31 ms·

100 pounds (lb) of silver?

rtpg 12y ago
I think it used to be pretty common to use metals instead of currencies to denote debts, for reasons mentioned in this thread. I have a friend who once lent me money in one currency, but denoted the debt in "in X Euro or (X Euro in Yen at lend date), whichever is worth more", which I'm pretty sure is the best way to deal with inflation problems as a lender.
- nl 12y ago
  Currency exchange rates are not the same as (or even very closely correlated in the medium term to) inflation.
- bostonpete 12y ago
  > which I'm pretty sure is the best way to deal with inflation problems as a lender Why stop at 2 currencies? Why not specify the debt in a large number of currencies that take the value at whichever is ultimately worth more? Of course this sort of hedging is good for the lender but it would be horrible for the borrower. I guess if you were desperate for the loan (or he was giving a really favorable rate) it's probably worth it, but I've never heard of a lender trying to hedge exchange rates in this way. But then again maybe I'm unaware of some of the games people have to play with other currencies since I mostly only have to deal with the dollar.
  - eru 12y ago
    You could denote your loan in Singaporean Dollar. Their central bank pegs the SGD to a basket of currencies, effectively giving you a similar hedge.
    - zodiac 12y ago
      If you do so, you run the risk that in the future the Singapore dollar is no longer pegged to a basket of currencies.
      - eru 12y ago
        You do. That's akin to counterparty risk. Depending on the time scale, this risk can go from miniscule to certainty.
- bbcbasic 12y ago
  Isn't it just priced into the interest rate? What is interesting is the different types of 'lender'. Banks are lending money they create by fractional reserve, and will pay a lower interest on those deposits than the lent money, so they don't really care about inflation. A wealthy individual investing in bonds would be a different prospect. But bond prices go up and down based on how the yield compares to interest rates. If I understand correctly lowering interest rates makes the bond worth more. Any long term debt for 100's years ago is eroded by inflation but by the same token the lender probably profited from all the interest years ago, so the diminishing returns now are just some left over pocket money. In reverse it is like a mortgage where you can go interest only and have a more modest mortgage in 10 years time, but I don't think that means the bank is the loser. If you are going to lend money rather than putting excessive terms just factor the inflation risk into the interest rate, and diversify into other assets. Owning some shares, real estate or gold, or foreign currency bonds.

rtpg 12y ago

I think it used to be pretty common to use metals instead of currencies to denote debts, for reasons mentioned in this thread. I have a friend who once lent me money in one currency, but denoted the debt in "in X Euro or (X Euro in Yen at lend date), whichever is worth more", which I'm pretty sure is the best way to deal with inflation problems as a lender.

nl 12y ago
Currency exchange rates are not the same as (or even very closely correlated in the medium term to) inflation.
bostonpete 12y ago
> which I'm pretty sure is the best way to deal with inflation problems as a lender Why stop at 2 currencies? Why not specify the debt in a large number of currencies that take the value at whichever is ultimately worth more? Of course this sort of hedging is good for the lender but it would be horrible for the borrower. I guess if you were desperate for the loan (or he was giving a really favorable rate) it's probably worth it, but I've never heard of a lender trying to hedge exchange rates in this way. But then again maybe I'm unaware of some of the games people have to play with other currencies since I mostly only have to deal with the dollar.
- eru 12y ago
  You could denote your loan in Singaporean Dollar. Their central bank pegs the SGD to a basket of currencies, effectively giving you a similar hedge.
  - zodiac 12y ago
    If you do so, you run the risk that in the future the Singapore dollar is no longer pegged to a basket of currencies.
    - eru 12y ago
      You do. That's akin to counterparty risk. Depending on the time scale, this risk can go from miniscule to certainty.
bbcbasic 12y ago
Isn't it just priced into the interest rate? What is interesting is the different types of 'lender'. Banks are lending money they create by fractional reserve, and will pay a lower interest on those deposits than the lent money, so they don't really care about inflation. A wealthy individual investing in bonds would be a different prospect. But bond prices go up and down based on how the yield compares to interest rates. If I understand correctly lowering interest rates makes the bond worth more. Any long term debt for 100's years ago is eroded by inflation but by the same token the lender probably profited from all the interest years ago, so the diminishing returns now are just some left over pocket money. In reverse it is like a mortgage where you can go interest only and have a more modest mortgage in 10 years time, but I don't think that means the bank is the loser. If you are going to lend money rather than putting excessive terms just factor the inflation risk into the interest rate, and diversify into other assets. Owning some shares, real estate or gold, or foreign currency bonds.