The risks in government bonds aren’t only those of default. Inflation (or exchange rates if you hold foreign bonds) can reduce the real value of bonds.
tc said “If you’re an optimist about the economic effects of AI/nanotech etc, then it seems that should make the chance of defaults less likely, not more.”
This is correct, but what are you holding the bonds for? Suppose during the next 30 years we experience a technological singularity. Your 30 year bonds will pay out as you expect, but the money will buy you relatively much less stuff; you might even be very poor by contemporary standards. (Incidentally what would the best investment/consumption strategy be if you thought a singularity was imminent? Consume only the barest minimum, and invest everything in stocks or other business opportunities? If many people behaved like this interest rates should go to zero, or even become negative.) This argument applies to any situation where economic growth is higher than expected. Your bonds payout, but the relative value of the cash is less than you expected, and you have a lower standard of living than you hoped—you can’t eat at as good restaurants, you have to live in a less nice area; although you could partially compensate for this by investing more in other positional goods like playing music, writing poetry, studying mathematics etc.
What happens to the price of bonds if Aubrey de Grey and friends manage to cure ageing? Pension funds and life insurance companies are one of the biggest investors in bonds, so this is bound to affect bond prices. What happens to the price of land in such a scenario?
What about a collapse of the Euro, or a breakup of the EU—possibly as a result of Russian machinations. This seems more likely than US government default or a breakup of the US, and it would undoubtably affect the entire world economy.
Incidentally what would the best investment/consumption strategy be if you thought a singularity was imminent? Consume only the barest minimum, and invest everything in stocks or other business opportunities? If many people behaved like this interest rates should go to zero, or even become negative.
Hanson’s simple models say that even under conservative assumptions, machine intelligence could increase annual world GDP growth rates to 25% from 3 or 4%. In that sort of steady state model, presumably the future growth would be priced into bonds or else investors would flee them for equities. On the other hand, if the market is insufficiently efficient/omniscient to foresee such an increase in growth rates, then there’d be a period where investors locked into low fixed-rate bonds will be screwed and missing out on the huge gains being reaped by equity investors.
I think markets are mostly efficient and I haven’t heard of even long-term bonds being priced very highly, so I would guess that either no machine intelligence is in the offing or the markets are not being efficient about this. Since I have strong reasons to believe that the former is false, I choose the latter—the markets are inefficiently prizing the current low fixed-income offerings. Hence, buying equities would be a better long-term strategy.
The risks in government bonds aren’t only those of default. Inflation (or exchange rates if you hold foreign bonds) can reduce the real value of bonds.
tc said “If you’re an optimist about the economic effects of AI/nanotech etc, then it seems that should make the chance of defaults less likely, not more.”
This is correct, but what are you holding the bonds for? Suppose during the next 30 years we experience a technological singularity. Your 30 year bonds will pay out as you expect, but the money will buy you relatively much less stuff; you might even be very poor by contemporary standards. (Incidentally what would the best investment/consumption strategy be if you thought a singularity was imminent? Consume only the barest minimum, and invest everything in stocks or other business opportunities? If many people behaved like this interest rates should go to zero, or even become negative.) This argument applies to any situation where economic growth is higher than expected. Your bonds payout, but the relative value of the cash is less than you expected, and you have a lower standard of living than you hoped—you can’t eat at as good restaurants, you have to live in a less nice area; although you could partially compensate for this by investing more in other positional goods like playing music, writing poetry, studying mathematics etc.
What happens to the price of bonds if Aubrey de Grey and friends manage to cure ageing? Pension funds and life insurance companies are one of the biggest investors in bonds, so this is bound to affect bond prices. What happens to the price of land in such a scenario?
What about a collapse of the Euro, or a breakup of the EU—possibly as a result of Russian machinations. This seems more likely than US government default or a breakup of the US, and it would undoubtably affect the entire world economy.
Hanson’s simple models say that even under conservative assumptions, machine intelligence could increase annual world GDP growth rates to 25% from 3 or 4%. In that sort of steady state model, presumably the future growth would be priced into bonds or else investors would flee them for equities. On the other hand, if the market is insufficiently efficient/omniscient to foresee such an increase in growth rates, then there’d be a period where investors locked into low fixed-rate bonds will be screwed and missing out on the huge gains being reaped by equity investors.
I think markets are mostly efficient and I haven’t heard of even long-term bonds being priced very highly, so I would guess that either no machine intelligence is in the offing or the markets are not being efficient about this. Since I have strong reasons to believe that the former is false, I choose the latter—the markets are inefficiently prizing the current low fixed-income offerings. Hence, buying equities would be a better long-term strategy.