AoM2 - Willow Carter
In this episode of the Ascent of Money, it mainly focused on bonds and their role in the economy. If tax money isn't enough to fund the government, they can issue bonds which allows them to borrow money. The money will go to government projects, and after a set amount of time the government will pay the bond back. This is a convenient way for governments to make revenue, but the bond market has been greatly affected due to historical events.
The bond market also greatly contributed to the 1989 financial crisis in Argentina. Many people had bonds in Argentina, but they couldn't get anybody to purchase new bonds. The government had spent much more than it could raise due to a civil war and a war with Britain over the Falkland islands. Inflation reached 10% per months, and the Argentinian currency had fallen 140% to the dollar. As a result, The World Bank froze lending money to the country saying that the government had failed to stop the root cause of inflation. In desperate need of money, the government tried selling bonds to the public. However, nobody was buying the bonds due to the rapid inflation and fear that they would become worthless. Inflation continued to rise and prices on goods would change multiple times per day. The bond prices decreased every day, causing nobody to but them, leaving the government with few options. In a desperate attempt to save their currency, the central bank was forced to print more money. They printed money at such a high rate that the mint actually ran out of paper to print it on. Along with that, with more money being printed at such a rapid rate, the currency rapidly lost value, forcing the bank to print larger bills. While the bill denominations were increasing, the value of the money was greatly decreasing. This hyperinflation greatly affected bondholders, who were relying on the interest on their bonds. While they made more money than when they had started, the money was worth far less than when the bonds were purchased. Many economists saw this as the death of the bond, believing that inflation would eat up holders money. However, bonds have made a comeback because of the number of bondholders.
The bond market also greatly contributed to the 1989 financial crisis in Argentina. Many people had bonds in Argentina, but they couldn't get anybody to purchase new bonds. The government had spent much more than it could raise due to a civil war and a war with Britain over the Falkland islands. Inflation reached 10% per months, and the Argentinian currency had fallen 140% to the dollar. As a result, The World Bank froze lending money to the country saying that the government had failed to stop the root cause of inflation. In desperate need of money, the government tried selling bonds to the public. However, nobody was buying the bonds due to the rapid inflation and fear that they would become worthless. Inflation continued to rise and prices on goods would change multiple times per day. The bond prices decreased every day, causing nobody to but them, leaving the government with few options. In a desperate attempt to save their currency, the central bank was forced to print more money. They printed money at such a high rate that the mint actually ran out of paper to print it on. Along with that, with more money being printed at such a rapid rate, the currency rapidly lost value, forcing the bank to print larger bills. While the bill denominations were increasing, the value of the money was greatly decreasing. This hyperinflation greatly affected bondholders, who were relying on the interest on their bonds. While they made more money than when they had started, the money was worth far less than when the bonds were purchased. Many economists saw this as the death of the bond, believing that inflation would eat up holders money. However, bonds have made a comeback because of the number of bondholders.
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