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Wednesday, March 14, 2012 3:11 AM

I Will Gladly Pay You 100 Years From Now, For a Hamburger Today

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UK Chancellor George Osborne proposes 100-year bonds. Essentially his message is "I Will Gladly Pay You 100 Years From Now, For a Hamburger Today". Whether it's Tuesday of next week or Tuesday a hundred years from now, the safe bet is the debt will never be repaid.

The Telegraph reports Britain to offer 100-year gilts

Britain is to offer 100-year gilts, meaning current Government borrowing will not be repaid until the next century, under a radical plan to be unveiled by George Osborne in next week's budget.

The Chancellor hopes that the 100-year gilts will help to "lock in" the benefits of Britain's international "safe haven" status.

Currently, the average duration of the Government's £1 trillion debt is around 14 years – with maturities ranging from months to a 50-year bond issued in 2005. Longer-dated debt is widely thought to offer a country more stability.

A Treasury source said tonight: "This is about locking in for the future the tangible benefits of the safe haven status we have today. The prize is lower debt interest repayments for decades to come.

"It is a chance for our great-grandchildren to pay less than they otherwise would have done because of the government's fiscal credibility."
Fiscal Credibility?

Only a politician could make such a preposterous claim. For another take, please consider The Guardian report George Osborne budget plan could mean never having to pay his debts
George Osborne is to exploit Britain's historically low borrowing rates by making plans to issue "perpetual" government bonds which will never have to be repaid.

In an unprecedented move in the modern era, the chancellor will unveil plans in the budget to relieve the debt burden on future generations by extending the length of bonds to 100 years or into perpetuity.

Britain last issued perpetual gilts in the aftermath of the first world war. These are still being paid at a rate of 3%, which makes it cheaper to carry on paying the loan than pay off the whole debt.
Note that Osborne pledged to eliminate Britain's structural deficit by 2015-16 and to ensure that government debt is falling as a proportion of GDP by 2014-15.

That is clearly not going to happen.

Other Side of the Coin

By the way, if it's such a great deal for the UK Osborne claims, then surely it is not a great deal for fools willing to hold 100-Year bonds for the duration.

Of course, no one will hold 100-year bonds for the duration, except perhaps government pension plans willing or forced to buy the damn things. Rather 100-year bonds will become a plaything of hedge funds speculating on when they will blow up.

A Good Deal for Anyone?

Forget the coin and please explain the need for government to borrow money in the first place. The same question applies to the US, China, Germany, and the rest of the world.

There is no "need", there is only political expediency of vote-buying promises that cannot be met with money that will never be paid back (by inflation or default). This is what happens when there are no fiscal constraints anywhere. This is what happens when currencies are backed by nothing and can be borrowed into existence at will by central banks in response to out-of-control spending by politicians.

At some point, even if there is no default, those 100-year bonds will go for 20 cents on the dollar if not less.

Neither the UK, nor the US, nor anyone else needs 100-year bonds. What we need is sound money, backed by gold, coupled with balanced budget amendments, and an end to fractional reserve lending.

Since that set of needs is highly unlikely barring a global currency crisis, I advise preparing for one. I just cannot tell you when. I can only tell you it's a wise thing to have some gold in your portfolio for when the inevitable happens.

Mike "Mish" Shedlock
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