Everyone had to turn in his or her gold for a payment of $20.67/ounce, which was what the dollar was backed by at the time.Ī year later in 1934, once they had effectively confiscated the nation's gold, Roosevelt devalued the dollar from being worth 1/20.67 an ounce of gold to 1/35 of an ounce of gold. However, in April 1933, President Roosevelt signed Executive Order 6102, which made it a criminal offense to own meaningful amounts of gold. However, suddenly in 1933, debt as a percentage of GDP dropped like a rock:Ĭhart Source: Hoisington Investment Management Co.īack then, the dollar was on a gold standard. It was an extreme, self-reinforcing, deflationary contraction. Government debt as a percentage of GDP wasn't very high, but the total amount of private debt and government debt combined was skyrocketing relative to the size of the (then shrinking) economy. Example 1) USA, 1930'sĭuring the Great Depression, total debt as a percentage of GDP in the United States reached what at the time was record highs. In addition to happening in emerging markets frequently, it happens in developed markets occasionally. We pay with paper, cards, and digital platforms, exchanging abstract units of currency, knowing that we can buy all sorts of things with those units.Įvery few decades though, that abstraction suddenly matters, because policymakers use that abstraction to reset debt burdens as a percentage of GDP by devaluing those units of currency. From day to day and year to year, that abstraction doesn't typically matter in daily life, because the purchasing power remains relatively consistent. Instead of being made of a rare and valuable substance, modern money is just a placeholder for value, an abstraction of value. We don't walk around with silver coins in our pockets, paying each other like pirates. In modern times, money is an abstraction that represents purchasing power, but is not valuable in and of itself. Treasury bonds lost real value, looks at one similar international example, and then dives into why the current environment is similar to those times. This article provides a description of three times in the past century that U.S. I like Treasuries as a tactical holding, but it's a position that needs to be managed just like any other. It's important for investors to understand the risks associated with this defensive asset class, and to ensure that they have a risk-management process for their holdings, just like with any other asset class. In addition, ETFs such as the iShares 20+ year Treasury Bond ETF ( TLT) don't hold their bonds to maturity, so they can experience a capital loss on their investment if the bond yield goes up (and thus bond price goes down) during the investor's holding period. This chart, for example, shows the historical yield of the 10-year Treasury note (blue line) along with the forward 10-year annualized inflation-adjusted return from the start of that year (orange bars):ĭata Sources: Robert Shiller, Aswath DamodaranĪs you can see, there were long stretches of negative real returns. They can lose real purchasing power during their holding period, and sometimes rather dramatically. However, what many investors miss is the fact that the purchasing power of those bonds is not guaranteed. Treasury has always fully paid back its debts in dollar-denominated nominal terms. Treasury bonds (and bills and notes) are often thought of as risk-free investments.
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