Gary North: If You Wouldn’t Buy A Company With Multiple Bankruptcies In Its Past, Don’t Buy Government Bonds (#bonds, #sovereigndebt, #inflation, #thievery)

Gary North: If You Wouldn’t Buy A Company With Multiple Bankruptcies In Its Past, Don’t Buy Government Bonds (#bonds, #sovereigndebt, #inflation, #thievery)

Having a historical perspective can open your eyes to risks and trends. According to Gary North on government bonds:

Today, governments issue bonds. They have been doing this in the West for three centuries. They have been defaulting on these bonds ever since, just as they have been doing on all other forms of debt since at least the fourth century B.C. The rate of defaults has escalated over the last two centuries.

Have you ever stopped to think about that? That the formal issuance of government bonds in the “West” is a practice which is only 300 years old? And that over that entire period, the rate of default has been rising?

In the grand scheme of things, government bonds are equivalent to a recent IPO with a pro-forma operating history of consistent unprofitability.

Why do governments issue bonds?

The ability of the government to extract wealth from rich people through taxation has always been limited. Rich people know how to hide their money. They know how to get it out of the country, and they know how to get it into markets that are less easily taxed.

So, politicians learned half a millennium ago to get their hands on rich people’s money before rich people started hiding their money. They did this by promising to pay a rate of interest on the money. Government bonds are ways of extracting money in advance, especially from rich people, which politicians would have preferred to tax directly, but which they did not tax directly because they knew that rich people would hide the money.

The whole point of the bond market is to enable the government to expand its operations beyond what would be possible by collecting taxes today. Politicians are able to get more money to expand operations today, because they promise to repay lenders a specific rate of interest. But, of course, this does not promise that the government will not repay with debased money.

The specific risk of government defaulting on debt while you own it changes over time.

The risk of government defaulting on debt is constant throughout time and is always guaranteed.

It’s worth reading the whole thing.

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