The image accompanying the story doesn't seem to be the bond in question. The date on the bond states the year 1944, and the payments also start around that date. The last payment was done in 2003. Odd.
Look at the second image on the page, which is definitely old; I think I can make out year numbers in the 1700s. The first image looks like an extra sheet appended in 1944.
Yes, it looks like the original sheet was filled up. There may be other auxiliary sheets that aren't shown (or are simply missing -- perhaps they went missing in WWII?).
Interesting point. The second image has dates much farther back, I see many from the 1700s.
Perhaps the bond was originally issued and in 1944 a companion document was issued with it? So now the single bond consists of two documents. It would make sense to issue a newer document that goes along with the original. I imagine some numbering scheme was introduced between the original issue and 1944. The 1944 document would provide a number in the modern scheme for the original bond.
When I first started learning about Individual Retirement Accounts, one thought I had on Roth was how long can income from a Roth IRA stay tax free?
I was hoping the answer would be in perpetuity. Sadly, it seems that the longest you can draw it out is until the death of one's surviving spouse.
Imagine how glorious it would be if you could stow away about $5k of post tax income every year and invest it in some stock index fund if you could give it to someone upon death. Of course, it wouldn't be a retirement account anymore though.
Trusts are sort of like this. I think the key is you have to have signed away the money irrevocably to the legal entity of the trust, so it's totally out of your control when you die and thus not taxed with your estate.
Whether it was a good idea or not depends on whether the pier generated enough revenue to exceed the amount that's been paid in interest over the last 367 years.
As an aside, note the typical Dutch way to write the digit 8: starting at the left of the middle with the bottom part, instead of at the very top left. It is used universally in the Netherlands, but I have been told it's used nowhere else, not even in Flanders.
Well, I wouldn't know for sure, but I haven't seen it differently yet (yes, I know, anecdotal). I don't think it is generally taught that way elsewhere. But the main intention of my post is to find out, so your data point is welcome. :)
There are some corpora of handwritten digits (for OCR training) lying around the net, I guess I should check those to be sure.
Wait, people start at the top left for 8? I start at the top right. I also write "e" by first writing the "c" and then filling it in, so it's very conceivable that I'm the outlier. I blame wanting to finish those dang writing practice sheets in 2nd or 3rd grade as quickly as possible.
After starting at the top right, do you move your pen left or down? I start at the top-right and move left (in other words, the first curve is counterclockwise).
I know what you mean, I had to unlearn the Dutch way of writing numbers when I moved to the US because almost no-one could read them. It's not just the 8 though, the 1's, 4's, 7's and 9's are also quite different, at least with my handwriting.
7 with a line through it is unusual in the US, but not totally unheard of.
Z with a line through it is quite common in mathematics in the US (to prevent confusion with the number 2.) Many people who do a lot of math carry the dash over to Zs in general.
Swedish here, I write Z with the line, as well as the number 7. My first teacher was ancient even in the 90s, so that may have something to do with it?
Flemish here: I write 8 by starting in the mid-point, then to top left, around via top right to bottom left, around to bottom right and then back to the middle.
So it's horizontally mirrored compared to the way you do it :-)
I'm Dutch and I've got no clue what you're talking about and write it differently, too. I also didn't know it was an actual thing that people paid attention to, I mean does anyone know in what sequence their friends write their numbers?
I'm Dutch and I write it that way. This is the first time in my memory that I consciously thought about how I write an 8 though. Probably I did when I was learning to actually write an 8 many years ago. Then again it's been a while since I actually wrote anything with a pen.
"Aan de noordzijde van de Lek was een dijk aangebracht van ruim 32 km lang en hij liep vanaf Amerongen (aan de rand van de Utrechtse heuvelrug) naar het Klaphek bij Vreeswijk, de Lekdijk Bovendams genaamd."
It was an bond ("obligatie") of 1000 guilders, given out by Hoogheemraadschap Lekdijk Bovendams (more recently merged into Hoogheemraadschap De Stichtse Rijnlanden). It returns 25 guilders (now 11,35 euros) interest per year. Yale bought it in 2003 for 24.000 euros. It was given out in 1648 to build a groyne ("krib") near the hamlet of Honswijk. Looking at Google Maps, you can see a system of multiple groynes there; I am not sure whether this bond paid for only one of them or for more: https://www.google.com/maps/place/3998+Honswijk,+Netherlands...
In the first 50 years of the 17th century, Lekdijk Bovendams gave out 300.000 guilders of bonds to repair the dikes along the 8 km stretch it was responsible for. Stichtse Rijnlanden is nowadays responsible for the Lek dikes between Amerongen and Schoonhoven, as well as water management in most of the province of Utrecht.
Thanks for the Google Maps link, you can follow that river for quite a long time and it goes well inland, into Germany. I'd love to take a boat all the way down that river.
Yup, the Lek is, after the Waal, the second main distributary of the Rhine. Some parts of the Rhine, notably the part between Köln and Koblenz, are widely known for their beauty.
Perpetuities are a great idea. One of their advantage is that new debt issues are fungible with old debt issues (provided the coupon payment dates debt align). The downside of that is that the duration of such a bond is fixed and depends on the prevailing interest rates.
However, one can issue a perpetuity where the coupon is set to decrease (or increase!) geometrically over time. Different issue of such bonds are still fungible (provided they use the same rate of exponential decay), but their duration can now be tuned at will, by changing the characteristic time of the exponential.
Why does this matter? There is a large market in government bonds (particularly in the US) and this market places a large premium on the latest issued bonds, or "on-the-run". This is because these bonds enjoy the most liquidity and can be used as alternatives to cash. The premium disappears as the bond is replaced with a new issue.
Real economic value is being destroyed because the bonds aren't fungible. Perpetuities with exponentially decreasing coupons would immediately solve that problem in one fell swoop.
When a currency disappears on a planned basis (like the Deutschmark) the government issues a recall of the currency in banks at a set exchange rate: e.g. for the Deutschmark it was set by law at 1.95583 DM = 1 euro (source: https://en.wikipedia.org/wiki/Deutsche_Mark)
When a currency disappears entirely (like with Zimbabwe), there's a much more chaotic basis as it switches to separate sovereign currencies, which often have different inflation rates baked in. As this can be much more unexpected than a planned currency transition, the market often doesn't incorporate the expected changes in real interest rates, and often the exchange rate needs to keep floating for a while to account for ongoing inflation. More info on Zimbabwe's abandonment of their currency: https://en.wikipedia.org/wiki/Zimbabwean_dollar#Abandonment_...
Seems like the easiest way would be to tie the payment to the cost of a basket of goods at the time of the issuing of the debt or at the cessation of the currency, whichever paid less (assuming you are the person paying) and then converting that to dollars at the date of the cessation of the original currency and then paying that amount.
Then it's just a futures contract; and nobody in their right mind would sell a futures contract on a perpetuity. Currency is a useful abstraction for a lot of reasons.
Do you mean the duration is infinite in the bond-market sense of the word (i.e. sensitivity of cash flows to interest rates)? In that case, a perpetuity still has finite duration.
If you're thinking: this is fascinating, what other schedules can we use, besides exponentially increasing or decreasing the coupon over time?
Assume we have a market with n different perpetuities: p1,p2...,pn. When we shift the coupon schedule of any of these securities in time, we would like the resulting security to be expressible as a linear combination of the n perpetuities.
p1...p2 should be the basis of a vector space of coupon schedules which is stable for time shifts. As it turns out, any vector space with such a property will be the sum of spaces spanned by { exp(lambda t) t^k | k < K } or { exp(lambda t) t^k cos t, exp(lambda t) t^k sin t | k < K } for lambda real.
So for instance, we could have the following set of coupon schedule, and it would be stable: {1, exp(-0.03 t)}
But so would: {1, t, exp(-0.03 t)} or even {1, cos t exp(-0.05 t), sin t exp(-0.05 t)} etc.
Serious question: Why is (bond) interest not adjusted for inflation (or deflation for that matter)? Very long timespans such as these really devalue any interest payments, do they not?
It didn't use to matter much. Consistent inflation is a rather new phenomenon that basically only appeared after WWII. There was for example almost no inflation in Britain between 1814 and 1914.
For the record, in case there still are Ron Paul fans/goldbugs out there: moderate inflation is generally considered a good thing by economists today and inflation is probably too low at the moment.
Personally, as a reductionist, I like the idea that money is somehow permanent. Maybe economists like inflation, and perhaps it is "good" for the economy overall. But the idea that a dollar saved today can buy roughly the same amount of stuff in a decade or a century seems like a powerful idea to me. To me that seems like a goal that's worthy of pursuing because then money becomes a true abstraction that's not leaky. And because of the way my brain works, I see that as incredibly useful. Not having to always inflation adjust things, not having to do this or that, not having to worry about how much retirement you actually have versus how much you think you have, etc. I understand that for various reasons few other people want this, but that doesn't convince me personally otherwise.
One person described money as "sweat, distilled" and I find that definition incredibly attractive. I recognize that plenty of people making money not by sweating but thinking or whatever, but I still find it an excellent description. And I can't see how devaluing a person's effort over time is a viable strategy for building a lasting civilization. I think it leads inevitably towards the kind of throwaway society we have here in the US and virtually guarantees that we won't build infrastructure of long lasting value like exists elsewhere in the world. Well built stuff can last for hundreds or thousands of years. I wish money was the same.
It might seem like a nice idea that cash stuffed in a mattress for a few decades would keep it's value, but that's not beneficial to society. Encouraging money to be invested in order to earn a premium, and stave off inflation, is a good thing overall because it puts wealth to work creating jobs and stimulating economic activity.
No he didn't. He argued that we need inflation to stop hoarding of money and make people spend their money and create activity in the economy. This is important because in the economy as a whole TotalSpending == TotalIncome
'Encouraging money to be invested, by motivating people via inflation, is a good thing overall because it puts wealth to work creating jobs and stimulating economic activity.'
He said that as a society we benefit from inflation because as individuals we are forced to invest our funds so that individually we can avoid the effects of the inflation.
Except it is beneficial, because that cash inside the mattress will get spent eventually. Guess when it gets spent? During a financial crisis. If everyone had a little bit of cash in their mattress, the spending wouldn't go down as much and the crisis would have a limited impact.
One aspect of inflation is that it is a tax on people who choose to hoard their money. Because inflation naturally makes every dollar worth less and less over time, you are forced to either spend it now or invest it somewhere that grows with inflation. As a result, money is actually utilized instead of sitting in a bank account.
Thus, I think the idea that a dollar saved today can buy roughly the same amount of stuff in a decade is actually bad, because in a world where that's likely, that dollar was probably sitting useless in someone's purse for a decade.
Inflation, in my opinion, actually does the opposite of what you suggest -- because it encourages lending and investing in order to beat inflation, money is actually put to use for longer term projects such as infrastructure that can last years and years.
As a result, money is actually utilized instead of sitting in a bank account.
Because we all know banks put all the currency they receive in huge vaults filled with paper $100 bills, instead of, oh, lending it out (several times over one way or another).
Unless you're converting it all to gold, or stuffing it under a mattress, your savings are in institutions like banks which are not a sink where the velocity of your money goes to zero, outside of economic messes where they aren't willing to lend, or people are afraid to borrow. And your being encouraged to spend your money doesn't seem to help those situations.
> Because we all know banks put all the currency they receive in huge vaults filled with paper $100 bills, instead of, oh, lending it out (several times over one way or another).
Right?! Every bank vault is just huge piles of gold bars and ornery old men counting and recounting the money, hoarding it up and never loaning it out.
A piggy bank would have been a better example. Anyway, it's not an argument against inflation: the reason putting your money in a bank account is a good idea today is (among other things) because they do invest it to stave off inflation. So inflation doesn't preclude saving (as in savings accounts), it just makes sure you save in better ways, like storing it in a bank that does lending.
Amplifying, the bank is also spending money to service your account. There's also the issue of how much your money is worth to the bank: demand deposits where it can all be withdrawn without notice are worth less than forms which lock it up for a while.
If you are earning less than a percent, you are probably paying for liquidity.
Inflation is currently bouncing between around 1.6% and 2% (but mostly towards the 1.6%). A 3 year CD at a decent bank is currently paying around 1.6%; a 5 year CD is paying around 2%. So if you're willing to commit to a 5 year deposit, you will probably beat inflation and realize a small, real return. Even an interesting-bearing checking account (with a sufficient balance...) pays close to 1.6%.
Granted, it's not the glorious 5%+ returns of yesteryear, but then, we're in a savings glut.
> Granted, it's not the glorious 5%+ returns of yesteryear, but then, we're in a savings glut.
That's a nonsensical statement when the central bank is fully in control of the money supply, and thus, the interest rate.
That's like saying "well my computer has a billion copies of funny cat gifs on it, so there's a funny cat gif glut". It doesn't make any sense. You control how many copies of funny cat gifs are on your computer. If there are too many, it's because you made too many copies. If there are two few, it's because you made too few. Pretending that market action had anything to do with something that you are ultimately in control of makes zero sense.
The interest rate is low (or zero) because the central bank decided it should be, not because all the people in the world collectively don't have any real preference for a dollar today versus a dollar tomorrow.
I don't see how you can just assert that they're similar but not the same, without any supporting argument, and expect me to accept it.
The interest rate is supposed to be the price of money. There's going to be a bid/ask spread on that because of the cost of accepting money and bundling it together, along with the cost of keeping up with the book-keeping and various other things that are costs for loans. So the rate you get paid in interest should always be less than the rate that you pay in interest. This I understand.
But if the interest rate is low, then the interest rate is low. The interest rate is determined by the aggregate supply and demand for money. If there is a lot of supply, relative to demand, then the interest rate is low. If there is a lot of demand relative to supply, then the rate is high. And given that people have a nearly infinite desire for money today versus in the future, the rate is really determined by the supply.
The Fed is in control of the supply by creating or destroying money as needed. That means that they fully and truly do set the rate, because they can do literally whatever is needed to move the needle.
The idea that everyone's individual actions to save is somehow what created the tremendous amount of expansion in the money supply (and thus the very low interest rate) is utter nonsense. The Fed created a lot of extra money which expanded the supply of loans, thus pushing down the rate.
So everyone should live paycheck to paycheck and thus keep money circulating in the economy more rather than "hoarded" in checking accounts to absorb shocks like big car repair bills and stuff like that?
I think the idea that a dollar today buys just as much in a decade IN NO WAY precludes people from investing their money to earn a return. It just eliminates the stupidity tax that some people pay for not understanding how things work.
In a non-inflationary environment nearly all people would still invest their money and put it to work. It's just that they wouldn't be taxed for not doing so.
Inflation doesn't encourage lending, it encourages borrowing. It's smart to pay back with dollars that are worth not as much as the dollars you borrow. Inflation actually discourages lending because you now have to find borrowers who can pay you back higher than the interest rate.
Of course, all this is predicated on a real market in interest rates which we don't have in the US because the Fed sets the rate through various means.
You don't need more than a year's buffer in a checking account, and target inflation is insignificant at the timescale of a year. It only discourages long-term uninvested money.
If a year's buffer is 20k (rent, utilities, car payments, insurance, etc can total $1500/mo pretty easily) then 2% inflation (and basically zero interest) means that this buffer costs me $400 a year, or over $30/mo. That's a non-trivial carrying cost, $30/mo can buy me substantial, actual real things.
I might not care too much if it was $0.50 or $1 per month. But quantitative differences eventually become qualitative ones, and at this point it's not just some tiny abstract amount of money, it's real consumption that a person has to forego every month (or day!) for the sake of not getting financially ruined the first time a big unexpected expense comes up.
Money is a measure of power. With money, you can make people do things for you. People don't crave money for its own sake. They crave money for the power it gives them over others.
Expanding on that, I came of age during the '70s where I believe the major transition in inflation expectations occurred, and being numerically literate, I have a feeling for how the value of the dollar declined (which I frequently reify with this calculator http://www.bls.gov/data/inflation_calculator.htm but know the government understates it, see below for one example).
When I see, oh, normal genre 300-500 page paperbacks going for Amazon prices from 8-11 USD, mid '80s official inflation adjusted prices of ~$3.65-5, and lower actual prices from a quick check of my library, my response to the higher end is not no, but hell no, and I'm not going to buy the lower end new for all but the most exceptional titles.
Many economists think deflation causes people to hoard their money, since an item bought tomorrow will cost less (assuming your form of storage survives, $N in a bank that goes bust before the FDIC was established is worth $0), and the reverse for inflation. I think it's a lot more complicated than that.
I agree that it's more complicated than that! Maybe for any 0.1% of change in the interest rate or inflation rate there is a marginal effect. But eventually quantitative differences become qualitative ones.
When the interest rate you pay is 4%, the inflation rate is 2% and the interest that you earn is 0.25% quantitative changes become qualitative ones at numbers that seem very innocuous.
2% annual inflation isn't a big deal, but 2% annual deflation would make all the money disappear in less than a year? How can that be so?
I do understand that for double-digit losses and gains things are nonlinear, in other words a 50% loss means that you need a 100% gain to offset it, and a 90% loss needs a 1000% gain to offset. But in the single digits, this is very close to linear. If you lose 5%, then gaining back 5% leaves you very close to even.
If 2% compounded deflation is the end of society, how can 2% compounded inflation be the savior?
I'm not saying inflation is the savior. I'm saying that in the current system, deflation can evaporate the money supply quickly and is a huge risk factor.
The reason is that ~90% of the money that exists needs to be continuously rolled over into new loans to maintain the total supply (and it actually needs to increase a bit [ie. inflation]). At any given time, only a small fraction (~10%) of the total supply is available to make the upcoming interest & principal payments. If new loans don't roll out in time (to replace the money destroyed by the principal payments), you can enter a situation where there is no legally manifestible currency (banks are completely insolvent) without some seriously disturbing hackery and deception.
You begin to hit serious problems (many individual actors will fail due to 0 flow) before you even get to that point. This is just the ultimate fate of our economy.
Edit: What we really need are accurate and accessible simulations of our economy so that everyone has a chance to understand it.
> to replace the money destroyed by the principal payments
The money isn't destroyed. It's back in the hands of the lender, available to do whatever they'd like with it. Perhaps they'd invest it into a factory or a business that they own, instead of just loaning it out. That would mean it'd be spent on real things in the real world, thus meeting the criteria of not being destroyed and being spent.
To start a bank, one must collect the initial capital on which to fund the bank's loans. The Federal Reserve requires that the bank must hold capital in excess of 10% of its assets. A bank cannot withdraw capital that would cause its assets to become greater than 90% of its net value. The capital that cannot be withdrawn is what I refer to as "true capital", as all of the other value exists solely as reflection of the true capital.
> The capital that cannot be withdrawn is what I refer to as "true capital", as all of the other value exists solely as reflection of the true capital.
What? How does that have any bearing on reality? The values of mortgages a bank has on its books aren't a reflection of how much reserves it has, it's a reflection of the dollar values attached to the loans.
How many loans a bank can write in a month is of course dependent upon how much money the bank has sitting around in excess of the reserves it is required to keep. But again, that doesn't dictate the dollar values on the loans. Those were fixed at signing and in the absence of problems, get smaller at a predictable rate. What do reserves have to do with the loan equations?
You said that the bank could just withdraw the money and use it for something else. The bank cannot just withdraw money. An individual or organization could withdraw from an account they have at the bank, but the bank itself cannot withdraw any of its capital (which is the only way the analogy we were discussing makes sense) if it has any outstanding loans. The reason the bank cannot do this is laid out in my previous comment.
> 2% annual inflation isn't a big deal, but 2% annual deflation would make all the money disappear in less than a year? How can that be so?
There's no symmetry between inflation and deflation. Your incredulity is unwarranted.
Money is an accounting method to enable easy trade. Ordinarily, it's worthless, which makes it available to be used in transactions. Under deflation, money gains an inherent value -- you can multiply your worth by holding on to the money you have now. This means that much less trade occurs, because the gains from that trade are less than the gains from holding on to your cash while it appreciates. But the gains from cash appreciation are in an important sense hallucinatory -- on a system level, they don't exist -- and the gains from trade are real, so the economy just ends up being crippled.
On the other hand, when you consider what money is an abstraction for - economic resources - inflation doesn't seem so unreasonable. Consider one fairly standardized resource unit - a barrel of oil. Crude oil lasts pretty well, but refined oil products definitely have a shelf life. Food commodities are of course perishable, and real estate can often lose use value if buildings aren't properly maintained. Of course this is not to say that all resources are perishable or perishable to similar degrees, but nature does impose 'use it or lose it' conditions of its own.
The other thing to consider is that any decision to wait has an opportunity cost, and the baseline opportunity cost is captured by the interest rate. Since nobody is going to stop charging interest to borrow money - even in sharia finance you pay a rental cost for money that is very very similar to interest - it would seem as if price inflation was an unavoidable characteristic of any system involving credit or loans.
Money, or more properly, _currency_, is not a store of value. Oil, timber, or woool is a store of value -- it is actually something you can use. Money is an abstract "IOU", a right to demand someone give you something of value. At the end of the day, a society with oil, timber and wool is better than a society with only money. The only utility money has is that it facilitates production, instead of leaving people unemployed and starving because they have no convenient way to trade their labor or capital for whatever they need.
Yes...that's why I described money as 'an abstraction.' My point is that the underlying resources on which money gives you an easy means of purchasing a claim (instead of having to barter) are sometimes perishable, which means that opting to store rather than use them can have a cost (separate of the opportunity cost of foregone alternatives) and inflation could be thought of as the incorporation of the aggregate perishability of goods into the abstraction of currency. I can't give you a citation for this, it's just my personal conjecture.
But permanent with respect to what? US GDP is 16.77 trillion. In 1950 it was $.3T. Ratio is 55:1. Population is only approximately 2:1. That's a compounded growth rate of 5%. So really- just to break even and make a dollar mean the same thing, we'd need an average money supply growth of 5% ( which is not the same as inflation ). But all the prices will be radically different - some more, some less.
No inflation encourages the type of behavior that we're seeing today -- hoarding of US dollars.
Gold as currency had lots of really negative effects, read up on the populist movement in the late 19th century U.S. and the background of the "Wizard of Oz" story.
There was a period of low inflation during that time frame but it temporary and isolated.. There were huge inflation swings before, during, and somewhat after that time..
I think you'll observe that there are periods of inflation offset by periods of deflation, meaning that over time the value of money was somewhat more stable than your image implies.
Generally speaking though, bonds are fixed income securities and are not explicitly inflation adjusted. The price you'd pay to buy a given bond fluctuates in part based on market expectations of future inflation.
> Serious question: Why is (bond) interest not adjusted for inflation (or deflation for that matter)?
Some bonds are, but with a moderate, low-volatility year-over-year inflation in the modern period its not that important (reasonably good inflation expectations exist and are factored into market prices), and before modern independent central banking -- governments weren't exactly inclined to surrender the power to monetize debt (when they were convinced to largely curtail that power, it was through independent central banking rather than through inflation-adjusting bond interest.)
Inflation adjusting bond yield -- if done generally so that it significantly affect debt service costs -- also creates substantial incentives to systematically manipulate official inflation measures; if you don't trust the issuing government to manage inflation within a reasonably predictable range so that it can effectively be priced-in to the bond purchase, do you trust them to accurately measure inflation when they have a substantial near-term financial incentive not to?
> Very long timespans such as these really devalue any interest payments, do they not?
Well, sure, they reduce the real (though not nominal) value of the annual income from a perpetuity, and those over time the real (though not nominal) value of the bond itself.
I'm not sure this is a bad thing inherently; why shouldn't bonds tend to have reduced real value over time?
Why should the real bond value reduce over time, though? Sorry to answer your question with another question, but I don't really see a reason why they should. After all, isn't some degree of predictability/fixed value the point?
These types of bonds do exist. They are called "linkers" and many governments issue them. In the US, we have TIPS (Treasury Inflation Protected Securities) and some savings bonds that are linked to the CPI.
One major issue with these is that the inflation adjustment typically lags by 6+ months, so they are not a good short-term hedge. But they are very popular.
Part of the reason Yale holds this artifact is due to Prof. Geert Rouwenhorst, who researched Dutch financial instruments. If I recall correctly, he actually collected a few decades of interest on behalf of Yale during the purchase of the bond back in 2003, and even had an ancient ledger updated to reflect the payout.
I still consider the more 'recent' 19th century bonds he passed around in class to be the coolest show-and-tell item ever from a professor.
Their economy is finally growing nicely, after 30 plus years of disaster.
From their small base, GDP has tripled in ten years. They've seen 11 straight growth years. The prior two years both saw around 10% growth, while inflation has been relatively low.
Life expectancy at birth has climbed from 50 to 64 in 20 years.
The poverty rate has fallen from 45% to about 25% in 20 years.
The infant mortality rate has fallen from 140/100k in 1980, to around 40 today, falling by 50% since 2000. It's expected to continue to fall.
They're actually generating wealth faster than any other comparable nation in Africa:
Why? That requires a per capita value contribution of less than $50 per month per person, about $45 or so. Even low-tech farmers with limited access to land, seeds, fertiliser etc manage to harvest $45 a month on average. (note about 85% of the labour force is in agriculture).
Fascinating. Yet they still require their students to pay tens of thousand of dollars each year in tuition. They should do what Stanford did and make education free for students whose families earn less than $125k.
"Yale does not require students to take out loans for their education. Instead, Yale meets 100% of demonstrated need for all admitted students with a financial aid package consisting of need-based scholarships, term-time employment, and a student income contribution."
Yale -- like a lot of elite private schools -- has very comprehensive need-based financial aid that often covers full costs. Despite the higher nominal tuition, its usually practically cheaper for a low- to moderate-income student who can get into such a school to pay less out of their own/parent funds (including both out-of-pocket and loans) than they would if they went to a nominally cheaper public university. This has been true of elite universities in general for decades.
Yale already does that. Tuition at top universities is essentially a steeply progressive tax. If you're a Rockefeller you pay the sticker price. Everybody else gets a discount.
Christie's also gives background info on the bond, such as "While it was originally a requirement that the bond-holder send the original parchment to the Lekdijk Bovendams on 12 January to receive the annual interest, the successful bidder on this lot need only send the allonge, on which the payment will be neatly recorded by a responsible clerk of the Waterschap Kromme Rijn (successor to the monk and Secretary who sealed the document in 1634), as it has been for 302 years since 1698."
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[ 4.6 ms ] story [ 115 ms ] threadPerhaps the bond was originally issued and in 1944 a companion document was issued with it? So now the single bond consists of two documents. It would make sense to issue a newer document that goes along with the original. I imagine some numbering scheme was introduced between the original issue and 1944. The 1944 document would provide a number in the modern scheme for the original bond.
Even if they had done 200 years, it likely wouldn't have diminished the bond's value too heavily (at purchase), and would have put a stop to this.
I guess they figured that they would eventually buy back all of the bonds, but missed a few or never had the money.
http://articles.latimes.com/2012/may/05/business/la-fi-0506-...
At least, from AA's perspective, that ends when the holder dies so there's light at the end of the tunnel.
I was hoping the answer would be in perpetuity. Sadly, it seems that the longest you can draw it out is until the death of one's surviving spouse.
Imagine how glorious it would be if you could stow away about $5k of post tax income every year and invest it in some stock index fund if you could give it to someone upon death. Of course, it wouldn't be a retirement account anymore though.
http://www.financeformulas.net/Perpetuity.html
Whether it was a good idea or not depends on whether the pier generated enough revenue to exceed the amount that's been paid in interest over the last 367 years.
There are some corpora of handwritten digits (for OCR training) lying around the net, I guess I should check those to be sure.
Did a brief survey off people around me, results were inconclusive:
1x Upper Left
1x Upper Middle
1x Upper Right
Do you write Z with a line through it? My British family does.
Z with a line through it is quite common in mathematics in the US (to prevent confusion with the number 2.) Many people who do a lot of math carry the dash over to Zs in general.
So it's horizontally mirrored compared to the way you do it :-)
"Aan de noordzijde van de Lek was een dijk aangebracht van ruim 32 km lang en hij liep vanaf Amerongen (aan de rand van de Utrechtse heuvelrug) naar het Klaphek bij Vreeswijk, de Lekdijk Bovendams genaamd."
It was an bond ("obligatie") of 1000 guilders, given out by Hoogheemraadschap Lekdijk Bovendams (more recently merged into Hoogheemraadschap De Stichtse Rijnlanden). It returns 25 guilders (now 11,35 euros) interest per year. Yale bought it in 2003 for 24.000 euros. It was given out in 1648 to build a groyne ("krib") near the hamlet of Honswijk. Looking at Google Maps, you can see a system of multiple groynes there; I am not sure whether this bond paid for only one of them or for more: https://www.google.com/maps/place/3998+Honswijk,+Netherlands...
Original buyer of the bond was Niclaes de Meijer: http://www.zeit.de/2015/15/ewige-anleihen-kredit-geldanlage (German!).
In the first 50 years of the 17th century, Lekdijk Bovendams gave out 300.000 guilders of bonds to repair the dikes along the 8 km stretch it was responsible for. Stichtse Rijnlanden is nowadays responsible for the Lek dikes between Amerongen and Schoonhoven, as well as water management in most of the province of Utrecht.
However, one can issue a perpetuity where the coupon is set to decrease (or increase!) geometrically over time. Different issue of such bonds are still fungible (provided they use the same rate of exponential decay), but their duration can now be tuned at will, by changing the characteristic time of the exponential.
Why does this matter? There is a large market in government bonds (particularly in the US) and this market places a large premium on the latest issued bonds, or "on-the-run". This is because these bonds enjoy the most liquidity and can be used as alternatives to cash. The premium disappears as the bond is replaced with a new issue.
Real economic value is being destroyed because the bonds aren't fungible. Perpetuities with exponentially decreasing coupons would immediately solve that problem in one fell swoop.
When a currency disappears entirely (like with Zimbabwe), there's a much more chaotic basis as it switches to separate sovereign currencies, which often have different inflation rates baked in. As this can be much more unexpected than a planned currency transition, the market often doesn't incorporate the expected changes in real interest rates, and often the exchange rate needs to keep floating for a while to account for ongoing inflation. More info on Zimbabwe's abandonment of their currency: https://en.wikipedia.org/wiki/Zimbabwean_dollar#Abandonment_...
The maturity, of course, is infinite.
Assume we have a market with n different perpetuities: p1,p2...,pn. When we shift the coupon schedule of any of these securities in time, we would like the resulting security to be expressible as a linear combination of the n perpetuities.
p1...p2 should be the basis of a vector space of coupon schedules which is stable for time shifts. As it turns out, any vector space with such a property will be the sum of spaces spanned by { exp(lambda t) t^k | k < K } or { exp(lambda t) t^k cos t, exp(lambda t) t^k sin t | k < K } for lambda real.
So for instance, we could have the following set of coupon schedule, and it would be stable: {1, exp(-0.03 t)}
But so would: {1, t, exp(-0.03 t)} or even {1, cos t exp(-0.05 t), sin t exp(-0.05 t)} etc.
Back then, inflation was probably less of a problem for investors.
For the record, in case there still are Ron Paul fans/goldbugs out there: moderate inflation is generally considered a good thing by economists today and inflation is probably too low at the moment.
One person described money as "sweat, distilled" and I find that definition incredibly attractive. I recognize that plenty of people making money not by sweating but thinking or whatever, but I still find it an excellent description. And I can't see how devaluing a person's effort over time is a viable strategy for building a lasting civilization. I think it leads inevitably towards the kind of throwaway society we have here in the US and virtually guarantees that we won't build infrastructure of long lasting value like exists elsewhere in the world. Well built stuff can last for hundreds or thousands of years. I wish money was the same.
I'll reword it for you:
'Encouraging money to be invested, by motivating people via inflation, is a good thing overall because it puts wealth to work creating jobs and stimulating economic activity.'
Thus, I think the idea that a dollar saved today can buy roughly the same amount of stuff in a decade is actually bad, because in a world where that's likely, that dollar was probably sitting useless in someone's purse for a decade.
Inflation, in my opinion, actually does the opposite of what you suggest -- because it encourages lending and investing in order to beat inflation, money is actually put to use for longer term projects such as infrastructure that can last years and years.
Because we all know banks put all the currency they receive in huge vaults filled with paper $100 bills, instead of, oh, lending it out (several times over one way or another).
Unless you're converting it all to gold, or stuffing it under a mattress, your savings are in institutions like banks which are not a sink where the velocity of your money goes to zero, outside of economic messes where they aren't willing to lend, or people are afraid to borrow. And your being encouraged to spend your money doesn't seem to help those situations.
Right?! Every bank vault is just huge piles of gold bars and ornery old men counting and recounting the money, hoarding it up and never loaning it out.
Inflation is currently bouncing between around 1.6% and 2% (but mostly towards the 1.6%). A 3 year CD at a decent bank is currently paying around 1.6%; a 5 year CD is paying around 2%. So if you're willing to commit to a 5 year deposit, you will probably beat inflation and realize a small, real return. Even an interesting-bearing checking account (with a sufficient balance...) pays close to 1.6%.
Granted, it's not the glorious 5%+ returns of yesteryear, but then, we're in a savings glut.
That's a nonsensical statement when the central bank is fully in control of the money supply, and thus, the interest rate.
That's like saying "well my computer has a billion copies of funny cat gifs on it, so there's a funny cat gif glut". It doesn't make any sense. You control how many copies of funny cat gifs are on your computer. If there are too many, it's because you made too many copies. If there are two few, it's because you made too few. Pretending that market action had anything to do with something that you are ultimately in control of makes zero sense.
The interest rate is low (or zero) because the central bank decided it should be, not because all the people in the world collectively don't have any real preference for a dollar today versus a dollar tomorrow.
The return from consumer savings accounts being near inflation / a near-zero real rate of return is because of the savings glut.
The two are related but not the same thing.
The interest rate is supposed to be the price of money. There's going to be a bid/ask spread on that because of the cost of accepting money and bundling it together, along with the cost of keeping up with the book-keeping and various other things that are costs for loans. So the rate you get paid in interest should always be less than the rate that you pay in interest. This I understand.
But if the interest rate is low, then the interest rate is low. The interest rate is determined by the aggregate supply and demand for money. If there is a lot of supply, relative to demand, then the interest rate is low. If there is a lot of demand relative to supply, then the rate is high. And given that people have a nearly infinite desire for money today versus in the future, the rate is really determined by the supply.
The Fed is in control of the supply by creating or destroying money as needed. That means that they fully and truly do set the rate, because they can do literally whatever is needed to move the needle.
The idea that everyone's individual actions to save is somehow what created the tremendous amount of expansion in the money supply (and thus the very low interest rate) is utter nonsense. The Fed created a lot of extra money which expanded the supply of loans, thus pushing down the rate.
Australia also still has a 2% official rate vs near 0 in the US.
I think the idea that a dollar today buys just as much in a decade IN NO WAY precludes people from investing their money to earn a return. It just eliminates the stupidity tax that some people pay for not understanding how things work.
In a non-inflationary environment nearly all people would still invest their money and put it to work. It's just that they wouldn't be taxed for not doing so.
Inflation doesn't encourage lending, it encourages borrowing. It's smart to pay back with dollars that are worth not as much as the dollars you borrow. Inflation actually discourages lending because you now have to find borrowers who can pay you back higher than the interest rate.
Of course, all this is predicated on a real market in interest rates which we don't have in the US because the Fed sets the rate through various means.
I might not care too much if it was $0.50 or $1 per month. But quantitative differences eventually become qualitative ones, and at this point it's not just some tiny abstract amount of money, it's real consumption that a person has to forego every month (or day!) for the sake of not getting financially ruined the first time a big unexpected expense comes up.
When I see, oh, normal genre 300-500 page paperbacks going for Amazon prices from 8-11 USD, mid '80s official inflation adjusted prices of ~$3.65-5, and lower actual prices from a quick check of my library, my response to the higher end is not no, but hell no, and I'm not going to buy the lower end new for all but the most exceptional titles.
Many economists think deflation causes people to hoard their money, since an item bought tomorrow will cost less (assuming your form of storage survives, $N in a bank that goes bust before the FDIC was established is worth $0), and the reverse for inflation. I think it's a lot more complicated than that.
When the interest rate you pay is 4%, the inflation rate is 2% and the interest that you earn is 0.25% quantitative changes become qualitative ones at numbers that seem very innocuous.
I do understand that for double-digit losses and gains things are nonlinear, in other words a 50% loss means that you need a 100% gain to offset it, and a 90% loss needs a 1000% gain to offset. But in the single digits, this is very close to linear. If you lose 5%, then gaining back 5% leaves you very close to even.
If 2% compounded deflation is the end of society, how can 2% compounded inflation be the savior?
The reason is that ~90% of the money that exists needs to be continuously rolled over into new loans to maintain the total supply (and it actually needs to increase a bit [ie. inflation]). At any given time, only a small fraction (~10%) of the total supply is available to make the upcoming interest & principal payments. If new loans don't roll out in time (to replace the money destroyed by the principal payments), you can enter a situation where there is no legally manifestible currency (banks are completely insolvent) without some seriously disturbing hackery and deception.
You begin to hit serious problems (many individual actors will fail due to 0 flow) before you even get to that point. This is just the ultimate fate of our economy.
Edit: What we really need are accurate and accessible simulations of our economy so that everyone has a chance to understand it.
The money isn't destroyed. It's back in the hands of the lender, available to do whatever they'd like with it. Perhaps they'd invest it into a factory or a business that they own, instead of just loaning it out. That would mean it'd be spent on real things in the real world, thus meeting the criteria of not being destroyed and being spent.
What? How does that have any bearing on reality? The values of mortgages a bank has on its books aren't a reflection of how much reserves it has, it's a reflection of the dollar values attached to the loans.
How many loans a bank can write in a month is of course dependent upon how much money the bank has sitting around in excess of the reserves it is required to keep. But again, that doesn't dictate the dollar values on the loans. Those were fixed at signing and in the absence of problems, get smaller at a predictable rate. What do reserves have to do with the loan equations?
There's no symmetry between inflation and deflation. Your incredulity is unwarranted.
Money is an accounting method to enable easy trade. Ordinarily, it's worthless, which makes it available to be used in transactions. Under deflation, money gains an inherent value -- you can multiply your worth by holding on to the money you have now. This means that much less trade occurs, because the gains from that trade are less than the gains from holding on to your cash while it appreciates. But the gains from cash appreciation are in an important sense hallucinatory -- on a system level, they don't exist -- and the gains from trade are real, so the economy just ends up being crippled.
The other thing to consider is that any decision to wait has an opportunity cost, and the baseline opportunity cost is captured by the interest rate. Since nobody is going to stop charging interest to borrow money - even in sharia finance you pay a rental cost for money that is very very similar to interest - it would seem as if price inflation was an unavoidable characteristic of any system involving credit or loans.
Gold as currency had lots of really negative effects, read up on the populist movement in the late 19th century U.S. and the background of the "Wizard of Oz" story.
http://imgur.com/HLfnO6R
Generally speaking though, bonds are fixed income securities and are not explicitly inflation adjusted. The price you'd pay to buy a given bond fluctuates in part based on market expectations of future inflation.
Some bonds are, but with a moderate, low-volatility year-over-year inflation in the modern period its not that important (reasonably good inflation expectations exist and are factored into market prices), and before modern independent central banking -- governments weren't exactly inclined to surrender the power to monetize debt (when they were convinced to largely curtail that power, it was through independent central banking rather than through inflation-adjusting bond interest.)
Inflation adjusting bond yield -- if done generally so that it significantly affect debt service costs -- also creates substantial incentives to systematically manipulate official inflation measures; if you don't trust the issuing government to manage inflation within a reasonably predictable range so that it can effectively be priced-in to the bond purchase, do you trust them to accurately measure inflation when they have a substantial near-term financial incentive not to?
> Very long timespans such as these really devalue any interest payments, do they not?
Well, sure, they reduce the real (though not nominal) value of the annual income from a perpetuity, and those over time the real (though not nominal) value of the bond itself.
I'm not sure this is a bad thing inherently; why shouldn't bonds tend to have reduced real value over time?
Why should the real bond value reduce over time, though? Sorry to answer your question with another question, but I don't really see a reason why they should. After all, isn't some degree of predictability/fixed value the point?
One major issue with these is that the inflation adjustment typically lags by 6+ months, so they are not a good short-term hedge. But they are very popular.
I still consider the more 'recent' 19th century bonds he passed around in class to be the coolest show-and-tell item ever from a professor.
As a side note, that's about half the entire GDP of Ethiopia last year. That's a country of 100m people.
From their small base, GDP has tripled in ten years. They've seen 11 straight growth years. The prior two years both saw around 10% growth, while inflation has been relatively low.
Life expectancy at birth has climbed from 50 to 64 in 20 years.
The poverty rate has fallen from 45% to about 25% in 20 years.
The infant mortality rate has fallen from 140/100k in 1980, to around 40 today, falling by 50% since 2000. It's expected to continue to fall.
They're actually generating wealth faster than any other comparable nation in Africa:
http://www.theguardian.com/world/2013/dec/04/ethiopia-faster...
Even in the article it states that some dont know where the money came from... I err on the side of corruption...
Per capita wealth in Ethiopia is close to $500, with 94 million people. They have around $45-$50 billion in wealth.
Fascinating. Yet they still require their students to pay tens of thousand of dollars each year in tuition. They should do what Stanford did and make education free for students whose families earn less than $125k.
"Yale does not require students to take out loans for their education. Instead, Yale meets 100% of demonstrated need for all admitted students with a financial aid package consisting of need-based scholarships, term-time employment, and a student income contribution."
http://admissions.yale.edu/financial-aid-prospective-student...
So...Yale does what Stanford does already...
http://admissions.yale.edu/financial-aid
Families don't have to pay if they make less than 65k.
Stanford's program is similar. Their 125k threshold is for not paying tuition, but a family making 125k is expected to pay for room and board.
Christie's also gives background info on the bond, such as "While it was originally a requirement that the bond-holder send the original parchment to the Lekdijk Bovendams on 12 January to receive the annual interest, the successful bidder on this lot need only send the allonge, on which the payment will be neatly recorded by a responsible clerk of the Waterschap Kromme Rijn (successor to the monk and Secretary who sealed the document in 1634), as it has been for 302 years since 1698."