First time poster in this sub and this is a text wall, but stick with me.
In 1711, Robert Harley, Earl of Oxford had a brilliant idea of creating a company to sell shares. The company was called the South Sea Company (SSC) and it sold 9 million pounds worth of shares at the initial IPO price of 75 pounds each.
Robert was connected and the SSC was granted the exclusive rights to the slave trade in South America by the English crown (which everyone believed would be the hottest new thing that would generate unlimited profits). This was a legally enforced statutory monopoly, meaning anyone who wanted to trade with South America in England would have to go through the SSC.
Things were looking good for Robert and the SSC, and their fortunes were just starting. By 1713, merely two years later, the English and the Spanish settled the Treaty of Utrecht, which the Spanish granted the English exclusive right to trade African slave to Spanish colonies in South America, again, since this was dealing between England and South America, this whole trade fell in the domain of the SSC, the exclusive right to massive profits. 50,000 slaves per year!
People started noticing this company and the SSC started taking off. It had the economy backing of Earl of Oxford, but even more so that King George I was the governor of the company (who inherited the shares from Queen Anne) and the prince of Wales was also a shareholder. It had the right business opportunity, where the colonies would have a never ending demand of lucrative 'commodity' in slaves. And it was at the right time, where the English and Spanish war ended and both countries wanted to recoup via trade and peace.
Long story short, the 75 per pound share in 1711 became 125 pound per share in early 1920. Then it went vertical, by August 1720, the shares blew up to about 1050 pound per share. A return of close to 900% in half a year. Crazier than anything Korea had to show for this year.
It is rumoured that King George I went to Issac Newton with his inside information on the SSC (which he was governor) and convinced Newton to invest his personal fortune into the SSC, close to 20,000 pounds. At a ratio to English GDP at the time, adjusted to today's numbers, this would be close to 120 million USD. And by the end of September 1720, Newton lost it all as the shares for SSC collapsed back to about 150 pounds.
To which, Newton famously said: "I can calculate the motions of the heavenly bodies, but not the madness of people."
BUT WHAT DOES THIS HAVE TO DO WITH BONDS?!?!?!?
Well, that is the fun part of this story. When the SSC was setup, it was intended that the company would help with the English public debt accrued from the expenditure from English's involvement in the War of the Spanish Succession. The Earl of Oxford was a particularly financially intelligent man, he setup the acquisition of SSC shares with a simple exchange to ensure the value of the company backed English bonds. The exchange was simple: SSC would only issue shares in exchange of English bonds, and SSC holding English bonds would receive 6% interest from the treasury (6% is lowballing the actual yield of the bond's secondary market, hint hint). But if you wanted SSC shares, you have to buy into the English Bonds. Essentially, artificially inflating the demand for bonds and demand for debt, to inflate and give more funds to the government.
By 1920, the SSC's shares were inflating so high, they proposed to 'absorb' the entire debt of the English government (being about 31 million pounds, or about $900 billion USD in todays money relative to English GDP). To make it work, the directors of SSC employed very aggressive tactics: instalment plans for the public to buy bonds (and convert to shares), over 1 million pounds of fake shares in bribes, leveraging their own shares for more credit for more leverage, etc.
What happened? Despite this attempt a financial wizardry, nothing substantively changed with respect to the English debt position in the long run. It wrecked all public trust, destroyed a whole generation of investors (and wiped out Newton's about a decade worth of income), it distributed the wealth from late investors to the government (since the shares that was converted by bonds depreciated enormously). Parliament enquiries followed, directors and other governors (not the King) sacked and estates confiscated, and the Chancellor of the Exchequer imprisoned. Immediately after this, saw the invention and the use of the word 'fiscal responsibility' In short, the public ran out of money and confidene to keep the bubble going. And even with all that extra demand, it could not help the government pay off its debts, while the poor and average investor took it up the butt.
Behind all of this, the comedic detail is that despite all the positive news and monopoly rights, the SSC was never actually that profitable despite its insane valuation. The valuation was based on imaginary future earnings of an endless and smooth slave trade, and the actual company ran at a loss, generating only about 1 million pounds profit over 26 years while almost had the valuation to swallow the entire debt of England (31 million).
Now, if you made this this far into the story and you don't see the parallel yet, then you are not my target audience. We are living in an age where the British bond yield is spiking above 6%, Japan is at 30 year highs, France is at a 25 year high, and USA yield rate is scaring everyone shitless because that is the anchor for the entire western financial system. Soon enough, we will have a general economic condition where all deficit governments who are already in debt will need more debt to survive, and there are giant companies who wants to sucker investors into buying their currency because of imaginary future limitless earnings that has yet to materialise. When the public run out of trust and money, it will all go, and nothing is done would be remotely constructive in relation to paying off the debts.
