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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/
[2] http://www.independent.co.uk/arts-entertainment/books/review...
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.
Except the UK Treasury fixed the price of gold at £3.17s10.5d in 1717 and the price didn't change for ~200 years until the UK left the gold standard in 1931. So, zero compounding for 211 years.
The fixed price was set by Newton, btw.
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.
Sure, but in this case wouldn't the 'prevailing rate at the time the cash flows were received' generally have been higher than the original coupon? Presumably the reason UK government waited 294 years is because the interest rate on UK gilts has never dipped significantly below the original coupon rate until now.
Besides what stygiansonic said:
The article does not claim that UK bonds have been paying 2.5~4% since 1720. That range refers to the current nominal rate for those bonds. Those bonds have been restructured/refinanced several times along the years. That is, the UK "soft-defaulted" a few times.
Sovereign bonds aren't risk-free, especially not in the very long term.
The fascinating part for me has always been the power of compounding : 1.032 ^ 300 = 12703, while 1.030 ^ 300 = 7098 ! i.e., a difference of 0.2% per annum makes a 5600-times difference in final wealth.
Related : in the finance industry, there's a term called basis points (written bps, pronounced "bips"). 1 bps = 1/100th of a percentage. So that 0.20% is actually 20 bps, a royal magnitude in this new perspective of compounding :-)
12703 / 7098 = 1.78965x.
So a 6.7% increase in intrest rate (3.2 vs 3.0) makes a 79% difference in return after 300 years.
> And yet buying a property in London probably would have been an even better investment
I believe you never really own a property in GB. I think you own it for 99 years and then it goes back to the crown.
Not true, there are properties sold on a lease, but freeholds are very common. I own the land my house stands on in perpetuity.
Is property tax waived for residents?
"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.
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.
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.
What stops Britain from calling them all in and paying them off at current interest rates?
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.
The effect of inflation eroding your funds can be eliminated by investing it effectively thought. Serious savers should be earning returns well in excess of 2%; my regular bank account pays more than inflation. Similarly competent lenders would have priced in margin on top of a 2% inflation expectation, so they'd be making a slightly smaller profit on their loan portfolios rather than a loss.
That's not the case when a governments freezes withdrawal of certain assets whilst proposing to give them a 6% haircut.
> Governments never pay back the capital unless thy have to.
Some do. See https://en.wikipedia.org/wiki/List_of_countries_by_public_de... as a starting point.
Happy to see someone makes this point. I think people assume I'm a little nuts when I try to explain that inflation is a tax.
Wasn't that Cyprus, not Greece?
Makes you wonder how long it will take - if ever - to pay off our current collective debts.
I think the US gov has become too addicted, structurally and incentive-wise, to this hack which lets them spend more each year than they take in organically through taxes/fees/etc.
I can not realistically picture them ever paying the debt off or going back to a zero deficit. I bet the most likely endgame will be some kind of future war against The Bad Guys (which they'll make sure to do sufficient propaganda demonization against for the low-brow general public) and then they could use that situation to justify "retiring" (not honoring) the debt. There is historical precedent. And while there are many good and honest human beings working throughout the US gov it would be a naive mistake to think the most important decisions are made by "good" people. History suggests the opposite. In (almost) all countries. Throughout history. And again, ignore words. Any words that come out of a politician's mouth just ignore. Only weigh actions, results and tangibles. Looking at those, the weight of evidence suggests they'll never eliminate the yearly deficit or debt. Just keep increasing it until some huge "oopsie!" reset excuse is found. The kind that will likely involve much loss of blood by the working/labor/non-wealthy classes, world-wide
That's the historical record, reinforced many times over millenia.
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.
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.
A completely balanced budget would probably result in deflation. In the U.S., there are only two ways that I know of that money is created: 1) A bank making a loan and 2) the federal government spending money. Likewise, there are two ways that money is destroyed: loan repayments and taxes. But in the case of loan repayments, the total amount paid/destroyed is always greater than the initial loan due to interest. The extra money for the interest has to come from somewhere. And this is without even considering the effects of increases in GDP.
The US public debt is 72.5% of GDP. This is roughly equivalent to a person owing a debt of 72.5% of their annual income. High, but not impossible to pay off by any means.
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%.
The situation in Japan is dire. Their debt is more than double gdp.
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?
You can read it for yourself: http://www.pdavis.nl/Legis_07.htm
Slavery was not considered a "horror" at the time, it was considered "injust" and it was seen as equally "injust" to take away a right society had given someone and not compensate them.
It's interesting that they also say "expedient". To me that means they felt their economy would continue just fine without the slaves. And they were freeing them as a sort of "eh, why not".
Remember these slave holders were not people on the fringes of society, they were ordinary people. Society did not consider what they did to be evil, so why would that same society punish them?
You have to look at people's actions through the lens of their own life, not the lens of yours. Well, you can look at them through your own lens, but that only lets you condemn the result, not the people, and not the actions.
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-d...
> 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...
The people that had slaves lost money because of the new law. They would have rioted and possible reverted the law if they got no compensation.
Law change is forever, compensation is short-term - of course it's worth it (that's one thing that paradox grand-strategy games taught me - never grant priviledges to provinces for gold ;) ).
BTW there's a lesson there - it shows how we should deal with the CO2 problem and global warming. Countries that industrialized recently won't stop becoming rich just because it's bad for someone else. We can try to make everybody pay, or we can compensate these that need coal industry the most (i.e. developing countries) to make them switch to better (and more expansive) alternatives.
As a matter of historical fact, yes, see link below. As a matter of rhetorical response, wouldn't paying off whomever be worth ending the horrors of slavery? As a matter of imagining a counterfactual, what would the late 19th and 20th centuries have looked like in the US if it had somehow followed a similar route instead of embarking upon the Civil War?
That's one of the factors that damaged Haiti after its independence. In order to normalize trade relations, they had to accept debt at the market rate for the slaves who had been emancipated. This was many, many times their annual income and is probably a major reason why the country became a failed state.
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).
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).
Debts are usually denominated in a currency, so if the nominal was 100 pounds, even if that used to be worth 100 times more before, that's what the government needs to pay.
Pound Sterling didn't evolve in a vacuum -- there are acts of Parliament regulating exchange rates with previous denominations; I expect they will be used, and have likely been used to pay out compounded interest until today, i.e. when the last Sterling reorganization happened (in the 70s? I can't remember), these debts were likely recalculated. It's not like the Bank of England is still issuing XVIII-century Pound Sterling just to pay interest on something.
One thing the United Kingdom of Great Britain really excels at, is continuity of government. It would be much more difficult for, say, Germany or France to deal with debts from 1720, considering they went through several revolutions and dissolutions and likely defaulted or simply ignored previous obligations at various points.
Yes, they'll only get the nominal amount back.
Although there has been a huge amount of inflation since then you'd expect that the interest payments have more than made up for this.
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."
... And yet we have >10x the civil servants now... What do they all do?
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?
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)
C1 * exp(-r * T1) + C2 * exp(-r * T2) + ... + CN * exp(-r * TN)
C1 * exp(-r * T1) + C2 * exp(-r * T2) + ...
C * exp(-r) + C * exp(-2r) + C * exp(-3r) + ...
= C * (exp(-r) + exp(-2r) + exp(-3r) + ...)
= C * exp(-r) / (1 - exp(-r))
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.
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.
You're probably making the mistake of confusing the interest rate with the yield. Just because the bond pays 4% on its principal doesn't mean you're getting 4% yield.
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_calcu...
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.