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The 100-Year Bond is Unethical

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Tags Money and BanksU.S. Economy

08/31/2019

With central banks globally once again suppressing the borrowing cost of sovereign entities to near zero rates, with yields in some countries even going negative, there is significant talk of issuing a 100-year bond to take advantage of these rates. Part of the argument is to lock in low rates now to hedge against future increase; though if the past decade is any consideration, central banks globally will fight until they collapse to keep sovereign borrowing near zero permanently because they legitimately have no choice in the matter. Even if governments do lock in these rates now, it won’t matter considering interest rate manipulations have placed banks on shaky ground. But if we assume this is a good idea on a purely financial basis (it’s not, I’ll get into that later), the concept of these ultra-long bonds are highly unethical.

Government AdmitsiIt has No Intention of Paying Off Debt

One of the key reasons behind the relatively short maturity rates of United States debt instruments is to maintain the illusion that the federal government is a responsible debt payer. While debt may be formally paid, it’s done by borrowing additional funds to cover the maturity of the bond. This is demonstrated by examining the federal cash flow statements, which show that $9 trillion was spent paying debt, or over twice the formal federal outlays. Two-thirds of all cash that transitions through the US Treasury today is related to debt maintenance.

[RELATED: "What Mises Would Say About Austria's New 70-year Bond" by Joseph Salerno]

While this is technically the government admitting it has no intention of paying off its debt, only perpetually engaging in credit card kiting, the Treasury does operate primarily on instruments that are due in four years or less. This does, hypothetically speaking, allow for the government to formally pay it off; or at least pretend to with new borrowings.

However, with the issuance of the 100-year bond or even a perpetual bond, such as this incredible bond that was issued 371 years ago and is still being paid by the Netherlands to this day, is that it’s akin to the government admitting it has no intention to ever pay back the debt. 100 years, for all intents and purposes, is akin to a permanent bond. Government is asking to take the principle and never pay it back, only interest.

It’s Financially Foolish

A major concept in organizational finance, be it a for-profit or non-profit, is maturity matching. The term of any debt should match, or be shorter than, the productive life of the asset it is used to buy. Organizations generally want to avoid paying debt on obsolete assets as this is a dead-weight loss. Setting aside for a moment that the vast majority of debt activity by modern governments is to give it away as a hand-out, the 100-year bond blows up this concept.

With the typical four-year bond issued by the government, the initial issuance fits perfectly with the concept of maturity matching. A four-year bond is relatively well suited to the life of typical physical assets purchased since it fits the rule of equal-to or shorter-than. However, the 100 year bond is illogical as there aren’t any assets purchased that would be realistically expected to perform for a full century or more. There may be some arguments for mega projects like a dam (though a government dam may not have that kind of lifespan), assets that are intended for use for a century or more are a rarity in the world.

As such, the century bond is fiscally unsound since it’s going to be paying out on some activity that has long lost its usefulness, assuming it wasn’t borrowed to fund Social Security or welfare.

Taxation without Representation

The biggest issue with the 100 year bond is it is inherently unethical when regarding self-governance and the structure of the nation. The United States is generally careful of organizing itself under the impression that no past governing body has the authority to bind a future governing body to any decision. The 116th Congress can’t pass any law, rule, regulation, program, or tax that can’t be repealed by the 117th or later Congress nor is the 116th obligated to follow any of those passed by their 115th predecessors.

The major issue here is that the 100-year bond throws out the entire notion that no prior governing body can bind a future governing body to any activity. The 100-year bond is a solemn promise that people a century from now are obligated to cover the expenses of today’s borrowings. Obligating hundreds of millions of unborn people to pay for our expenses today is the very meaning of taxation without representation. The only option handed to the future generation is to either pay for today’s excesses or default on that debt and undermine their own priorities in the process.

While the four-year bond has some questionable elements since the life of these bonds do extend beyond the life of both the current and subsequent Congress, the ethical impact is limited to whoever turned 18 during the following Congressional session. That Congress can then decide at the time to either pay it or roll-over to what are still, effectively, the same people it represents. Congress today doesn’t even have this overlap as no one of voting age now will likely be alive when the debt is due.

The concept of public debt is already on shaky ethical grounds, but those ethics are generally limited by the short-term nature of those debts. They do give the option to those who issued the debt to eventually pay it off. However, the 100-year debt is highly questionable as they’re designed to safely insulate the beneficiaries from the costs. In the immortal words of John Maynard Keynes, “In the long run, we’re all dead.” And what better way to leverage that long run than by issuing a century bond? We’ll be dead when it comes due, so who cares?

Justin Murray received his MBA in 2014 from the University of St. Gallen in Switzerland.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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