Early U.S. Government Borrowing

A Nation of Deadbeats mentions someone proposing that future U.S. government bonds should have

the following Devices inscribed upon [them] according to [their] denomination. 1. The bloody arm of a soldier. 2. The wooden leg of a soldier. ... 5. A continental colonel's widow with six children dining on a salted herring and two potatoes. 6. A continental major begging his bread with his family on the way to Kentucky. 7. A continental captain confined in gaol for a debt of 50 shillings. 8. A speculator driving his carriage over a soldier on a pair of crutches, in the streets of Philadelphia. ... 15. A Ring to denote the irredeemability of the public debt, or that the evils produced by the certificates will have no end.

The quote seems to have been circa 1790. Amazingly prescient prediction from small sample size (couple years post-ratification).

Young Money: "The American and Foreign Power Company" and Foreign Investments

YM:

"[I]f a depression or financial crisis shuts off the foreign-investment spigot, these countries will see no further reason to respect foreigners' rights. If their investments aren't confiscated, they'll be subject to actions that drastically limit their return on investment."

A correspondent writes,

"See what is going on with Clorox assets in Venezuela. Currency and price controls made it impossible to operate at a profit, they shut down the plant and decided to exit the market in Venezuela for the time being. The govt has now confiscated the property and is attempting to operate it. Granted, Venezuela is about as extreme as they come in terms of not respecting property rights, but this all happened in about two weeks."

This is the problem with the "BRICs" that I have written about before.

Sovereign Shorts

Aleph Blog:

What applies to companies also applies to nations. During a debt crisis or a currency crisis, there will be an appeal against speculators that are shorting the debt. Well, guess what, for every unit of debt shorted, there is another party buying the debt. This applies to credit default swaps as well – on the other side of the trade there is a guy saying, “What a nice yield.”

The politicians complain, but they could fight back: they could buy in their debts and squeeze the shorts. What’s that, you say? If they did that, they would either have to raise taxes or cut programs? And that is anathema? Well, then the shorts aren’t to blame. The government is to blame; it has made its own bed, let them sleep in it.

CPI-Linked Bonds Are For Chumps?

This post is about Argentinian inflation numbers, not U.S. ones, which are relatively accurate. The bogus numbers here are the employment numbers.

The Economist has a long article this week about the Argentine book-cooking of inflation numbers, which are really 2-3x higher than official reports. In fact, the Economist will being disregarding the official numbers in favor of privately estimated ones.

When governments lie about inflation, it is a huge problem if you own CPI-linked bonds.

Proposition for audience: CPI-linked bonds are for chumps.

Think about it; you are letting the debtor choose his own interest rate. What is he going to pick? Duh, a low one.

The incentives are clear - don't be a chump.