This story also shows another facet of inflation: the amount currently paid is €13.61 a year. Effectively, that debt was killed by inflation over the years.
Inflation makes it harder for the current generation but also free future generations from your debts.
the view you are describing could be described as (or at least, i would describe as) "newtonian" interest/inflation, where modern thinking is more "einsteinian".
the interest rate of a bond isn't just "liquidity/the time value of money", it also contains expectations for future inflation rates. However, we never know the future, so inflation risk cannot be eliminated/hedged by any means, so being "wrong" about the future might harm or reward you.
furthermore, by portfolio theory, you would have needed to reinvest all the interest received from this bond immediately upon receipt as part of your evaluation of the performance of the bond (which, that being difficult to do is why we evaluate bonds at "present value"). All those past interest payments made would have been reinvested at prevailing (e.g. so-called "inflationary") rates and might have done extraordinarily well.
If you include all factors, this bond might have been the best investment she could have made, and it would be wrong to describe it as somehow "ravaged by inflation"; with nothing any better to do with her savings, it's the idea that money is somehow "fixed" and potentially permanent unless "eroded" that we should see as damaged, not the value of this bond.
I think a more nuanced take would simply be that the long tail of a perpetual bond is unlikely to be worth that much, which is why these days bonds with extremely long maturities aren’t issued.
I think I was taught that perpetuities were banned because of the legal/accounting woes they create in the future.
As an example, the reason that coupons (like $1 off a box of Wheaties) or refunds (good for 1 airline ticket) and similar "financial instruments" have expiration dates on them is because it is required by accounting rules. When those items are issued, companies need to put them on their books as liabilities, and having to keep around an ever increasing accumulation of liabilities for many years would give a "wrong" picture of the financial health of the entity, when the purpose of books is to give a "right" picture.
(your take is not more nuanced, it acknowledges this practicality aspect. to extend the newtonian/einsteinian analogy, you're advocating ignoring the ∆x² term as the lim ∆x→0 version of the calculus derivative rather than the approach taken by analysis :)
Hm interesting. I think that would also explain why they make gift cards expire or lose value over time, even though, if anything, they should be paying you interest because you’re giving them a(n otherwise) free loan.
My understanding is that this is correct. If they don't expire, you have an difficult to define liability on your books forever for e.g. lost cards.
> Inflation makes it harder for the current generation
Inflation benefits borrowers and penalizes lenders.
I would posit that younger people tend to be borrowers and older people tend to be lenders (bond owners).
That said, it's not clear what you meant by "the current generation."
Final note, inflation helps encourage people to use their money and keep the economy moving.
> Inflation makes it harder for the current generation
It's not obvious to me that this is the case- if your wages go up with inflation, and you store money in stocks/bonds that keep up with inflation- doesn't it also just make any debt you have gradually reduce overtime?
This is why being in low interest debt is so amazing. Take two people with the exact same job tracks, same appartments, family, interests, etc...
But give one of them $2,000,000 in mortgage debt at 3.0% interest on 3 properties that are rented out, and don't have the other have anything.
In 15 years, those properties will be worth 2-3x as much, and the debt will still be 2,000,000. This is what happened to boomers even though they don't realize it. Its not that houses are some amazing investment, its that no one will give you 7figure loans at 3% interest to buy stocks with money you don't have, but they will do it for a property.
>This is what happened to boomers even though they don't realize it. Its not that houses are some amazing investment, its that no one will give you 7figure loans at 3% interest to buy stocks with money you don't have, but they will do it for a property.
Interest rates from 1971-1998 were higher than they are today[1].
That did happen to Boomers, but I wouldn't assume it will happen again. Over a long enough time period housing values must approximately track inflation, because there is an upper threshold of income percentage (certainly below 100%) people can afford to spend on housing. Currently, mortgage rates are about 2x what inflation has been over decades historically. Boomers mostly made money with regulatory capture- landowners were able to politically block housing construction during a time of increasing population, causing a short term anomaly where people were paying steadily increasingly high percentages of income on housing. Both that regulatory capture, and the population growth are disappearing now.
When I run the numbers where I live based on current market rates buying a home is predicted to be a big money loser over time vs renting and investing the difference. Renting lets you buy into housing with the prices and tax rates of when the owners bought them decades ago.
Doesn't that depend on which generation collects payments on the bond, and which makes the payments?
I would assume that bond was made in an era of low or no inflation. The yield of 2.5% would barely cover our current levels of desired inflation.
> In return for her money, the water board promised Jorisdochter, her descendants or anyone who owned the bearer bond 2.5 per cent interest in perpetuity.
This is inaccurate; it was 5%:
> According to its original terms, the bond would pay 5% interest in perpetuity, although the interest rate was reduced to 3.5% and then 2.5% during the 18th century. [1]
Sounds like the Wikipedia article is talking about a different set of bonds, "Another of these bonds, issued in 1648, is currently in the possession of Yale University."
From the article, it looks like the original interest on this one was 6.25% (75/1200) though.
So, not in perpetuity.
HN headline in the year 2400: "I SSHed into a box with a 146923-day uptime and found a cronjob still running"
I found a server I used to host in 1996 still online, but I don't know where it is. Looks like it is running a 2010 version of Apache, though, so it was at least updated 14 years ago:
It's in the UK somewhere: https://bgp.he.net/AS13037
I'm curious if anyone has run the numbers and looked at what the interest payments of this bond over the past 400 years would have amounted to had they been invested in some theoretical basket of typical assets that were available at the time.
It sounds like a pittance now but 400 years of a compounding pittance could be a lot of money.
Edit: with an annual contribution of €13.61 and a real rate of return of 3%, 400 years of annual compounding would be over €7 million. With a rate of 4% it would be €280 million.
> with an annual contribution of €13.61 and a real rate of return of 3%, 400 years of annual compounding would be over €7 million. With a rate of 4% it would be €280 million.
Calculating the total return given an annual average rate of return is the easy part here. The idea that you can easily invest in a diversified basket of assets and receive a fairly safe x% a year is a relatively recent one. I'm not sure what assets you could invest in 400 years that would even be guaranteed to exist today.
The issue would be finding an asset (or group of assets) that 1) held value and 2) you could maintain ownership over continuously for 400 years. Cities, kingdoms, countries, currencies, corporations, banks, markets all rise and fall over much shorter periods.
> with an annual contribution of €13.61 and a real rate of return of 3%, 400 years of annual compounding would be over €7 million. With a rate of 4% it would be €280 million.
Reminds of Futurama with billionaire Philip J Fry after unintentionally leaving 93 cents in the bank for 1000 years.
I asked a bot to do the math for me (if anyone was as curious as I was):
93 cents would turn into approximately $17.88 trillion with compound interest of 3% over 1000 years.
93 cents would turn into approximately $4.28 billion with compound interest of 2% over 1000 years.
93 cents would turn into approximately $19,482.22 with compound interest of 1% over 1000 years.
Bond, Perpetual Bond
Do I understand this right that this is a public works project with effectively a 400 year old interest only loan?
Pretty much! (Securities like this are also something of a headache for compliance people since _technically_ they can be caught by current regulations not written with them in mind. Good luck getting an LEI for this bond’s issuer. (An actual concern I’ve seen raised by people responsible for such things)
I checked it, and the issuer of this bond (Hoogheemraadschap De Stichtse Rijnlanden) indeed does not seem to have a LEI!
For those like me that didn't know
"The Legal Entity Identifier (LEI) is a reference code — like a bar code — used across markets and jurisdictions to uniquely identify a legally distinct entity that engages in a financial transaction."
This has me hoping the Vesuvius prize finds an ancient Roman bond that needs to get paid out.
Pity that the Holy Roman Empire dissolved a while ago.
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CUSIP?
Bearer bonds exist in crypto and are extremely popular there, for anyone lamenting the loss of the concept
What I love about this is how in just the last 20 years, a lot of work has been done to jettison bearer bonds from existence in jurisdictions across the globe, and cause the “registration” of any existing bearer bonds so that they couldnt be grandfathered in
But no sooner than this advancement in global geopolitical hegemony was developed and leveraged, the crypto market reinvented bearer bonds and they work even better
Where is the in perpetuity language in the bond terms? Doesnt it say until full repayment?
> [I also declare] to have awarded and given 75 Carolus guilders of twenty stivers apiece per year as heritable annuity, to be paid one half of the annuity aforesaid on the 9 th of June 1625 and the other half the 9th of December following and so on every six months until repayment with all payments entirely free of all taxes, impositions or burdens of whatever name or title none excepted.
It is confusingly written, but what it means by repayment in the above paragraph is not "until you get your 1200 guilders back in these 75-guilder installments", its meaning is clarified by the next paragraph,
> On such conditions that I or my successors [unreadable] of the aforesaid Leckendijck may, at any time when it pleases us, extinguish, repay, and buy back the said annuity in full at once and not in parts or fractions with the sum of one thousand two hundred Carolus guilders
which explains how the board can get itself out of this obligation: by paying the original principal of 1200 guilders back.
Thank you!
Curious why the board never paid back the original principal at any point in time over the past 400 years?
If the current annual interest of 2.5% cited in the article is €13.61, that would make 1200 guilders €544.40.
Did they just forget to? Did they figure the bond would eventually disappear? Or did they at some point think it was really cool to have a piece of "living history" and want to keep the world record alive for oldest active bond? If so... when?
A similar one owned by Yale can be viewed online [0]. It was issued in 1648, and it seems to have a fairly continuous payment history since then. There are gaps of a few decades, but nothing too extreme.
How is the exchange rate between modern money and "carolus guilders" calculated?
Something like a foreign exchange market cannot help determine this right?
In theory, could the exchange rate for $1 be made equal to 1,200 carolus guilders? (Effectively, making the bonds worthless)
I guess conversely, if you had a bond dominated in say Francs and the currency goes away do you just default?
So if their available interest rates had ever dropped below 6.25% then the issuers should have bought it back?
Thanks, yes, very helpful!
Yes, but they never repaid it. They have just been paying out the interest.
ah thanks, I think I get it now.
"heritable annuity" is the perpetual interest. "until repayment" threw me off.
75/1200 = 6.25% though.
Where does the 2.5% interest rate quoted in the article come from?
See also Tom Scott on a different perpetual bond:
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This is amazing, but I find it disappointing that the NYSE (current owner) hasn't collected interest on it since 2004. Given that most of the charm is that this is still an active financial document, I don't understand why they wouldn't keep it going. Otherwise it's just another defunct historical document.
Because the bond has to be physically presented.
Moving such a document is extremely risky and a lot of work so not worth it in almost any case short of the PR bump/curiousity of having the "world's oldest bond"
Even if you didn't have to move it, getting a taxi to some meeting place would exceed the interest payments, let alone traveling to Europe.
Given this, we should be thankful that the NYSE is maintaining this at a loss. It occurs to me that NYSE might be the best owner of this bond, as the primary value isn’t monetary, but the demonstration of stable financial institutions.