 2y ago
  > 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.
  - chgs 2y ago
    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 You receive 900 units of work for free. That’s immoral.

nico 2y ago

> also free future generations from your debts Only if the debt is not pegged to inflation 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 Most mortgages there are in UF

jandrese 2y ago
Debtors see hyperinflation in neighboring countries and start getting nervous.
tvaughan 2y ago
Rents are in UF. I’ve never seen a mortgage in UF. Some savings accounts also pay “interest” in UF.
- nico 2y ago
  > I’ve never seen a mortgage in UF ?? On this recent Reddit post in /r/Chile someone asks “does anyone know if there is a bank which offers mortgages in pesos instead of UF?” The answers all pretty much say they don’t even exist, or if the poster finds one to please let them know https://www.reddit.com/r/chile/comments/1ep21lq/hipotecario_en_pesos/ https://www.reddit.com/r/chile/comments/1ep21lq/hipotecario_... It looks like Chileans have never seen a mortgage _not_ in UF
  - tvaughan 2y ago
    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.

rvba 2y ago

The banks nowadays know very well to index your debt with inflation

Spooky23 2y ago
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.
- rvba 2y ago
  Your view is very USA centric. In many places the loans are not unloaded.
  - Spooky23 2y ago
    Fair point!

asah 2y ago

survivor bias: bonds paying interest rates above inflation get paid off and replaced ("called"), leaving the bonds paying under the inflation rate.

pjc50 2y ago

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".

shadowerm 2y ago
It is worse than that though. Credit markets don't work without inflation and none of this progress in the last 400 years happens without credit markets. The age of this bond and the march out of the dark ages is not unrelated.

chgs 2y ago

Inflation means we value work done in the future more than now. And that’s right. If I do $100 of adding up numbers in 1950 that’s likely worth millionths of a cent in 2025.