What Mises Would Say About Austria's New 70-year Bond
Last week, Austria issued a 70-year bond, the longest dated sovereign in the Eurozone. (Italy had issued a 50-year bond on October 4.) Austria’s bond issue was a “dual tranche transaction,” involving around 3 billion euros worth of 7-year debt and 2 billion of 70-year debt. The July 2023 bond yielded -0.191% while the yield on the November 2086 bond was 1.53%. And even at these piddling yields order books exceeded $5.4 billion euros for the 7-year bond and 7.8 billion for the 70-year bond.
In today’s environment, the eagerness to invest in long-term bonds is surprising to say the least. With bond yields being relentlessly suppressed by central banks at artificially low levels and bound to rise, the risk of substantial capital losses for holders of long-term bonds is significant. Furthermore, since the means used to effect this financial repression involves inflationary monetary policy, the risk of consumer price inflation speeding up and eroding the real value of bond yields and principal is also significant. So the question is: Why would anyone with a modicum of foresight buy long-term bonds?
Nearly seven decades ago, Ludwig von Mises explained the seemingly irrational hunger among capitalists for long-term government bonds as based on an illusion. The illusion is that wealth once painstakingly accumulated in risky ventures can be removed from the competitive and uncertain sphere of the dynamic market process and preserved forever intact in a changeless realm of perfect certainty created by an imaginary political sovereign who is eternal, all-powerful, and unchanging. According to Mises (p. 226):
[W]hen governments initiated their policies of long-term irredeemable and perpetual loans . . . [t]he state . . . this eternal and superhuman institution beyond the reach of earthly frailties, offered to the citizen an opportunity to put his wealth in safety and to enjoy a stable income secure against all vicissitudes. It opened a way to free the individual from the necessity of risking and acquiring his wealth and his income anew each day in the capitalist market. He who invested his funds in bonds issued by the government and its subdivisions was no longer subject to the inescapable laws of the market and to the sovereignty of the consumers. . . . He was secure, he was safeguarded against the dangers of the competitive market in which losses are the penalty of inefficiency; the eternal state had taken him under its wing and guaranteed him the undisturbed enjoyment of his funds. Henceforth his income no longer stemmed from the process of supplying the wants of the consumers in the best possible way, but from the taxes levied by the state's apparatus of compulsion and coercion. He was no longer a servant of his fellow citizens, subject to their sovereignty; he was a partner of the government which ruled the people and exacted tribute from them.
As Mises went on to point out, the attempt to “find an inexhaustible source of income” outside of the framework of the market economy is vain and must eventually come to grief. First, the real value of interest payments on the debt can never be definitely fixed because of the constant changes in the purchasing power of the money in which they are denominated. This is especially the case in a fiat-money regime since the indebted government has the incentive and power to increase the money supply and deliberately create inflation in order to surreptitiously lighten the real burden of its debt service payments. Second, because the funds invested in government bonds are used for current expenditures, there is no income-generating, productive asset in the real economy that corresponds to the paper wealth represented by government bonds. In fact, these scraps of paper are hardly riskless. They are empty promises by the current political regime that an uncertain, and possibly radically different, future political regime will tax indefinite persons to pay for the debts it incurs today. With inevitable changes in political and economic doctrines, policies, and regimes, not even the most powerful government can guarantee against future default on—or even repudiation of—the public debt. In practice government bonds therefore represent—regardless of their nominal maturities—what Mises called “irredeemable perpetual public debt.” For no government that issues long-term bonds ever formulates a clear intention to acquire the means necessary to actually pay off the public debt.
Thus Mises (p. 228) argued that public debt is a fictitious concept that is utterly incompatible with a real market economy in which real wealth is actually accumulated as a counterpart to debt obligations incurred:
The long-term public and semipublic credit is a foreign and disturbing element in the structure of a market society. Its establishment was a futile attempt to go beyond the limits of human action and to create an orbit of security and eternity removed from the transitoriness and instability of earthly affairs. What an arrogant presumption to borrow and to lend money for ever and ever, to make contracts for eternity, to stipulate for all times to come! In this respect it mattered little whether the loans were in a formal manner made irredeemable or not; intentionally and practically they were as a rule considered and dealt with as such. . . . The financial history of the last century shows a steady increase in the amount of public indebtedness. Nobody believes that the states will eternally drag the burden of these interest payments. It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract.
What was true when Mises wrote this in 1949 is even truer today. Austria will never pay off on its 70-year bonds; nor will the U.S. government ever redeem its debt, which currently stands at $19.6 trillion, $14.1 trillion of which is owed to the public. Most sovereign debt will eventually be disposed of by inflation or outright default. The sooner the myth that the sovereign debt of a handful of developed nations led by the U.S. provides a “safe haven” for wealth is shattered, the better it will be for the real wealth producers. Indeed irredeemable public debt serves precisely the same function as irredeemable fiat money. The creation of both kinds of instruments enables the political elite to covertly and repeatedly plunder and impoverish productive savers, capitalists, entrepreneurs and workers, while avoiding the need to incur the wrath of the productive class by raising taxes.
The issue of government bonds is actually more insidious and destructive of the market economy than the issue of fiat money for two reasons. First, politically, the issue of long-term bonds and the relentless piling up of government debt perversely bolsters and perpetuates the myth that the State is an eternal entity that somehow is not subject to the disturbances and uncertainties of human affairs. And second, economically, the existence of government debt as a safe haven for wealth and an inexhaustible fount of income diverts capitalists and entrepreneurs from devoting all their attention and resources to their vital function of allocating scarce resources to the most urgent of the anticipated demands of consumers. In fact, in an economic system burdened with fiat money, it would be preferable to ban government borrowing altogether. This would force the government to cover all of its deficits with irredeemable paper fiat money, which does not pay interest. There would be substantial benefits from this course of action. It would demystify the inflationary process for the average citizen. Instead of the Fed camouflaging its creation of money by the hocus pocus of “setting interest rates” via buying and selling bonds, financing government budget deficits would entail a completely transparent operation in which the Fed prints up money and directly hands it over to the U.S. Treasury. Also the Fed would become a division of the Treasury and would no longer be involved in manipulating interest rates, which is the root cause of business cycles. And lastly, banks and other financial firms, which now hold vast quantities of government bonds and are a powerful constituency in favor of maintaining the political status quo in order to keep their interest payments flowing, would no longer be “a partner of the government which ruled people and exacted tribute from them.” Keynes infamously called for the “euthanasia of the rentier”; Mises’s theory of the public debt leads us to call for the euthanasia of the parasitic, government rentier.
Joseph T. Salerno is professor of economics in the Lubin School of Business of Pace University in New York. He is editor of the Quarterly Journal of Austrian Economics; Academic Vice President of the Mises Institute, and Director of the Mises Institute Fellows Program. Contact: email.