Arnold Kling  

Britain in the 1840s

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Andrew Odlyzko sees parallels with the U.S. today.

Britain managed its huge national debt by relying on debt instruments ("consols" and similar bonds) that were perpetual yet callable. That meant that sudden spikes in interest rates, associated with wars or financial crashes, had limited impact on government solvency. Compare this to the danger that Italy and other European countries are facing, with the need to refinance over the next few months large fractions of their (much smaller) national debts. There was certainly a cost in terms of higher interest rates to British financial policy. But in retrospect one can argue that British authorities were wise to take that course, and that in general they were smarter than ours not to be deluded by the promises of liquid and rational markets, and were prepared for upheavals. For all the sophistication of our economic theory, our ancestors may have been more sophisticated than we are in truly understanding how the world works.

Read the whole paper. Thanks to John Mauldin for the pointer.

I was a big Odlyzko fan back around 2001. He also gets a mention in Jon Gertner's The Idea Factory.

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COMMENTS (3 to date)
genauer writes:

if you demonstrate people for lets say 50 years,
that integral inflation is ZERO

like 1794 vs 1851 vs 1887

real people might get inclined to buy consols again.

The discussion of this without the words "inflation" or "interest rate" recommends the author for the sociology department : - )

Patrick writes:

Odlyzko claims consols are a better technology. It might be interesting to hear the story of why this technology wasn't adopted broadly.

How much of it is about "liquid and rational markets" versus other politicians' incentives?

david stinson writes:

Perhaps the free lunch exists after all? If only we're clever enough?

Yes, as genauer suggests, the existence of a market for consols may have been dependent on the classical gold standard and the resulting lack of inflation expectations.

Now, I suppose one could try it with perpetual TIPS - the problem there though is market confidence in the potential for a consistently accurate measurement of inflation.

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