12 ms·

That Debt from 1720? Britain’s Payment Is Coming

183 points by benbreen 12y ago

Animats 12y ago
"Never sell consols." - The Forsyte Saga Britain still has some consols outstanding. They're perpetual bonds, paying interest at a fixed rate, forever. (Or at least as long as the UK lasts.) Some date back to the 18th century. It takes an act of Parliament to call them in and pay them off. That's finally happening, at least for the 4% consols.
- walshemj 12y ago
  mm part of me whishes' that I had brought some consols a couple of years back when they where at 65-70. I think the 4% ones had gone to a premium (ie price had gone over 100 ) so it makes sense to redeem then.
- toomuchtodo 12y ago
  What stops Britain from calling them all in and paying them off at current interest rates?
  - conistonwater 12y ago
    They don't need to. Saying that yields are low is the same as saying that bonds' prices are high. It would make more sense for the government to buy bonds when their prices are low (and yields high).
    - tempestn 12y ago
      Except that they're not buying them on the open market; they're redeeming them for face value. At least that's my understanding. The only reason it hasn't been done previously is that there is significant administrative overhead in some cases to do so (up to and including an act of Parliament), and only recently have market interest rates fallen below their coupons.
      - conistonwater 12y ago
        You're right, they are redeemable. But even so, to make it worth repaying the 4% bond, they would need to believe that their interest rates would remain below that. If the rate at which the government borrows is higher, then it would be better to do something else with the money. But that's a rather odd belief, isn't it? It's unlikely to happen except in the case that the BoE fails to relax the monetary policy that has been too tight for quite a while now (as evidenced by the current low rates). Isn't it a bit like betting on your own failure? I suspect there is more than economics to this.
        tempestn 12y ago
        Good point, although there may also be administrative overhead in just keeping these ancient bonds on the books, so the total cost may be higher than 4%. As far as future interest rates, there is an argument that as a civilization matures, interest rates trend toward zero. The more mature the economy, the lower the perceived risk (on average), and so the lower the rates. Apparently in the later stages of the Roman Empire for instance, interest rates were very low. So it isn't a foregone conclusion that interest rates will ever return to the "normal" levels of the 20th century, at least until a new global paradigm comes along. (Nor that they won't, of course.)
        conistonwater 12y ago
        > there is an argument that as a civilization matures, interest rates trend toward zero. I'm inherently suspicious of any argument that is supposed to apply to "civilizations". Not that it doesn't matter, but there are usually much more simple explanations to be found elsewhere. For example, whatever we know about money in the Roman empire, we know far more about money in Britain, US, France, Germany, etc., in the last several centuries. > So it isn't a foregone conclusion that interest rates will ever return to the "normal" levels of the 20th century, at least until a new global paradigm comes along. The way I understand interest rates work, from conventional macroeconomics, is that some people have money to spend and invest, and some people want to borrow money and spend it on something that will make them more money. So when you look at the interest rates, you aren't really looking at the riskiness of a modern government (US is definitely risk-free, UK also probably), you are mostly looking at the "price" of the people's savings. When lots of people want to save, interest rates --- the price others are going to pay to borrow --- will go down to balance the supply and demand of savings. So one way of looking at low interest rates is to see this as a situation where there is an excess of desired savings (i.e. the interest rate that would truly balance savings and investment is below the current rate, which is already almost zero in real terms). This explanation is incomplete (you need to introduce another constraint, and do more macroeconomics), but it's more conventional, and I think also more robust than most theories of civilization.
- pacaro 12y ago
  Finally the passage in Pride and Prejudice where Mr Collins says "one thousand pounds in the four per cents ..., is all that you may ever be entitled to" now makes sense.
  - jdavis703 12y ago
    For an interesting analysis of the economics in Jane Austen and other literary works from that era you could read Capital in the 21st Century.
rsp1984 12y ago
I wonder what the process is for paying back the Nominal. Surely Pound Sterlings in 1720 had an entirely different value than today (as has pretty much every other currency, in case Pounds was not the currency for this particular debt).
- throwaway183839 12y ago
  Sure, pounds sterling had a different value in 1720 (although the question arises - a different value in comparison to what? The US dollar and the Euro didn't exist in 1720! You could take a set quantity of gold as your comparison, but the value of an oz of gold has fluctuated more than the value of a pound sterling over the same period). However, it is all a bit immaterial. If the debt was denominated in pounds sterling, then it will be repaid in pounds sterling. If it was in guilders, then it will be repaid in guilders (or in sterling, at whatever the current nominal sterling/guilder exchange rate is).
  - dredmorbius 12y ago
    The question of how to compare prices over time is an interesting one in economics. There are a few answers which have been arrived at. There's Angus Maddison's history of GDPs dating to the year 1. Gregory Clark of UC Davis has compiled a price history of England dating from 1209 to 1914: http://www.econ.ucdavis.edu/faculty/gclark/papers/Agprice.pdf http://www.econ.ucdavis.edu/faculty/gclark/papers/Agprice.pd... Generally, there are commodities with fairly well-established prices and costs, including food and energy. In particular, food as a share of average wages is a reasonable proxy over time. Another argument is that money should ultimately be considered to be backed in energy units, an idea I've traced to H.G. Wells and a 1914 short story. It appears subsequently in Arthur C. Clarke, R. Buckminster Fuller, and Kim Stanley Robinson's writings. Clarke was quite the fan of Wells.
  - mohanmcgeek 12y ago
    >The value of an oz of gold has fluctuated. Compared to what? Other goods. So, value of pounds is determined by its purchasing power
- 12y ago
charlesdm 12y ago
Are there other EU countries that issued these kinds of consols? 4% interest sounds like a great low risk investment to own as part of a portfolio Am I missing something?
- throwaway183839 12y ago
  Not necessarily. The standard way of valuing a bond is future value discounting. If the annualized interest rate between times 0 and T is r, then a payment of 1 unit at time T is worth exp(-r * T) and a stream of payments C1, C2, ... CN at times T1, T2, ... TN is worth C1 * exp(-r * T1) + C2 * exp(-r * T2) + ... + CN * exp(-r * TN) In particular, N can be infinite, so that the value of a never-ending stream of payments is C1 * exp(-r * T1) + C2 * exp(-r * T2) + ... which can sum to a finite value. For example, if all the C's are constant, and T1 = 1 year, T2 = 2 years etc, then the present value is C * exp(-r) + C * exp(-2r) + C * exp(-3r) + ... = C * (exp(-r) + exp(-2r) + exp(-3r) + ...) = C * exp(-r) / (1 - exp(-r)) so, for example, if C = $1,000 and r = 4%, then the value of this infinite stream of payments is about $24,500 - so if you had to lend more than $24,500 for a 4% consol paying $1,000 you would be getting a bad deal. This is before taking account of the possibility of default, which means that what you thought was an infinite payment stream turns out to be quite finite. Right now, when interest rates are low, a 4% consol looks like a great deal. But you obviously can't buy a 4% consol at the moment. Maybe you could buy a 1.5% consol, if you're lucky.
  - bboreham 12y ago
    Just to correct your last point, UK 30-year gilts are currently trading around 2.6% yield, so perpetual bonds should pay at least that. And indeed, according to this page, they pay around 3.7%. They don't seeem to trade very often. https://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=3 https://www.fixedincomeinvestor.co.uk/x/bondtable.html?group...
- bboreham 12y ago
  The key risks are: 1. Prevailing interest rates can go way above 4%, leaving you with a less-valuable investment. This is what happened for most of the period. 2. Prevailing interest rates can go way below 4%, so your investment ought to be more valuable, but the issuer retained the right to call in and repay the bond at face value. This is what just happened.
deleted 12y ago
[deleted]
mleonhard 12y ago
295 years at 4% yields 105,885 times the principal [1]. The income value of £1 in 1720 was equal to £2,271 in 2013 [2]. Therefore the investment yielded only 4,700% over 295 years. [1] http://www.moneychimp.com/calculator/compound_interest_calculator.htm http://www.moneychimp.com/calculator/compound_interest_calcu... [2] http://www.measuringworth.com/ppoweruk/ http://www.measuringworth.com/ppoweruk/
- Marazan 12y ago
  You don't get the interest compounded though, this isn't a bank account, it's payment on a bond. You'd have to find other south sea bubble bond holders to sell you their bonds (which would only be done in whole units, you wouldn't be able to dribble in your 4% every year) to get the compound effect. Basically you look at the interest paid over the whole issue yearly and linear sum it, not apply a compound interest calculation.
  - mleonhard 12y ago
    Thanks for explaining this.
jacquesm 12y ago
Makes you wonder how long it will take - if ever - to pay off our current collective debts.
- maratd 12y ago
  We're at a point where it's pretty obvious that the principal will never be repaid. The debt will continue to get serviced, which is all anybody really cares about.
- Amezarak 12y ago
  I imagine most debt is owed in bonds, the principal of which are paid off any time someone cashes one in. But since (people are always buying|the government is always selling) more bonds, the nominal amount of the total debt rarely if ever decreases.
- matt4077 12y ago
  GB & Germany are getting closer to a balanced budget (Germany will probably get there next year). It's not impossible to pay off all debt, especially if inflation returns to healthy 3%.
  - CamperBob2 12y ago
    A balanced budget doesn't mean you've paid off your debts.
    - tonyedgecombe 12y ago
      I've noticed a lot of the media (in the UK) don't seem to understand this.
    - calpaterson 12y ago
      I find the entire concept to be unavoidably confusing. In accounting, to "balance the books" means to complete the process of double-entry bookkeeping. Once the books are balanced you can then determine whether you made a profit or a loss. The political term "balance the budget" seems to be a corruption of the accounting term, and it means just for the state to break even. It seems likely to me that the coiner of this term had some misconception about double-entry bookkeeping - such as that you break even iff your books are balanced
lifeisstillgood 12y ago
Never a saver be. About five years ago, the Greek government tried to slice 6% off every Greek bank account as a once only tax. There were riots and a change of government. The UK, over a similar period ran inflation "just above" it's target of 2%. And so sliced 11% off everybody's bank accounts anyway, and 11% off what it owed us. Governments never pay back the capital unless thy have to. I'm hoping inflation will eat my mortgage capital away.
- eru 12y ago
  > Governments never pay back the capital unless thy have to. Some do. See https://en.wikipedia.org/wiki/List_of_countries_by_public_debt https://en.wikipedia.org/wiki/List_of_countries_by_public_de... as a starting point.
  - aikah 12y ago
    The list shows that debt is "ok" if creditors believe it'll be repaid eventually(USA,Japan). Some countries just cant afford the "cost of debt"(mostly Africa). Others are in a dire situation when creditors feel they wont get their money back(Greece). I didn't know Japan was the country with the largest public debt.thanks.
    - cordite 12y ago
      Norway loos to be pretty interesting on that list too. As well as Finland.
      - eru 12y ago
        Singapore, too. No natural resources, still no net public debt. (http://www.gov.sg/government/web/content/govsg/classic/factually/Factually-310812-IsitfiscallysustainableforSingaporetohavesuchahighlevelofdebt http://www.gov.sg/government/web/content/govsg/classic/factu...)
- arethuza 12y ago
  Wasn't that Cyprus, not Greece?
jaysonelliot 12y ago
This sentence leapt out at me: "That includes borrowing that may have been used to compensate slave owners when slavery was abolished." You mean to tell me that after the horrors of slavery finally ceased, it was the slaveholders that got reparations?
- minot 12y ago
  > You mean to tell me that after the horrors of slavery finally ceased, it was the slaveholders that got reparations? How would you have done things differently? The slave holders were powerful people. Even the Church of England apparently owned slaves. Compromise is a part of life. Yes, even difficult compromises like these...
- altoz 12y ago
  Believe it or not, the alternative was much worse. In the US, the Civil War cost roughly $8 billion (in 1860 dollars) and 600,000 lives. There were roughly 4 million slaves in the US at that time and using the New Orleans auction prices of that time you get an estimate of $2.7-$3.7 billion for the entire slave population of the United States. Basically, NOT compensating slaveholders cost more than twice as much and many more lives in the US. http://www.washingtoncitypaper.com/articles/40820/straight-dope-could-the-civil-war-have-been-avoided-by/ http://www.washingtoncitypaper.com/articles/40820/straight-d...
  - dredmorbius 12y ago
    Ah, but t'weren't t' North 'as started shootin': Hostilities began on April 12, 1861, when Confederate forces fired upon Fort Sumter, a key fort held by Union troops in South Carolina. http://en.wikipedia.org/wiki/American_Civil_War http://en.wikipedia.org/wiki/American_Civil_War Some transactions are more than strictly financial.
    - logfromblammo 12y ago
      Sometimes the first bullet that flies is not the first shot of the war. Some scholars claim that the USA committed the first act of war well before the CSA opened fire on Ft. Sumter. Obfuscating the adversarial acts that occurred before battle is joined is a choice made by historians. I recall my history teachers teaching about the Stamp Act and the Intolerable Acts prior to Lexington and Concord, but somehow Fort Sumter started the Civil War? That situation would be a lot like petitioning for divorce, getting the house in the settlement, and coming home that night to find that your ex-spouse was still living in the garden shed. But I think it is safe to say that there were plenty of jerkfaces on both sides of the conflict, and they got a lot of good people killed, along with the bad. I can't say for certain what would have avoided the bloodshed, if anything, because we cannot A/B test history. I believe that war then was substantially similar to war now; it is usually a handful of people who stand to benefit, maneuvering other people into a false choice between losing and losing more. By the time the actual shooting starts, the bets have already been placed, and all that remains is to wait for the dice to stop rolling. It's nice that slavery was abolished in the whole USA in the aftermath of the war, but on the whole, the UK way of doing it was much better. If the worst aftereffect they are feeling now is some outstanding 4% consols, that's hardly worrisome at all, compared to the lingering legacies of abolition in the US.
MarkMc 12y ago
In 1720 an ounce of gold in London cost about £4.31 [1] and today it costs £768. So the effective interest rate for gold over that period has been about 1.8% per year, while the gilts paid 2.5 - 4% according to the NY times article. So despite the huge depreciation of the UK pound over almost 300 years, buying UK bonds in 1720 was a much better investment than gold. And yet buying a property in London probably would have been an even better investment - a 'barrel store' in Picadilly cost about £2,500 [2]. Today it might be worth 10,000 times as much, giving a compound return of 3.2% per year plus a significant rental income. [1] http://www.measuringworth.com/ http://www.measuringworth.com/ [2] http://www.independent.co.uk/arts-entertainment/books/reviews/london-in-the-18th-century-by-jerry-white-8553732.html http://www.independent.co.uk/arts-entertainment/books/review...
- stygiansonic 12y ago
  I assume you calculated the effective growth rate for gold ("effective interest rate for gold") from 1720 to 2014 assuming annual compounding. This does indeed give a rate of roughly 1.78% per annum, compounded annually. (Also known as CAGR) However, this rate cannot be directly compared with a bond coupon rate. Bond coupons are cash flows that are not automatically reinvested/compounded. Even if one were to reinvest them, one would have to reinvest at the prevailing yields at the time the cash flows were received, a somewhat more involved calculation. So that 2.5%-4.0% coupon rate does not represent an annually-compounded rate and thus is not directly comparable to a CAGR. Apples and oranges, so to speak.
  - graeme 12y ago
    To add context to this, I ran a calculation of simple interest and compound interest you'd receive for an initial investment of £4.31 over the 294 years from 1720 to today. I assumed a 3% return. Simple interest, not reinvested: £42.32 Compount interest: £25,622.49 As the parent poster pointed out, the actual return for a bond bought in 1720 depends on what the holder did with the returns. Whereas with gold, merely holding £4.31 worth of gold from 1720 would yield £768 of gold today. I found this calculation interesting in that it demonstrates the true power of compound interest if maintained. Of course, such a return is actually very hard to maintain over a 300 century timespan.
SapphireSun 12y ago
This stood out to me: "Reissuing bonds was a big administrative endeavor in earlier eras. In 1932, the conversion of an earlier war loan to one paying lower interest required so many temporary clerks that 700 lambs were prepared to feed them one evening, according to a history of Britain’s debt by Jeremy Wormell. Now, in the computer age, the task is relatively straightforward, officials say."
- gaius 12y ago
  ... And yet we have >10x the civil servants now... What do they all do?
  - innguest 12y ago
    They sit and collect dividends from the social contract you were forced into.

183 points by benbreen 12y ago

"Never sell consols." - The Forsyte Saga Britain still has some consols outstanding. They're perpetual bonds, paying interest at a fixed rate, forever. (Or at least as long as the UK lasts.) Some date back to the 18th century. It takes an act of Parliament to call them in and pay them off. That's finally happening, at least for the 4% consols.

walshemj 12y ago
mm part of me whishes' that I had brought some consols a couple of years back when they where at 65-70. I think the 4% ones had gone to a premium (ie price had gone over 100 ) so it makes sense to redeem then.
toomuchtodo 12y ago
What stops Britain from calling them all in and paying them off at current interest rates?
- conistonwater 12y ago
  They don't need to. Saying that yields are low is the same as saying that bonds' prices are high. It would make more sense for the government to buy bonds when their prices are low (and yields high).
  - tempestn 12y ago
    Except that they're not buying them on the open market; they're redeeming them for face value. At least that's my understanding. The only reason it hasn't been done previously is that there is significant administrative overhead in some cases to do so (up to and including an act of Parliament), and only recently have market interest rates fallen below their coupons.
    - conistonwater 12y ago
      You're right, they are redeemable. But even so, to make it worth repaying the 4% bond, they would need to believe that their interest rates would remain below that. If the rate at which the government borrows is higher, then it would be better to do something else with the money. But that's a rather odd belief, isn't it? It's unlikely to happen except in the case that the BoE fails to relax the monetary policy that has been too tight for quite a while now (as evidenced by the current low rates). Isn't it a bit like betting on your own failure? I suspect there is more than economics to this.
      - tempestn 12y ago
        Good point, although there may also be administrative overhead in just keeping these ancient bonds on the books, so the total cost may be higher than 4%. As far as future interest rates, there is an argument that as a civilization matures, interest rates trend toward zero. The more mature the economy, the lower the perceived risk (on average), and so the lower the rates. Apparently in the later stages of the Roman Empire for instance, interest rates were very low. So it isn't a foregone conclusion that interest rates will ever return to the "normal" levels of the 20th century, at least until a new global paradigm comes along. (Nor that they won't, of course.)
        conistonwater 12y ago
        > there is an argument that as a civilization matures, interest rates trend toward zero. I'm inherently suspicious of any argument that is supposed to apply to "civilizations". Not that it doesn't matter, but there are usually much more simple explanations to be found elsewhere. For example, whatever we know about money in the Roman empire, we know far more about money in Britain, US, France, Germany, etc., in the last several centuries. > So it isn't a foregone conclusion that interest rates will ever return to the "normal" levels of the 20th century, at least until a new global paradigm comes along. The way I understand interest rates work, from conventional macroeconomics, is that some people have money to spend and invest, and some people want to borrow money and spend it on something that will make them more money. So when you look at the interest rates, you aren't really looking at the riskiness of a modern government (US is definitely risk-free, UK also probably), you are mostly looking at the "price" of the people's savings. When lots of people want to save, interest rates --- the price others are going to pay to borrow --- will go down to balance the supply and demand of savings. So one way of looking at low interest rates is to see this as a situation where there is an excess of desired savings (i.e. the interest rate that would truly balance savings and investment is below the current rate, which is already almost zero in real terms). This explanation is incomplete (you need to introduce another constraint, and do more macroeconomics), but it's more conventional, and I think also more robust than most theories of civilization.
pacaro 12y ago
Finally the passage in Pride and Prejudice where Mr Collins says "one thousand pounds in the four per cents ..., is all that you may ever be entitled to" now makes sense.
- jdavis703 12y ago
  For an interesting analysis of the economics in Jane Austen and other literary works from that era you could read Capital in the 21st Century.

rsp1984 12y ago

I wonder what the process is for paying back the Nominal. Surely Pound Sterlings in 1720 had an entirely different value than today (as has pretty much every other currency, in case Pounds was not the currency for this particular debt).

throwaway183839 12y ago
Sure, pounds sterling had a different value in 1720 (although the question arises - a different value in comparison to what? The US dollar and the Euro didn't exist in 1720! You could take a set quantity of gold as your comparison, but the value of an oz of gold has fluctuated more than the value of a pound sterling over the same period). However, it is all a bit immaterial. If the debt was denominated in pounds sterling, then it will be repaid in pounds sterling. If it was in guilders, then it will be repaid in guilders (or in sterling, at whatever the current nominal sterling/guilder exchange rate is).
- dredmorbius 12y ago
  The question of how to compare prices over time is an interesting one in economics. There are a few answers which have been arrived at. There's Angus Maddison's history of GDPs dating to the year 1. Gregory Clark of UC Davis has compiled a price history of England dating from 1209 to 1914: http://www.econ.ucdavis.edu/faculty/gclark/papers/Agprice.pdf http://www.econ.ucdavis.edu/faculty/gclark/papers/Agprice.pd... Generally, there are commodities with fairly well-established prices and costs, including food and energy. In particular, food as a share of average wages is a reasonable proxy over time. Another argument is that money should ultimately be considered to be backed in energy units, an idea I've traced to H.G. Wells and a 1914 short story. It appears subsequently in Arthur C. Clarke, R. Buckminster Fuller, and Kim Stanley Robinson's writings. Clarke was quite the fan of Wells.
- mohanmcgeek 12y ago
  >The value of an oz of gold has fluctuated. Compared to what? Other goods. So, value of pounds is determined by its purchasing power
12y ago

charlesdm 12y ago

Are there other EU countries that issued these kinds of consols? 4% interest sounds like a great low risk investment to own as part of a portfolio Am I missing something?

throwaway183839 12y ago
Not necessarily. The standard way of valuing a bond is future value discounting. If the annualized interest rate between times 0 and T is r, then a payment of 1 unit at time T is worth exp(-r * T) and a stream of payments C1, C2, ... CN at times T1, T2, ... TN is worth C1 * exp(-r * T1) + C2 * exp(-r * T2) + ... + CN * exp(-r * TN) In particular, N can be infinite, so that the value of a never-ending stream of payments is C1 * exp(-r * T1) + C2 * exp(-r * T2) + ... which can sum to a finite value. For example, if all the C's are constant, and T1 = 1 year, T2 = 2 years etc, then the present value is C * exp(-r) + C * exp(-2r) + C * exp(-3r) + ... = C * (exp(-r) + exp(-2r) + exp(-3r) + ...) = C * exp(-r) / (1 - exp(-r)) so, for example, if C = $1,000 and r = 4%, then the value of this infinite stream of payments is about $24,500 - so if you had to lend more than $24,500 for a 4% consol paying $1,000 you would be getting a bad deal. This is before taking account of the possibility of default, which means that what you thought was an infinite payment stream turns out to be quite finite. Right now, when interest rates are low, a 4% consol looks like a great deal. But you obviously can't buy a 4% consol at the moment. Maybe you could buy a 1.5% consol, if you're lucky.
- bboreham 12y ago
  Just to correct your last point, UK 30-year gilts are currently trading around 2.6% yield, so perpetual bonds should pay at least that. And indeed, according to this page, they pay around 3.7%. They don't seeem to trade very often. https://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=3 https://www.fixedincomeinvestor.co.uk/x/bondtable.html?group...
bboreham 12y ago
The key risks are: 1. Prevailing interest rates can go way above 4%, leaving you with a less-valuable investment. This is what happened for most of the period. 2. Prevailing interest rates can go way below 4%, so your investment ought to be more valuable, but the issuer retained the right to call in and repay the bond at face value. This is what just happened.

deleted 12y ago

[deleted]

mleonhard 12y ago

295 years at 4% yields 105,885 times the principal [1]. The income value of £1 in 1720 was equal to £2,271 in 2013 [2]. Therefore the investment yielded only 4,700% over 295 years. [1] http://www.moneychimp.com/calculator/compound_interest_calculator.htm http://www.moneychimp.com/calculator/compound_interest_calcu... [2] http://www.measuringworth.com/ppoweruk/ http://www.measuringworth.com/ppoweruk/

Marazan 12y ago
You don't get the interest compounded though, this isn't a bank account, it's payment on a bond. You'd have to find other south sea bubble bond holders to sell you their bonds (which would only be done in whole units, you wouldn't be able to dribble in your 4% every year) to get the compound effect. Basically you look at the interest paid over the whole issue yearly and linear sum it, not apply a compound interest calculation.
- mleonhard 12y ago
  Thanks for explaining this.

jacquesm 12y ago

Makes you wonder how long it will take - if ever - to pay off our current collective debts.

maratd 12y ago
We're at a point where it's pretty obvious that the principal will never be repaid. The debt will continue to get serviced, which is all anybody really cares about.
Amezarak 12y ago
I imagine most debt is owed in bonds, the principal of which are paid off any time someone cashes one in. But since (people are always buying|the government is always selling) more bonds, the nominal amount of the total debt rarely if ever decreases.
matt4077 12y ago
GB & Germany are getting closer to a balanced budget (Germany will probably get there next year). It's not impossible to pay off all debt, especially if inflation returns to healthy 3%.
- CamperBob2 12y ago
  A balanced budget doesn't mean you've paid off your debts.
  - tonyedgecombe 12y ago
    I've noticed a lot of the media (in the UK) don't seem to understand this.
  - calpaterson 12y ago
    I find the entire concept to be unavoidably confusing. In accounting, to "balance the books" means to complete the process of double-entry bookkeeping. Once the books are balanced you can then determine whether you made a profit or a loss. The political term "balance the budget" seems to be a corruption of the accounting term, and it means just for the state to break even. It seems likely to me that the coiner of this term had some misconception about double-entry bookkeeping - such as that you break even iff your books are balanced

lifeisstillgood 12y ago

Never a saver be. About five years ago, the Greek government tried to slice 6% off every Greek bank account as a once only tax. There were riots and a change of government. The UK, over a similar period ran inflation "just above" it's target of 2%. And so sliced 11% off everybody's bank accounts anyway, and 11% off what it owed us. Governments never pay back the capital unless thy have to. I'm hoping inflation will eat my mortgage capital away.

eru 12y ago
> Governments never pay back the capital unless thy have to. Some do. See https://en.wikipedia.org/wiki/List_of_countries_by_public_debt https://en.wikipedia.org/wiki/List_of_countries_by_public_de... as a starting point.
- aikah 12y ago
  The list shows that debt is "ok" if creditors believe it'll be repaid eventually(USA,Japan). Some countries just cant afford the "cost of debt"(mostly Africa). Others are in a dire situation when creditors feel they wont get their money back(Greece). I didn't know Japan was the country with the largest public debt.thanks.
  - cordite 12y ago
    Norway loos to be pretty interesting on that list too. As well as Finland.
    - eru 12y ago
      Singapore, too. No natural resources, still no net public debt. (http://www.gov.sg/government/web/content/govsg/classic/factually/Factually-310812-IsitfiscallysustainableforSingaporetohavesuchahighlevelofdebt http://www.gov.sg/government/web/content/govsg/classic/factu...)
arethuza 12y ago
Wasn't that Cyprus, not Greece?

jaysonelliot 12y ago

This sentence leapt out at me: "That includes borrowing that may have been used to compensate slave owners when slavery was abolished." You mean to tell me that after the horrors of slavery finally ceased, it was the slaveholders that got reparations?

minot 12y ago
> You mean to tell me that after the horrors of slavery finally ceased, it was the slaveholders that got reparations? How would you have done things differently? The slave holders were powerful people. Even the Church of England apparently owned slaves. Compromise is a part of life. Yes, even difficult compromises like these...
altoz 12y ago
Believe it or not, the alternative was much worse. In the US, the Civil War cost roughly $8 billion (in 1860 dollars) and 600,000 lives. There were roughly 4 million slaves in the US at that time and using the New Orleans auction prices of that time you get an estimate of $2.7-$3.7 billion for the entire slave population of the United States. Basically, NOT compensating slaveholders cost more than twice as much and many more lives in the US. http://www.washingtoncitypaper.com/articles/40820/straight-dope-could-the-civil-war-have-been-avoided-by/ http://www.washingtoncitypaper.com/articles/40820/straight-d...
- dredmorbius 12y ago
  Ah, but t'weren't t' North 'as started shootin': Hostilities began on April 12, 1861, when Confederate forces fired upon Fort Sumter, a key fort held by Union troops in South Carolina. http://en.wikipedia.org/wiki/American_Civil_War http://en.wikipedia.org/wiki/American_Civil_War Some transactions are more than strictly financial.
  - logfromblammo 12y ago
    Sometimes the first bullet that flies is not the first shot of the war. Some scholars claim that the USA committed the first act of war well before the CSA opened fire on Ft. Sumter. Obfuscating the adversarial acts that occurred before battle is joined is a choice made by historians. I recall my history teachers teaching about the Stamp Act and the Intolerable Acts prior to Lexington and Concord, but somehow Fort Sumter started the Civil War? That situation would be a lot like petitioning for divorce, getting the house in the settlement, and coming home that night to find that your ex-spouse was still living in the garden shed. But I think it is safe to say that there were plenty of jerkfaces on both sides of the conflict, and they got a lot of good people killed, along with the bad. I can't say for certain what would have avoided the bloodshed, if anything, because we cannot A/B test history. I believe that war then was substantially similar to war now; it is usually a handful of people who stand to benefit, maneuvering other people into a false choice between losing and losing more. By the time the actual shooting starts, the bets have already been placed, and all that remains is to wait for the dice to stop rolling. It's nice that slavery was abolished in the whole USA in the aftermath of the war, but on the whole, the UK way of doing it was much better. If the worst aftereffect they are feeling now is some outstanding 4% consols, that's hardly worrisome at all, compared to the lingering legacies of abolition in the US.

MarkMc 12y ago

In 1720 an ounce of gold in London cost about £4.31 [1] and today it costs £768. So the effective interest rate for gold over that period has been about 1.8% per year, while the gilts paid 2.5 - 4% according to the NY times article. So despite the huge depreciation of the UK pound over almost 300 years, buying UK bonds in 1720 was a much better investment than gold. And yet buying a property in London probably would have been an even better investment - a 'barrel store' in Picadilly cost about £2,500 [2]. Today it might be worth 10,000 times as much, giving a compound return of 3.2% per year plus a significant rental income. [1] http://www.measuringworth.com/ http://www.measuringworth.com/ [2] http://www.independent.co.uk/arts-entertainment/books/reviews/london-in-the-18th-century-by-jerry-white-8553732.html http://www.independent.co.uk/arts-entertainment/books/review...

stygiansonic 12y ago
I assume you calculated the effective growth rate for gold ("effective interest rate for gold") from 1720 to 2014 assuming annual compounding. This does indeed give a rate of roughly 1.78% per annum, compounded annually. (Also known as CAGR) However, this rate cannot be directly compared with a bond coupon rate. Bond coupons are cash flows that are not automatically reinvested/compounded. Even if one were to reinvest them, one would have to reinvest at the prevailing yields at the time the cash flows were received, a somewhat more involved calculation. So that 2.5%-4.0% coupon rate does not represent an annually-compounded rate and thus is not directly comparable to a CAGR. Apples and oranges, so to speak.
- graeme 12y ago
  To add context to this, I ran a calculation of simple interest and compound interest you'd receive for an initial investment of £4.31 over the 294 years from 1720 to today. I assumed a 3% return. Simple interest, not reinvested: £42.32 Compount interest: £25,622.49 As the parent poster pointed out, the actual return for a bond bought in 1720 depends on what the holder did with the returns. Whereas with gold, merely holding £4.31 worth of gold from 1720 would yield £768 of gold today. I found this calculation interesting in that it demonstrates the true power of compound interest if maintained. Of course, such a return is actually very hard to maintain over a 300 century timespan.

SapphireSun 12y ago

This stood out to me: "Reissuing bonds was a big administrative endeavor in earlier eras. In 1932, the conversion of an earlier war loan to one paying lower interest required so many temporary clerks that 700 lambs were prepared to feed them one evening, according to a history of Britain’s debt by Jeremy Wormell. Now, in the computer age, the task is relatively straightforward, officials say."

gaius 12y ago
... And yet we have >10x the civil servants now... What do they all do?
- innguest 12y ago
  They sit and collect dividends from the social contract you were forced into.