r < 0

A few thoughts on the fact that r < 0, where r is the real rate of interest on long-term (< 30 years) debt for developed country governments

Situation predates pandemic and has happened despite central bank attempts to resist it, such as abandoned attempt by Fed to raise funds rate in 2019. Extends to corporate bonds as well. Lowest investment grade BBB currently offering 2.38 which implies expected real return (net of inflation and expected loss from default) also below zero. Was 5-6 per cent before GFC

Same for publicly traded stocks on plausible estimates of future earnings

Implies r < g (nominal growth rate), contra Picketty. But corporate profits are high and (ultra) rich are getting (ultra) richer. Presumably profits are being creamed off as rents in some way. Brett Christopher’s forthcoming Rentier Capitalism is highly relevant

If r < 0, any public investment that generates sufficient income to cover costs improves public finances. If we take r as social discount rate, scope for socially beneficial increased public investment is vast. Implied policy: nationalise sources of rent: IP, monopoly platforms, financial sector etc

31 thoughts on “r < 0

  1. “scope for socially beneficial increased public investment is vast. Implied policy: nationalise sources of rent: IP, monopoly platforms, financial sector etc”.

    Where do I sign. Any campaign?

    Which political party will do this next term please commenters.

  2. Not quite there, since Picketys r is not the risk free rate, rather he is estimating the average weighted return of all investments in aggregate. He also talked about the Mathew effect in investing already. Albeit he did not do much to convince there is much of that in terms of risk adjusted returns. Or to be more precise that it exists by adding returns to the numbers Piketty has. Rather the typical small saver, which represents at least 80% of the public typically has too few money to bother much, too little education about it and pays a fortune for the investment middle men, reducing r significantly below those before adminstration cost averages Picketty was collecting..

  3. The biggest part of Piketties aggregate investement portfolio was real estate.Wundering how things look there on a global scale. My local situation sure is pretty much the same as the stock market. That is rents rise fast, purchase prices rise faster, leaving little in expected return and quite a bit downside risk. .

  4. J-D: nit-Pikking.
    The one thing I share with the great man is having a surname nobody can spell right.

  5. Re monopoly. It’s an under-recognized feature of the energy transition that it’s driven by pretty competitive industries, with low IP rents. The poster child is PV solar, which also has the steepest learning curve. Wind is more oligopolistic (no minnows), but the are enough players with equivalent technology to keep the market reasonably competitive. The same holds in batteries. The one transition company making superprofits is Tesla, but its advantages in design, software and battery supply are inherently fragile. There’s nothing VW and BYD can’t replicate cheaper, given time. EVs don’t have the network effects that give us $1000 iPhones costing $100 tops to make.

    Why not nationalize the benevolent monopolist ARM, since Softbank wants to sell? Purchase by Nvidia would be a catastrophe. It doesn’t make superprofits, so the aim would be prevention.

  6. Part 1 – General Argument

    At this juncture of history, and looking ahead indefinitely, cost-benefit analysis in the exchange-value “dimension” – a social-fictive dimension with no real physical system meaning and measured in the floating, unstable base unit of the numéraire – is a meaningless exercise and indeed highly counterproductive. Following this path, we will compound our real system errors and damage real people, real economy and real environment with further consequent destructive feed-backs in the meta-system of socio-environmental systems consisting of “the tightly linked social and biophysical subsystems which mutually influence one another.”

    The irreversible collapse of real systems (e,g, the benign Holocene climate) is the comprehensive refutation of capitalism’s formal, prescribed systems. Orthodox political economy (that of really existing capitalist-state mixed economy systems) is an entirely prescriptive discipline. It is not a descriptive or objective discipline. It prescribes, “This is how things SHOULD work.” It does not describe how things DO work except where the real “obeys” or at least does not “forbid” the prescriptions.

    This last is a central point. Before we approached biospheric limits (as limits to growth and limits to “business as usual”), the prescriptive algorithms (for that is what they are) of historical and extant “capitalisms” were operable in real systems albeit often with horrendous human and natural costs (slavery, imperialism, settler colonialism, pollution and “sacrifice zone” environmental destruction). This historical operability of current “capitalist” or “really existing economic system” prescriptions is now breaking down as the sacrifice zones expand without check. The atmosphere and climate systems are now become a global sacrifice zone of the un-sacrificable.

    The pragmatic use of money in markets for exchange does not validate the second-order (macroeconomic) aggregation of unlike items (disparate good and services) in denominations of the exchange-facilitating money unit (the numéraire). What this statement is saying is that (a) markets work proximally as exchange mechanisms but (b) an aggregation of market values is not a sufficient or even suitable mechanism for management of the entire economic or political economy system. It also says as a point (c) that markets as an auto-pilot heuristic are also not a sufficient or even suitable mechanism for management of the entire economic or political economy system in the real systems. Point (c) would apply if one attempted an American-Libertarian minarchist state. This is as opposed to point (b) applying in a partly neoliberalized mixed economy system as exemplified by contemporary Australia (at least before the pandemic).

    I have made the following point before in this blog. Money is not a valid and objective measuring-stick of anything. It is a herd driven subjective evaluation system, useful for facilitating trades and exchanges but not useful for the derivation of any real and objective values nor useful for the derivation of any ethical or moral values. Money serves control and logistical functions, not any objective or ethical valuation functions. In macroeconomics, and high finance for that matter, money is a control and logistical tool. It is used to control what people do and it used as an adjunct in the logistical allocation of real energies, materials, goods and services. (If only one material suffices for a function in terms of its characteristics then a quantity surveyor / structural engineer will specify that material. if two different materials would suffice then, all other things being equal, the professional in question will specify the cheaper material.)

    What I am arguing for above is of course for the complete ontological renovation of economics or political economy. Persisting in thinking that money measures something real and is a valid comparison yardstick of disparate processes and objects is to persist in an applied economics “founded” in a false ontology. In other words it is unfounded.

    Part 2 -Towards an Ontology of Laws and Rules

    GDP is objectively meaningless. Standard macroeconomics (like standard microeconomics) is a pseudo-science. Economics claims to have laws but it does not and can not have laws. This can be demonstrated surprisingly enough by an investigation of array games. In particular, I mean array games which can be represented by finite state machines.

    If I investigate the “laws” of an array game (like chess), I will find that the “laws” are dependent on the rules. First, we need to clarify terminology. The FIDE Laws of Chess are not “laws”, they are “rules”. A rule is a prescription for action by an agent. The rules of chess prescribe the legal moves in chess. When humans, as agents, play chess they (usually) obey the rules of chess, especially in formalized competition.

    Rules, as prescriptions, set up a formal system. Rules, in some ways, can be considered equivalent to axioms. The interesting thing is that formal systems set up by rules usually have both an agent-behavioral component (agents obeying or disobeying rules) and a materially actualized component. The materially actualized component of chess (before computers) is the board (a physical representation of an array), the chessmen (wooden carvings or molded plastic pieces) and even the physical rule book with rules materially actualized as inked symbols on paper.

    Adept chess players can play without a board or pieces, maintaining the array in their brains, provided they accept the traditional rules of modern chess. In New York on April 27, 1924, Alexander Alekhine broke the world record for simultaneous blindfold play when he played twenty-six chess club opponents, winning sixteen games, losing five, and drawing five after twelve hours of play. What roles do the board and pieces play? They are physical place markers for those with less memory and mental abilities. They are a social validating, facilitating and coordinating system. They validate the game as socially and physically real (including tactilely real which is important to humans as tactile beings among other characteristics). The physical board and pieces multiply the powers of the less adept by providing physical/logical markers to assist them to play the game. he physical board and pieces function as an external physical/logical check on claims (that moves and captures are legal) because memory is imperfect and humans can be deceptive.

    This brings us to laws. Does a game like chess truly have laws (in the objective, empirical sense?) as opposed to mere rules? It appears to do so at first analysis. One consistent objective “law” of chess is that a piece in the center of the board, ceteris paribus, “controls” (can move to) more squares than a piece at the edge of the board. This is due to the move rules and the array limits or board edges. This is analogous to the fact that I can sweep a greater horizontal area with my outstretched hands while standing in the middle of the room than I can while standing in the corner of the room, again ceteris paribus. This is a key point. When a logical array, plus rules for its use, mimic a real aspect of the real world (2 dimensions of space in this case) and the rules also mimic other aspects of the real world (non-occupation of the same space (array element) by two objects then the system develops what might be called “pseudo-laws”. They are really meta-rules (or theorems?) generated by the rules. The formal system begins to demonstrate what can be mistaken as objective law-like behavior. We begin to feel, intuit and believe that our formal system has laws just like the real world. This is an intellectual illusion.

    This is easily demonstrated by varying the rules to subvert the pseudo-laws, meta-rules (or theorems) observed for a given rule set (axiom set). If we give chess a “wrap-around” move rule, then a piece at the side of the board can now control the same number of squares as a piece at the center. The “law” is exposed as a pseudo-law. This would also radically change the game of chess. Let us call the new game “Wrap-around Chess”. It is clear straight away that early piece exchanges are possible, like a first move queen swap and tit for tat rook captures. These possibilities may well “deconstruct” the game as it were and ruin it, at least for afficianodos.

    The above insight is useful. Extant rules in political economy, for example, construct a game of a certain kind. The rules do not generate genuine laws (inflexible correlations in the objective universe like the laws of thermodynamics ) but only pseudo-laws which can be annulled or subverted by targeted rule changes. On the other hand, we can see that various rule-sets could generate playable games and unplayable games or perhaps more playable games and less playable games. And indeed the playability of the game of political economy is class-mediated, opportunity mediated, education mediated, intelligence mediated and so on. Different individuals will have different experiences and different opinions on the playability of the extant political economy game, each from their own perspective.

    Rather than viewing economics, or rather political economy, as an objective discipline we should view it as a (very serious) competitive-cooperative game with all rules open (hopefully) to democratic amendment. Rather than uncovering laws and law-bound behaviors in the game itself (aside from its interactions with all real systems) we will only uncover at that level games which most humans want to play or most do not want to play and perhaps more importantly games which are unplayable in real systems as well as games which are playable in real systems. For example, the current game of “destroy the biosphere for the short term wealth gain of a few” is not playable in the long term or even medium term. This last points to the issues where our legal, ownership and financial games, which only have pseudo-laws, direct a real economy with real laws to clash dangerously with a real biosphere which also has real laws.

    The worst macro mistake to make is to assume that our legal, ownership and financial game rules construct a law-bound system rather than a mutable and modifiable game system. The worst thing to do is to hare off looking for the non-existent laws of our socially constructed competitive-cooperative game when the constructed rules of the game simply need changing taking cognizance of democratic system and real system feedback. This entails is a complex, messy, practical, pragmatic and empirical process. Axiomatic theorems (inflexible game rules) and complex equations and prescriptions based on such axioms will not generate a solution. Empirical (scientific) ontology and moral philosophy (ethics) will provide better answers.

  7. Our Federal government was prompted by the House of Representatives Standing Committee on Infrastructure, Transport and Cities to lower the discount rate to 4%. (https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2018/October/Discount-rates)

    It’s response (12 May 2020) was equivocal: “With respect to discount rates, the Notes on Administration for Land Transport Infrastructure Projects (2019-20 to 2023-24) asks project proponents to provide cost-benefit analysis results at both 4 per cent and 7 per cent discount rates. The use of two different rates is a sensitivity test which provides a fuller picture of the potential benefits of a project. Similarly, Infrastructure Australia uses 7 per cent as the central rate for assessments, and requires sensitivity tests at 4 per cent and 10 per cent discount rates.” (https://www.aph.gov.au/DocumentStore.ashx?id=8017c651-b8a2-4a95-a77b-af1623b224e5)

    Changing government guidelines on discount rates seems likely to be a decades long project.

  8. QuentunR, I have spent an hour looking through RBA, PC, PMC to find ‘social discount rate’.

    It would seem Infrastructure is the only thing the govt classifies as ‘social’.

    Best I found which discussed social disc rate and various supporting reports was from 2018;


    And NOT confidence boosting re the JQ’s statement “investment that generates sufficient income to cover costs” – read tack on a fudgy bit to cover roi & capital gains. ymmv.

    “RBA defines “Additional Rate” as ” a percentage of the security’s market value”…

    “Margin Ratios
    Last updated: 22 May 2020

    “Where an additional discount is applicable, this is applied in addition to the margin for asset-backed securities outlined in Section 1 above. Note that the additional discount is defined differently from the margin; while the margin is defined as a percentage of the security’s purchase price, the additional discount is defined as a percentage of the security’s market value. The additional discount is defined in this way so that it is independent of the margin. Where an additional discount is applied, the margin ratio can be expressed in terms of both the margin and the additional discount:”

    Margin Ratio = 1 / [1 / (1 + Margin / 100) − Additional Discount / 100] “”


    JQ, to enhance productivity and reduce co2e, please post some links to put us out of our misery.

  9. Ikon – thanks. Lots to digest as always.

    J-D says: at 7:51 pm
    “Implies r < g (nominal growth rate), contra Picketty."

    Or even Piketty."

    Or uneven?
    Or not even?
    Or even stevens?

    Citation please. ☺

  10. “If r < 0, any public investment that generates sufficient income to cover costs improves public finances. If we take r as social discount rate, scope for socially beneficial increased public investment is vast. Implied policy: nationalise sources of rent: IP, monopoly platforms, financial sector etc"

    Sure is hard to deny that logic. But we'd need the resources from a lot of high-cost welfare in the form of a big proportion of the salaried public service jobs. And we need to get the money creation benefits off the commercial bankers even before buying them out. The resource base is right there. Its huge. But we are going to need to take it.

    To borrow money from the international bankers for such a project, and to hope for the best, thats a strategy that would lead to trade deficits as far as the eye can see, and turning ourselves into even more of a captive nation than we currently are. No way can we invite those vampires into the house.

  11. Brilliant article by Ann Pettifor on this topic (rentier capitalism and financialization):

    Click to access Pettifor92.pdf

    A short quote from the above article:

    “The nature of money-creation as a largely effortless social construct or technology, requires social, or society-wide regulation of the public good that is the monetary system in order to prevent the capture of this public good by a small elite. As John Maynard Keynes understood better than many of his peers: “Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital…”(Keynes, 1936)” – Ann Pettifor.

  12. “Who pays the real interest rate on a debt obligation?” – E.G.

    Sounds like a rhetorical question, a trick question or even a leading question. Or perhaps it is a plurium interrogationum in disguise? 😉

    Wikipedia tells me: “The real interest rate is the rate of interest an investor, saver or lender receives after allowing for inflation.” Hence, an investor receives a real interest rate but a borrower never pays it? It has the makings of a nifty riddle. “What is it that an investor receives but a borrower never pays?”

    Or does a borrower implicitly pay a real rate, as a percentage of the nominal rate, when the totality of the borrower’s position is considered over time? I’m wondering if Ernestine’s question contains the germ of a plurium interrogationum at its core or is it simply an amusing question?

    Forgive me, for I am:

    “The Bookful Blockhead, ignorantly read,
    With Loads of Learned Lumber in his Head,” – Alexander Pope.

  13. Preface: I get a wave of absolute frustration generated by my relative impotence to bring about this change and JQ’s theroerical ability to show it, and your lack of power to realsise it also. **

    Ernestine, I’d appreciate some info and a question. Teach me how to fish.

    I’d like to know, “Who pays the real interest rate on a debt obligation?” Because;- “Total returns assume reinvestment of interest and capital gains.”.-(^tr)

    1. JQ: “If r < 0, any public investment that generates sufficient income to cover costs improves public finances.'

    The implication is 'investment that generates sufficient income' begs the question, where is the sufficient income generated? Private biomedical companies or monopoly /monopolies / rentiers?

    Then, how will the "income to cover costs" be governed so the transition to "improving public finaces" remains and is retained by the public & the commons. 

    Bonds can be either secured or unsecured. A physical asset -collateral – vs 'subordinated' which have no asset backing, which I assume means to me 'we rekon it has a market in the future'.

    My first link searching for 'bbb bonds principal market' was … guess anyone … 1st hit – Blackrock. And close by was charles shwabb. Both rate the chances of bbb to be downgraded to junk. Derivatives anyone?

    Blackrock says:
    "You are entering the Institutional Client siteTerms and Conditions [followed by every get out clause ever, and then…] "This material is provided for educational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are subject to change."
    Which says to me again,  with a financial services licence I can say anything and am protected at law. Not confidence inspiring over 30yrs.

    ^tr- And Shwabb quoting Bloomberg;
    "Total returns assume reinvestment of interest and capital gains. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no indication of future results."

    ( Shwabbs next subhead:
    "The broad view: near-term support, longer-term risks")

    So if the 'returns assume reinvestment of interest and capital gains' – is that not TISATAAFL? Won't that allow for the common wealth even if r < 0, to be bled back into capitals pockets???

    This will potentially be Lemon Socialism (^1) – yes / no? As in …" while in lemon socialism the company is allowed to keep its profits but its losses are shifted to the taxpayer."
    Which would now read due to r <0…
    "allowed to keep the capital gains" unless profits / gains directly and expressly at law, defined such that investors – capital – is retained by government decree, as you've said recently JQ, the end of capitalism.

    As I trust your theoretical framework JQ, you even got khaneman and tversky to alter concepts to prospect theory,…

    Q1. Please tell us / suggest / reveal potential pitfalls during transition as to how the market, politics, and education of polity is to be achieved and managed? A trifle – not!

    Q2. How will the sunk costs and stranded assets be managed? I assumed 'we' will have to swallow them.
    – End pt 1 – 

    JQ again: "If we take r as social discount rate, scope for socially beneficial increased public investment is vast. Implied policy: nationalise sources of rent: IP, monopoly platforms, financial sector etc
    But"…in September 2018, the House of Representatives Standing Committee on Infrastructure, Transport and Cities recommended the adoption of a 4% discount rate for the appraisal of Commonwealth infrastructure projects."

    "In May 2018, Applied Economics published Choosing the Social Discount Rate for Australia, a research paper which argued that 
    … discount rates should be determined by the opportunity cost of capital rather than the cost of funds. 
    This view is shared by the Reserve Bank of Australia (see footnote 9). The Applied Economics paper concluded that the appropriate rate for Australia was 6.5%.

    In June 2018, the New South Wales Standing Committee on State Development published Regional Development and a Global Sydney, which recommended a review of the 7% discount rate used by the state government."

    Q3. Why then are the RBA & NSW applying large discount rates?
    – end – 

    NOT confidence boosting! The RBA defines "Additional Rate" as " a percentage of the security's market value"

    "Margin Ratios
    Last updated: 22 May 2020
    "Where an additional discount is applicable, this is applied in addition to the margin for asset-backed securities outlined in Section 1 above. Note that the additional discount is defined differently from the margin; while the margin is defined as a percentage of the security's purchase price, the additional discount is defined as a percentage of the security's market value. The additional discount is defined in this way so that it is independent of the margin. Where an additional discount is applied, the margin ratio can be expressed in terms of both the margin and the additional discount:
    Margin Ratio = 1 / [1 / (1 + Margin / 100) − Additional Discount / 100] ""

    If I seem too ignorant please proffer a pointer, all you 'experts'. The people who will actually implement your theories need it. And as J-D says, citations please.

    ^1. https://en.wikipedia.org/wiki/Lemon_socialism 

    ^2. https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2018/October/Discount-rates

    ** It is all Harry's fault. He boke the Elder wand.

  14. “A few thoughts on the fact that r < 0, where r is the real rate of interest on long-term (< 30 years) debt for developed country governments."

    The "real rate of interest" is a calculated number. That is, the coupon rate is adjusted for the inflation rate. But the inflation rate is what? It is another estimate, which has its own measurement problems (eg consumer prices, production prices, asset prices….). Setting aside all these important qualifications, another problem remains, namely the inflation rate between now and 30 years, however measured, could be positive or negative. The latter would be called deflation. I. Fisher captured this uncertainty regarding future 'inflation' to some extent by defining the nominal interest rate as the sum of the real interest rate and the next period price level expectations. So, how long is a period? One way to make a guess about the appropriate length of the period is to consider how much could happen between now and 30 years time. Considering the last financial crisis started in earnest only 12 years ago and the effects of climate change are looking worse every reporting period, it seems to me it is prudent for governments to keep some financial powder dry.

    The Whitlam government was not as lucky as the current government when attempting to buy back the farm. But then the Bretton Woods system had not died completely as yet around 1974.

    IMHO, there is at present some room for governments to borrow long term for some strategic investments. But it is surely not without limits and without risks for the currently young. One way to handle this is to borrow very long term and plan to repay much quicker. (While it is true that the financing constraints of governments are not identical to those of private individuals or businesses, it is also true, that both can experience severe financial distress and, in the case of governments, history indicates it is the less wealthy segment of a society that suffers most when a country is in financial distress.)

    "Implies r < g (nominal growth rate), contra Picketty."

    I have not read all of Piketty's recent publications. However, in his book, Capital in the 21st century, Piketty works with nominal rates of return. Furthermore, as stated by another commenter above, the r in Piketty's work refers to the return on assets and not to the official discount rate or the current yield on government securities.

    Empirically, Piketty's condition r < g is, to the best of my knowledge, true at present because the nominal growth rate is more negative than the rate of return on most asset portfolios that entered Piketty's estimates (real estate, shares, ….) for the countries I assume JQ has in mind. (And there is no evidence that the income distribution problem – between 'capital' and 'labour' in Piketty's case – nor the income distribution problem within 'labour' has been resolved.

    So, I am a bit at a loss as to JQ's post.

  15. “So, I am a bit at a loss as to JQ’s post.” – Ernestine Gross.

    JQ’s post reads like notes to himself. When we wrote notes of ideas to ourselves they are usually brief, cyrptic, speculative, half-formed and so on. I don’t think any of us knows precisely what J.Q. is thinking on this matter yet. Perhaps, he doesn’t know himself as he mentally tests different ideas about what is happening.

    My advice to economists and everyone would be to get over our monetary and fiscal obsessions and start thinking about the objectively real. That takes some explaining. I do write long posts about such ideas, my last on this thread being on August 16, 2020 at 8:58 am. My long posts do not escape being “notes towards”. Since nobody who has ever existed or exists currently has yet “solved” political economy, I don’t feel bad about that.

  16. Doodling here, in the spirit of the OP.

    What will be the effect of persistently low and possibly nil real returns to the overmighty finance industry? I see two two opposite reactions.

    One is that the search for high yields will become more desperate leading to more manipulation, smoke and fraud. This is likely, but not sustainable for long.

    The countervailing pressure, which I suggest will dominate eventually, comes from investors, who will be less tolerant of high rents to intermediaries. For instance, in a world of >5% returns, retail investors have let fund managers get away with 2% annual fees for the valueless service of stock picking. That won’t hold up when the gross yield is itself <2%. Everybody will switch to index funds with low fees. the intermediation rents will shrink, and so will the finance industry as a whole. Good.

    The scale of the needed cultural adjustment is suggested by the useful annual surveys of US electrical generating costs by investment bankers Lazards. When they started, 14 years ago, a WACC of 9.6% may have been reasonable for the risky infant industries of wind and solar. They aren't infant any more and this nostalgic rate bears no relation to the current cost of capita for the likes of Warren Buffett, who can borrow for 30 years at a real rate around 2%.

  17. “Nothing changes. Nothing. Many ‘Masters of the Universe’ believe they’ve been playing a zero sum game because it made them feel better about themselves. Now the game is becoming closer to zero sum all it means is they’ll be a little leaner and a little less mean, because revenge costs money. Sure, more will hit the bottom and stay there, but the ones that stay on top will feel just as good about themselves as they ever did, and their self evaluations will be a little more accurate.”

  18. “Everybody will switch to index funds with low fees.”

    Taken literally, index funds wouldn’t know what to do because they offer portfolios which track market indices – what would happen to those when everybody buys index funds?

  19. Ernestine: There always have to be traders for securities markets to work at all. They make their money on volume. Perhaps we will need a Speculators’ Protection Act.

  20. Side issue. Do low yields affect the Soros case for reviving consuls? The case would be that that as yields fall, administrative costs and frictional trading losses loom larger. Consols minmize these. All consols issued by a single borrower are mathematically equivalent; a 4% consol will always be worth exactly twice a 2% one. IIRC the British Treasury in Pitt’s day took this to the logical conclusion by never changing the 2.5% coupon, simply selling each new issue at the price set by the market at the time. So they got a single register of holders, minimal paperwork on the coupons, and a single enormous pool of debt, making for very high liquidity. That will still hold today, though computers reduce the paperwork savings..

    This does not of course solve the main problem with consols, their high volatility as a store of value for patient investors. If you remember Jane Austen’s Mr. Bingley, the rich in her day thought of consols as an income stream – so many thousands a year – not really as a capital sum. The benchmark was Darcy’s rents from land.

  21. 1. Therefore, “Everybody will switch to index funds with low fees.” is not a possible solution.

    2. Interesting how Soros’ name is associated with something that is in all reasonable comprehensive introductory finance texts I’ve come across.

  22. Making private income out of the mere possession of capital is a privilege which needs either to be withdrawn from all or extended to all. Given the progress of technology, and the supplanting of labor by machines, it is clearly a privilege which needs to be extended to all. [1] Jobseeker and jobkeeper are current (imperfect) forms of inalienable income from (social) capital to individual persons. Calling them “jobseeker” and “jobkeeper” is simply an anachronistic appellation disguising what they really are. They are payments from social capital.

    We ought to make the existence of inalienable and non-tradable social capital formal and acknowledged. To that end the Government could issue sociols (so-shols) to every citizen when the citizen attains age at 18. The sociols would be inalienable and non-tradable privately. This means no person could sell or have taken from them in any manner their sociols. The sociols would always provide an income sufficient for basic living. One of the changes inherent in this system would be the sense of dignity, ownership and participation in owning the social capital of the nation. The share in social capital is an acknowledged right.

    Persons receiving sociols and working, even if in a Job Guarantee job, could elect to borrow from he federal government against the future income of the sociols to purchase or build a house or other domicile. They would then receive no income from the sociols for the appropriate period be it 20 or 30 years for example. The house would be saleable at any point only back to the Federal Government who would maintain a social housing stock for “sociol-sale” or “sociol-rental”. Sociol-rental would entail rentals to those who did not wish to purchase and the rent rate would leave sufficient funds to live on.

    The intention of the sociol and like policies over time would be to remove all rentier income from the economic system and to de-financialize the economic system such that eventually the private possession of financial capital and real capital would not be possible in such large tranches as made any one person a possessor of private capital (with income producing rights) more than ten times greater than the median adult wealth of the nation.

    Land would always belong to the state and thus to all the people. Ninety-nine year leases from the state would apply for private uses of land. All minerals and mineral leases would belong to the state. Laws would change to remove person rights from corporations. Laws would change to progressively disfavor large private, corporate, patrimonial and share-owner businesses and to progressively favor worker cooperative businesses.

    The power of private capital over society has to be broken or else society and the environment will be broken. We see the regress of the USA under the rule of private capital. A few become super rich. Many others die on that alter. It is that stark. Do we want more of that despicable, inhumane and unsustainable nonsense or do we want to reset to a social, sustainable society?

    Note 1. The extension to all persons of the capitalist privilege of income from capital is the point where capitalism, as capital and modern money operations, may be seamlessly transformed from capitalism into socialism. The distributed infrastructure of late stage capitalism and its ability to produce much use-value with minimal labor is fully socialism-ready. This is the path by which advanced capitalism may be rapidly and extensively transformed into advanced socialism.

  23. “Making private income out of the mere possession of capital is a privilege which needs either to be withdrawn from all or extended to all”

    Compulsory superannuation does extend making private income out of the mere possession of (financial) capital to almost all. (But not to the same extent!) As for physical capital (eg houses and the land on which they are built), fewer people now own real estate.

  24. My hypothetical “sociols” (a deliberate play on the word and concept of consols) would implement a socialized dimension to society better than private, market-linked superannuation. It is arguable that the compulsory private and market-linked superannuation system is (another aspect of) compulsory capitalism. Or if one does not like the word “capitalism” then it is compulsory participation in debt-credit financial markets to which some people might object for risk-averse or even conscientious reasons. I can imagine both religious people (Islamic and Christian doctrines come to mind) and secular humanist democratic socialists like myself objecting to being forced to be part of the credit-debt system of privatized financial capital. [1]

    This system is people being forced to be part of the extant financial market system and to commit their modest spare capital and their futures to the vagaries of the monopoly-tending, oligarch-creating, manipulated, regulatorily-captured and ecologically unsustainable market of the current “extent empirical reality of our really existing political economy system”. [2] This is the milieu where the sharks swallow the minnows and the financial advisers grow fat while market-linked supers can and do evaporate. We have seen these things happen in the real world and the likelihood of it happening again soon is high.

    The “sociols” system, or something comparable, would remove layers of the financial industry. As for physical capital (eg houses), fewer people now own real estate precisely because of the rise of rentier capitalism. It is rentier capitalism which has wrought this change. Again, the decline in home ownership in Australia is the empirical evidence of the change. Why should 1 pair of adult persons (let us assume pairs as the basis of household and family formation) own 10 houses and 9 pairs of adults rent? Instead, by simply changing the rules (of extant political economy) we could engineer the position where each of the 10 pairs own 1 house each. Of course my examples are an argument to extremes to make the point.

    My point is that current trends move away from the position where each of the 10 pairs or at least some high percentage like 90% could own a house (“sociol-mortgaged” or not).


    Scroll down to see the graph “Proportion of households by tenure type”. Note how historically selective and dishonest the graph is by cutting off the period from 1945 to 1995. I call it historically selective and dishonest because it removes the pre-neoliberal period of the really existing Australian economy. I will keep looking for a full graph. Even from 1995, we see disturbing trends. I would argue that as baby boomers die and their bequests fail to provide all offspring with adequate deposits for home ownership, the ownership graphs will plummet precipitously.

    My overall point in arguing about hypothetical “sociols”, which system by the way would be perfectly practicable and implement-able, is to highlight that arguing over consols and such-like is to remain rooted and indeed trapped in the current paradigm. Our imaginations have to range wider now because the current system is unsustainable and collapsing. I mean all of the real environment, real economy and nominal finance system are now or will shortly be collapsing. We had better have some new ideas ready or we will be caught out with no useful ideas at all.

    Note 1: Think of Islamic Finance. Also, Christian theological doctrines encompass the following opinions, for example:

    (a) “NO DENOMINATION of the Christian Church has ever condoned usury, which we might define as an extortionate charge for the use of money or fungible goods, but the charging of interest is no longer regarded as usurious in all circumstances.” – Gwen Seabourne, London.

    (b) I don’t think Gwen Seabourne should be allowed to get away with her anodyne answer… usury (cannot) be defined as the extortionate charging of interest: usury is the charging of any interest. – Jonathan Morton, London.

    These are simply opinions of citizens (of London in this case) but opinions of citizens are precisely what matter or should matter in democracy. Should a conscientious objector to usury or debt-credit finance be forced to participate in the scheme and not be given religious or secular alternatives?

    Note 2: I use this valid but slightly rhetorically exaggerated description to avoid the word “capitalism”, at least in this sentence, and to highlight that I argue from undeniable empirical facts, from what is really happening in the extant system.

  25. Ernestine: the British government redeemed its last consols decades ago, and if any survive anywhere, they aren’t significant. George Soros is a high-profile financier who has very recently proposed that the EU use them for large-scale borrowing. The attribution is merited.

  26. Why do we continue thinking in the failing paradigm? These are academic arguments about systems and conditions coming to an end. It is said that generals prepare to fight the last war. Economists prepare to address the last crisis. Endless growth capitalism is so yesterday. It’s all over bar the shouting (and the dying unfortunately). The privatized debt finance system is also finished in the longer historical view. It can’t be usefully adapted to a steady state or collapsing system.

  27. James, your post re Soros and consols is not the first time I have read something very similar. Your comment re Soros advising the EU re consols is also interesting.

    I am confident the EU does not depend on George Soros for advice, irrespective of whether or not US or UK consols are still in circulation. Soros made $US 1billion profit in 1992 from short selling Pound Sterlings during the currency crisis. He lost in subsequent speculative positions against the Euro, which are not so much publicised. He has used his huge wealth from his financial market activities for good causes, which are much publicised. He is a very wealthy and complex person, IMHO.

  28. Ernestine Gross says @ 7:45 AM
    “1. Therefore, “Everybody will switch to index funds with low fees.” is not a possible solution.”

    I – for a reason –  remember this switzer report clear as day. Switzer was asking dixers of course, and ishares / Blackrock head was switzer slipped in a quickie off the cuff observation / question –
    ” so a bit like ticket clipping”
    – a question NOT on the list to which Mr ishares couldn’t keep a smirk from  flashing across his face,  regained composure within 1.5secs, mumbled diversion and Switzer of course immediately moved on.

    I have tried to find video. Page at switzerreport indexed, but NO video, ONE search return on eft’s, not even googl finds 26 May 2016:
    “Exchange Traded Funds (ETFs)
    26 May 2016
    To discuss, head of iShares Australia Jon Howie joins the show.”/switzersuperreport.com.au/video/etfs/”

    Scrubbed. For shekels I assume.

  29. What would happen if everbody would index is a really academic question. Not going to happen. In directional terms, odds are good markets would become a lot more efficient if a much larger share of investors would switch to passive. Lots of incompetent active investors are at best noise. Most mutual funds are alibi active anyway. Ishares itsself in all likelyhood makes more mone with active than passive investors – as those are the ones more concerned with liquitdity than annual fees, which puts many ishares etfs in a convenient quasi monpolistic position. Also look at all those Blacksrock etfs – many expensive ones with lots of assets are not really fit for passive investors, just replicating single (often small within a curency union) countries or sectors, or just gold things like that. Humans have a built in tendency for overconfidence and gambling. Don´t think we will ever have the problem to have to subsdice active investors. If not, well that can be done, won´t be a real problem and will still be a huge improvment over the current state of things. Index funds have an unfortunate monopol tendency and we are lucky to have one major non profit player.

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