Ed Driscoll


Reason’s “Hit & Run” blog is often hit or miss for me (although that’s certainly true of many group blogs I read–and no doubt, for many readers of our blog as well).

In this post, Brian Doherty, an otherwise extremely sharp writer, is upset that the federal government is calling the 30 year bonds they issued in 1979–mainly because current interest rates are so much lower than the 9 and 1/8th percent interest the ’79 bonds pay.

Doherty fumes, “Sorry, but who knew that promise they made 30 years ago would gets so damn expensive to honor?” But as his more thoughtful readers note, that promise included a call provision.

One not-as-thoughtful reader commented, “There used to be no virtually no risk premium, because there was no perceived risk [on T-Bonds]. No more.”

Well, what’s your definition of risk? For most investors of government debt, their biggest fear is the risk of default, which is why they invested in T-Bonds, instead of stocks or corporate bonds. And unlike corporate investment, there is no risk of default on US debt. But all investments involve trade-offs. You can’t avoid all risk, you can only decide which risks you want to minimize. With Treasury paper, after adjusting for inflation, there’s very little chance of having any decent return on your money, with the very rare exception of those who have hung onto their say…1979 Treasury bonds which paid 9 and 1/8th percent interest–in a year when inflation was 11.3 percent.

Which is why, to my mind, the Federal government retiring old, expensive, inflationary-era debt is a very, very good thing. But to Doherty, and many of Reason’s readers, they’re reneging on a promise–even though call provisions are part of that promise.

Oh, and as to what happened to all that inflation–click here.