AOM2
My takeaway from the second section of the Ascent of Money is that the sale of a bond is, as fiscal transfers tend to be, two parties making bets on the value of what they're giving when they give it against the value of what they'll receive when they get it. The outcomes of bond sales and their effects on power structures hinge on the parties' abilities to accurately assess these values, and can be divided into multiple categories based on these assessments.
The first scenario to consider is when both parties lose out. This happens in cases such as Argentina's when nations default on the loans. Although there is arguably no effect on the nations because they were already set to fail if they had to saddle themselves with unpayable debt, investors never see their money back, and even the fear of this scenario is, as we saw, enough to make them wary and force more economically unstable nations to offer higher interest rates to make their bonds appealing.
Another case is where the buyer benefits and the nation loses out. This is when a nation underestimates how valuable what they offer to pay as interest will be. In the case of the Civil War, the Confederates felt desperate enough to offer up cotton as bond security, ultimately failing while investors (or at least the ones who managed to cash out on the bonds) profited.
The opposite can occur too, where the nation benefits and the buyer loses. This happens when the nation does pay out, but below inflation rates. The US's 1% bonds are an example of this. Ultimately, the nation makes money on this, and investors who buy are strictly losing out in the deal with the US, but attempt to profit either through separate deals with other bond market players or through buying long-term bonds and hoping for eventual lowered inflation rate levels.
Finally, perhaps the most ideal scenario, is where both the nation and buyer benefit. In the case of the Rothschild's bond purchases from Britain, while the Rothschilds made profits high above inflation rates, because Britain received money in a time when it needed it more and paid it back in a time when it needed it less, in terms of relative value they still made off well from the deal.
While we tend to focus mostly on whether governments benefit from bonds when considering their interaction with power, the effects on buyers are also critical to acknowledge.
The first scenario to consider is when both parties lose out. This happens in cases such as Argentina's when nations default on the loans. Although there is arguably no effect on the nations because they were already set to fail if they had to saddle themselves with unpayable debt, investors never see their money back, and even the fear of this scenario is, as we saw, enough to make them wary and force more economically unstable nations to offer higher interest rates to make their bonds appealing.
Another case is where the buyer benefits and the nation loses out. This is when a nation underestimates how valuable what they offer to pay as interest will be. In the case of the Civil War, the Confederates felt desperate enough to offer up cotton as bond security, ultimately failing while investors (or at least the ones who managed to cash out on the bonds) profited.
The opposite can occur too, where the nation benefits and the buyer loses. This happens when the nation does pay out, but below inflation rates. The US's 1% bonds are an example of this. Ultimately, the nation makes money on this, and investors who buy are strictly losing out in the deal with the US, but attempt to profit either through separate deals with other bond market players or through buying long-term bonds and hoping for eventual lowered inflation rate levels.
Finally, perhaps the most ideal scenario, is where both the nation and buyer benefit. In the case of the Rothschild's bond purchases from Britain, while the Rothschilds made profits high above inflation rates, because Britain received money in a time when it needed it more and paid it back in a time when it needed it less, in terms of relative value they still made off well from the deal.
While we tend to focus mostly on whether governments benefit from bonds when considering their interaction with power, the effects on buyers are also critical to acknowledge.
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