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It can work as long as not all of the proceeds are reinvested. A consol paying 7 % can be perfectly sustainable. Expecting to be able to take the payout from the consol and use it to buy another 7 % consol, and so on most certainly is not.

Compounding interest is usually unsustainable, which is why a prudent lender should insist that interest be paid as it accrues.

This, incidentally, breaks money neutrality. Hard.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 10:24:53 AM EST
[ Parent ]
The assumption the proceeds can be reinvested is central to the very concept of internal rate of return and the associated concept of reinvestment risk.

So investment theory is bollocks. Oh, well...

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 10:28:44 AM EST
[ Parent ]
Well, yeah, the usual interpretation of discount rates is garbage. This surprises you why?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 10:32:44 AM EST
[ Parent ]

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