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EJ
09-02-08, 03:31 PM
http://www.itulip.com/images/firstindexbond.jpgTreasury's future inflation fears topple TIPS

In 1779 when the dollar was toast, the Treasury paid soldiers with bonds indexed to a basket of commodities. Today they don't even want to pay up with bonds indexed to a dubious inflation index of the government's own making. Is this any way for a government to behave that's banking on deflation?

So convinced was I of imminent inflation in 1999 that in that year and the two years that followed I bought the maximum quantity of Series I savings bonds allowed for me and my wife, in those days $30,000 each per year. The yield on a Series I bond is the combined fixed rate plus a bi-annually applied inflation rate.

For the bonds I bought the fixed rate is 3.6%, 3.4%, and 3.0% for each of the years 1999, 2000, and 2001 respectively plus the inflation adjustment that started off at a measly 0.86% in 1999 and fell to 0.54% during the Fed’s Great Deflation Ruse of 2002.

You remember. They said, in effect, "Oh, woe is us! We can’t print money as fast as dot com stocks are crashing! Double entry bookkeeping will fail! We can't press the zero key on the keyboard fast enough!"

Seven years later, the highest inflation adjustment for all Series I bonds ever issued is the most recent. At 2.42% my Series I bonds earn a total risk-free yield of 5.42%, 5.82%, and 6.02% respectively.

Not bad. But the Treasury’s marketing push ended in 2003. The fixed rate dropped from a juice teaser rate of 3.6% to a lousy 2%. I wasn’t buying. Then in 2007 the Treasury lowered the maximum annual purchase from $30,000 to $5,000, cutting the opportunity to earn inflation tax back from the government by 83% – fun while it lasted. Then this May they set the fixed rate at a heart pounding 0%. With a $5,000 annual limit and a fixed rate dropped to 0% as inflation hits new highs, rest assured that Series I bonds will soon be directed at the financially uneducated where the government, and the FIRE Economy interests that fund it, aim all of the high powered marketing of bogus financial products, public or private.

What’s an inflation dodger to do besides buy foreign bonds or precious metals and hope the government doesn't figure out a way to cancel out the inflation compensation by taxes or some other means?

There’s always inflation indexed treasures – TIPS. Or maybe not. Today Bloomberg reports:
Paulson Asked to Spurn Rubin's Inflation Indexed Debt (http://www.bloomberg.com/apps/news?pid=20601109&sid=atKnQFruecww&refer=home)

Sept. 2 (Bloomberg) -- Almost 12 years after then-Treasury Secretary Robert Rubin championed inflation-linked bonds as a way to lower U.S. borrowing expenses, advisers to Henry Paulson say they have cost taxpayers an extra $30 billion.

The Treasury Borrowing Advisory Committee, consisting of officials from 14 investment firms including Goldman Sachs Group Inc. and Soros Fund Management, recommends eliminating five-year Treasury Inflation-Protected Securities. At a minimum, the supply of TIPS, now $517 billion outstanding, should be reduced relative to the amount of nominal Treasuries, the committee says.

Paulson and Rubin worked together at Goldman from 1974 to 1992. In 1988, Paulson was promoted to co-head of investment banking when Rubin was vice chairman and co-chief operating officer. Rubin left the firm in January 1993 to become assistant to President Bill Clinton for economic policy. He became Treasury Secretary in 1995.

The U.S. started selling TIPS in 1997, saying the market would help Americans' retirement savings keep pace with inflation.

Rubin, now a senior counselor to Citigroup Inc. in New York, told reporters in his office in January of 1997 before the first auction that TIPS had the ``potential'' to cut borrowing costs and predicted they would be ``a big, big program someday.'' The bonds account for 11 percent of the Treasury market, up from 6.2 percent at the end of 2004.
In countries that care about such things the Minister of Finance recuses himself for reasons of the appearance of conflicts of interest from decisions affecting the industry that he is likely to revolving-door back into. Countries like Norway. Not here, apparently.

A decision to eliminate TIPS, if taken, combined with the virtual elimination of inflation indexed savings bonds and of M3 money aggregate reporting in 2006, is a clear sign that our government is not anticipating a painful resurgence in deflation like the one that didn’t occur last time the Fed fretted about it in 2001 and 2002.

Here's the game: bring out the inflation indexed government financial products when inflation is low and the Treasury expects inflation to fall, then cancel them when inflation is due to rise.

Could have been worse for the government. If TIPS cost $30 billion at the contrived CPI-U rate that is now officially 5.5% per the Bureau of Labored Statistics but is per ShadowStats 13% using 1990 CPI measurement methods, imagine how much more the government could have lost.

As PIMCO's John Brynjolfsson said in the Bloomberg report, "TIPS serve as a real-time referendum on the ability of the central bank and government to contain inflation. Investors who have confidence in the resolve of policy makers to keep consumer prices in check are more willing to lend them money at lower rates." Well, we can't have that – markets setting bond prices – especially as the government explodes its balance sheet to bail out the collapsing FIRE Economy.

A Modest Proposal: Bring back the Commodity Indexed Bond


http://www.itulip.com/images/tableofdepreciation.jpg
Click to enlarge (http://www.itulip.com/images/tableofdepreciationLG.jpg)


If the Treasury is dumping TIPS, I propose that the Treasury replace them with the world’s first inflation-indexed bond, issued by the US Treasury in 1779 during the Revolutionary War after the government massively inflated the dollar. Robert Shiller, who discovered the bonds in his research in 2003, said, "These bonds were invented to deal with severe wartime inflation and with angry discontent among soldiers in the U.S. Army with the decline in purchasing power of their pay." Rather than a politically manipulated, made-up inflation index, these bonds were indexed to a basket of commonly used commodities of the day: beef, corn, wool, and shoe leather.

To bring the concept up to date, the Treasury can create a Commodity Indexed Bond and index it to the price of beef, corn, iPods, and gasoline twice a year.

I'd expect my proposal to gain traction if the Treasury foresees the government shrinking its balance sheet, borrowing from foreign creditors at a lower rate of interest, and following monetary and economic policies to strengthen the dollar in the future. Obviously, they do not, so my Commodity Indexed Bond will have to wait until real versus ruse deflation appears on the horizon.

Still no deflation spiral

We summarize our anti-deflation spiral argument with two pictures. The first graph is from the Fed's 2003 "Deflation Handbook" (PDF) (http://www.itulip.com/Select/feddeflationplaybook.pdf).


http://www.itulip.com/images/USdeflationNote.jpg




The US remained on the gold standard from the time of the 1929 crash until 1933
A debt deflation and deflation spiral took inflation rates down to negative 14% in 1933
A negative inflation rate indicates true "deflation," whereas a declining rate of inflation is called "disinflation"
The US went off the gold standard in 1933, and gold was re-priced 40% from $20.67 to $35
At the time, the banking system was for all intents and purposes broken
Loans and investments of Federal Reserve member banks had declined 31% and loans overall by 50% (1 (http://books.google.com/books?id=gDrlTbyBKvYC&pg=PA111&lpg=PA111&dq=bank+credit+1933&source=web&ots=bjginriVrQ&sig=ZbVHbgzlNcBA0RX5OdQ0rJRrPhQ&hl=en&sa=X&oi=book_result&resnum=6&ct=result))
The money supply had contracted by over over 30% (2 (http://www.econlib.org/LIBRARY/Enc/GreatDepression.html))
Nonetheless, the result of the 40% dollar depreciation was 28% rise in inflation from -14% to +14% as shown by the Fed in the chart above



Anyone in long bonds betting on a continuation of deflation in 1933 got wiped out in the ensuing bond market crash.

http://www.itulip.com/images/1929longbond.gif
(Source: Jesse's Crossroads Cafe (http://jessescrossroadscafe.blogspot.com/))


Since the 1929 to 1933 deflation spiral episode in the US there has not been a single other example in history, despite all of the pre-conditions, such as over-indebtedness and asset price inflation, while dozens of inflationary events have occurred as a result of debt repudiation and currency depreciation.


Moral: Currency depreciation is the foolproof way out of a deflation spiral, irrespective of credit
and money creation by government or the endogenous credit markets.


Absent the constraints of a gold standard, governments can devalue currencies instantaneously, producing inflation – and do. Sometimes foreign investors, fearing losses, or hostile foreign governments do it for them by withdrawing funds.

The US will suffer a period of disinflation as debt deflation and recession continue. Commodity prices will decline with falling global demand, until producers cut output to reduce supply (inflationary). Then as surely as day follows night, the government will reflate via currency depreciation (inflationary). The question is, what will happen to US borrowing costs as a result?



iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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LargoWinch
09-02-08, 05:06 PM
To bring the concept up to date, the Treasury can create a Commodity Indexed Bond and index it to the price of beef, corn, iPods, and gasoline twice a year, to bring the old index up to date.



May I suggest the Slurpee (1L), Nintendo Wii, Whopper, iPod, Starbucks, Bike Helmets and Verizon Wireless subscription index? Nike sneakers are so 80s...

pwcmba
09-02-08, 07:04 PM
EJ,

I believe those returns are actually higher than you stated as the I-bonds are calculated with the Urban CPI (CPI-U). The July report had CPI-U at a 5.6% annual rate.

http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

Paul

metalman
09-02-08, 07:41 PM
EJ,

I believe those returns are actually higher than you stated as the I-bonds are calculated with the Urban CPI (CPI-U). The July report had CPI-U at a 5.6% annual rate.

http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

Paul

what, the treasury doesn't even give you cpi-u?

Fixed Rates

I bond fixed rates are determined each May 1 and November 1. Each fixed rate applies to all I bonds issued in the six months following the rate determination.
<table class="indepth" summary="Current and historical I bond fixed rates by start of rate period."> <tbody><tr> <th>DATE</th><th>FIXED RATES*</th> </tr> <tr><td class="cj">MAY 1, 2008</td><td class="cj">0.00%</td></tr> <tr><td class="cj">NOV 1, 2007</td><td class="cj">1.20%</td></tr> <tr><td class="cj">MAY 1, 2007</td><td class="cj">1.30%</td></tr> <tr><td class="cj">NOV 1, 2006</td><td class="cj">1.40%</td></tr> <tr><td class="cj">MAY 1, 2006</td><td class="cj">1.40%</td></tr> <tr><td class="cj">NOV 1, 2005</td><td class="cj">1.00%</td></tr> <tr><td class="cj">MAY 1, 2005</td><td class="cj">1.20%</td></tr> <tr><td class="cj">NOV 1, 2004</td><td class="cj">1.00%</td></tr> <tr><td class="cj">MAY 1, 2004</td><td class="cj">1.00%</td></tr> <tr><td class="cj">NOV 1, 2003</td><td class="cj">1.10%</td></tr> <tr><td class="cj">MAY 1, 2003</td><td class="cj">1.10%</td></tr> <tr><td class="cj">NOV 1, 2002</td><td class="cj">1.60%</td></tr> <tr><td class="cj">MAY 1, 2002</td><td class="cj">2.00%</td></tr> <tr><td class="cj">NOV 1, 2001</td><td class="cj">2.00%</td></tr> <tr><td class="cj">MAY 1, 2001</td><td class="cj">3.00%</td></tr> <tr><td class="cj">NOV 1, 2000</td><td class="cj">3.40%</td></tr> <tr><td class="cj">MAY 1, 2000</td><td class="cj">3.60%</td></tr> <tr><td class="cj">NOV 1, 1999</td><td class="cj">3.40%</td></tr> <tr><td class="cj">MAY 1, 1999</td><td class="cj">3.30%</td></tr> <tr><td class="cj">NOV 1, 1998</td><td class="cj">3.30%</td></tr> <tr><td class="cj">SEP 1, 1998</td><td class="cj">3.40%</td></tr> <tr><td class="cj" colspan="2">*Annual rates compounded semiannually

</td></tr> </tbody></table>Inflation Rates

The semiannual inflation rate is determined each May 1 and November 1. Each semiannual inflation rate applies to all outstanding I Bonds for six months.
<table class="indepth" summary="Current and historical I bond inflation rates by start of rate period"> <tbody><tr> <th>DATE</th><th>INFLATION RATES*</th> </tr> <tr><td class="cj">MAY 1, 2008</td><td class="cj">2.42%</td></tr> <tr><td class="cj">NOV 1, 2007</td><td class="cj">1.53%</td></tr> <tr><td class="cj">MAY 1, 2007</td><td class="cj">1.21%</td></tr> <tr><td class="cj">NOV 1, 2006</td><td class="cj">1.55%</td></tr> <tr><td class="cj">MAY 1, 2006</td><td class="cj">0.50%</td></tr> <tr><td class="cj">NOV 1, 2005</td><td class="cj">2.85%</td></tr> <tr><td class="cj">MAY 1, 2005</td><td class="cj">1.79%</td></tr> <tr><td class="cj">NOV 1, 2004</td><td class="cj">1.33%</td></tr> <tr><td class="cj">MAY 1, 2004</td><td class="cj">1.19%</td></tr> <tr><td class="cj">NOV 1, 2003</td><td class="cj">0.54%</td></tr> <tr><td class="cj">MAY 1, 2003</td><td class="cj">1.77%</td></tr> <tr><td class="cj">NOV 1, 2002</td><td class="cj">1.23%</td></tr> <tr><td class="cj">MAY 1, 2002</td><td class="cj">0.28%</td></tr> <tr><td class="cj">NOV 1, 2001</td><td class="cj">1.19%</td></tr> <tr><td class="cj">MAY 1, 2001</td><td class="cj">1.44%</td></tr> <tr><td class="cj">NOV 1, 2000</td><td class="cj">1.52%</td></tr> <tr><td class="cj">MAY 1, 2000</td><td class="cj">1.91%</td></tr> <tr><td class="cj">NOV 1, 1999</td><td class="cj">1.76%</td></tr> <tr><td class="cj">MAY 1, 1999</td><td class="cj">0.86%</td></tr> <tr><td class="cj">NOV 1, 1998</td><td class="cj">0.86%</td></tr> <tr><td class="cj">SEP 1, 1998</td><td class="cj">0.62%</td></tr> <tr><td class="cj" colspan="2">*Semiannual rates</td></tr> </tbody></table>
http://www.savingsbonds.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

orion
09-02-08, 07:58 PM
I'd like to add health insurance. I am self employed and my rate goes up 15 to 20% / year.

LargoWinch
09-02-08, 11:18 PM
The Bank of Canada interest rate is 3.00%:

http://www.bank-banque-canada.ca/en/index.html

...yet, I get 3.40% in a risk-free CDIC-insured account (CDIC in Canada = FDIC in the US):

http://www.icicibank.ca/default.htm

What gives?

ASH
09-03-08, 01:08 AM
The Bank of Canada interest rate is 3.00%:

http://www.bank-banque-canada.ca/en/index.html

...yet, I get 3.40% in a risk-free CDIC-insured account (CDIC in Canada = FDIC in the US):

http://www.icicibank.ca/default.htm

What gives?

Um... Canada rocks? Better run? Fewer shenanigans? :D

But, seriously, it seems they're giving you exactly what is quoted for CPI-U, right? Higher than the overnight rate, and no risk. That does seem pretty damn weird to me. Is this because the competition for deposits is extremely tight? Is it a sign that this particular bank has a really weak balance sheet?

... But then I see online that there are plenty of American money market accounts, FDIC-insured, which also beat the overnight rate. Chalk my confusion up to a lack of sophistication on my part. It's easy to understand that the yield on commercial paper will be higher than the overnight rate, so I suppose this means that deposits backed by the bank's investments in commercial paper still qualify for insurance.

Slimprofits
09-03-08, 07:02 AM
an interesting historical sidenote - States issued bonds such as these to pay soliders too and in Massachusetts the situation eventually led to Shay's Rebellion.

here (http://www.amazon.com/review/R1C55MGS9FNRS5) and here (http://www.historycooperative.org/cgi-bin/justtop.cgi?act=justtop&url=http://www.historycooperative.org/journals/wm/60.3/br_12.html)

GRG55
09-03-08, 08:49 AM
Um... Canada rocks? Better run? Fewer shenanigans? :D

But, seriously, it seems they're giving you exactly what is quoted for CPI-U, right? Higher than the overnight rate, and no risk. That does seem pretty damn weird to me. Is this because the competition for deposits is extremely tight? Is it a sign that this particular bank has a really weak balance sheet?

... But then I see online that there are plenty of American money market accounts, FDIC-insured, which also beat the overnight rate. Chalk my confusion up to a lack of sophistication on my part. It's easy to understand that the yield on commercial paper will be higher than the overnight rate, so I suppose this means that deposits backed by the bank's investments in commercial paper still qualify for insurance.

You got it. Deposits have once again become a valued source of capital for the banks (after years of being scorned), and the competition for these deposits means higher rates for depositors. As long as the Fed [and other Central Banks] can maintain a positive yield curve [by keeping their administered rates low] the banks can still relend the deposit funds at a premium to what they are paying depositors, thus generating the risk-free profits that are so vital to rebuilding their balance sheets [precisely what the Fed and other CBs desire]. This is the reason that there is virtually zero probability that the Bank of Canada will raise its rates any time soon, and the next move is almost certainly going to be a rate cut as Canada is now heading into recession. (http://www.ft.com/cms/s/0/4fc9b74a-7621-11dd-99ce-0000779fd18c,dwp_uuid=b491af84-d311-11db-829f-000b5df10621.html?nclick_check=1)

As for balance sheet, ICICI Bank is actually one of the largest banks in India. The Canadian subsidiary is registered and regulated under Canadian banking law which is why it qualifies for CDIC coverage.

Charles Mackay
09-03-08, 10:35 AM
EJ, same as the 30 year bond... they pulled it during falling inflation and now reissue it during rising inflation. Pretty good indicator I think.

GRG55
09-03-08, 11:27 AM
...To bring the concept up to date, the Treasury can create a Commodity Indexed Bond and index it to the price of beef, corn, iPods, and gasoline twice a year.

I'd expect my proposal to gain traction if the Treasury foresees the government shrinking its balance sheet, borrowing from foreign creditors at a lower rate of interest, and following monetary and economic policies to strengthen the dollar in the future. Obviously, they do not, so my Commodity Indexed Bond will have to wait until real versus ruse deflation appears on the horizon...


At the moment there's lots of liquidation [masquerading as deflation] splattered all over the windshield (http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080903/REG/809039991/1036). Perhaps obscuring the horizon for the time being?

ocelotl
09-03-08, 12:42 PM
This reminded me the 80's here in Mexico... Issue here is that Bank Rates don't follow price inflation, thus burning population savings. People under that condition stops saving at banks and begin searching "creative" ways of saving. In similar periods on the past on different countries the response was obvious, as stated in the "Can the USA have a Peso Problem (http://www.itulip.com/forums/showthread.php?t=105)" thread, either reliable foreign currency or PM's.

Since in the US a large percentage of economic activity relies on banking, a diminished amount of savings does deepen the limitation of banks to have deposits upon which finance future projects. This worsens financial institutions problems and can trigger massive amounts of bankruptcies among all kinds of finance institutions, therefore worsening the recession already present.

bart
09-03-08, 12:53 PM
TIPpy charts...

http://www.nowandfutures.com/images/tip_spread.png



http://www.nowandfutures.com/images/bond10_minus_cpi.png

metalman
09-03-08, 12:59 PM
TIPpy charts...

http://www.nowandfutures.com/images/tip_spread.png



geez, no wonder they want to get rid of TIPS. the 10yr bond is a great deal... for the treasury. :eek:

icm63
09-03-08, 06:10 PM
..."geez, no wonder they want to get rid of TIPS. the 10yr bond is a great deal... for the treasury."...

So why are the Asians so stupid to buy the stuff? Where is the line in the sand that they will stop.

There has already been a trend for dumping agency debt (FNM/FRE) for treasuries by foreign banks. Is the leak that will start a flood ?

icm63
09-03-08, 06:15 PM
ALSO ..

I want to subscribe again, I want to by EJ a beer ? This is the best god dam forum on the web.

Have a nice day.

metalman
09-03-08, 06:38 PM
ALSO ..

I want to subscribe again, I want to by EJ a beer ? This is the best god dam forum on the web.

Have a nice day.

ej's pretty good but it's the cast of characters he's collected that's what really impresses me.

just ran across this from 2006... posted it elsewhere. creepily accurate so far...


Although the U.S. economy maintained its rapid growth during most of the 1990s and 2000s, it was progressively undermined by fiscal mismanagement and a resulting sharp deterioration of the investment climate. The GDP grew about 4 percent annually during the administrations of President Bill Clinton (1993-2001) and during that of his successor, President George W. Bush (2001-2009), except for a brief recession following the collapse of the stock market bubble in 2000. But asset prices fluctuated wildly during the decade, with booms and busts in the stock, bond and real estate markets.

Fiscal profligacy combined with the 2008 oil shock exacerbated inflation and upset the balance of payments. The balance of payments disequilibrium became unmanageable as capital flight intensified, forcing the government in 2008 to devalue the dollar by 30 percent.

Although a bubble in bond and real estate prices from 2001 to 2006 allowed a temporary recovery, the windfall from sales of financial assets to foreign central banks also allowed continuation of the Bush administration's destructive fiscal policies. In the mid-1980s, the U.S. went from being a net exporter of goods and to a significant importer. Sales of financial assets became the economy's most dynamic growth sector. Net foreign purchases of U.S. financial assets grew from 50% of issuance in 1996 to nearly 80% in 2005. Rising foreign borrowing allowed the government to continue its expansionary fiscal policy. Between 2001 and 2006, the economy grew more than 4 percent annually, as the government spent heavily on the military and the real estate and financial sectors provided more than 50% of private sector employment.

This renewed growth rested on shaky foundations. The United States' external indebtedness mounted, and the dollar became increasingly overvalued, hurting exports in the late 2000s and forcing a second dollar devaluation in 2010. The action effectively ended the U.S. dollar's status as a reserve currency. The portion of import categories subject to controls rose from 10 percent of the total in 2008 to 24 percent in 2010. The government raised tariffs concurrently to shield domestic producers from foreign competition, further hampering the modernization and competitiveness of U.S. industry. As unemployment rose to more than 20%, government policies to limit immigration fueled further increases in wage rates and inflation.

The macroeconomic policies of the 2000s left the U.S. economy highly vulnerable to external conditions. These turned sharply against the U.S. in the late 2000s, and caused the worst recession since the 1930s. By mid-2010, the U.S. was beset by rising oil prices, higher world interest rates, rising inflation, a chronically overvalued dollar, and a deteriorating balance of payments that spurred massive capital flight. This disequilibrium, along with the virtual disappearance of the U.S. international reserves--by the end of 2010 they were insufficient to cover three weeks' imports--forced the government to devalue the dollar three times during 2012. The devaluation further fueled inflation and prevented short-term recovery. The devaluations depressed real wages and increased the private sector's burden in servicing its dollar-denominated debt. Interest payments on long-term debt alone were equal to 28 percent of export revenue. Cut off from additional credit, the government declared an involuntary moratorium on debt payments in August 2013, and the following month it announced the nationalization of the U.S. private banking system.

- Face of Inflation: Does the U.S. Have a "Peso Problem" (http://www.itulip.com/faceofinflation.htm) (April 9, 2006)

ocelotl
09-03-08, 07:22 PM
ej's pretty good but it's the cast of characters he's collected that's what really impresses me.

just ran across this from 2006... posted it elsewhere. creepily accurate so far...

Although the U.S. economy maintained its rapid growth during most of the 1990s and 2000s, it was progressively undermined by fiscal mismanagement and a resulting sharp deterioration of the investment climate. The GDP grew about 4 percent annually during the administrations of President Bill Clinton (1993-2001) and during that of his successor, President George W. Bush (2001-2009), except for a brief recession following the collapse of the stock market bubble in 2000. But asset prices fluctuated wildly during the decade, with booms and busts in the stock, bond and real estate markets.

Fiscal profligacy combined with the 2008 oil shock exacerbated inflation and upset the balance of payments. The balance of payments disequilibrium became unmanageable as capital flight intensified, forcing the government in 2008 to devalue the dollar by 30 percent.

Although a bubble in bond and real estate prices from 2001 to 2006 allowed a temporary recovery, the windfall from sales of financial assets to foreign central banks also allowed continuation of the Bush administration's destructive fiscal policies. In the mid-1980s, the U.S. went from being a net exporter of goods and to a significant importer. Sales of financial assets became the economy's most dynamic growth sector. Net foreign purchases of U.S. financial assets grew from 50% of issuance in 1996 to nearly 80% in 2005. Rising foreign borrowing allowed the government to continue its expansionary fiscal policy. Between 2001 and 2006, the economy grew more than 4 percent annually, as the government spent heavily on the military and the real estate and financial sectors provided more than 50% of private sector employment.

This renewed growth rested on shaky foundations. The United States' external indebtedness mounted, and the dollar became increasingly overvalued, hurting exports in the late 2000s and forcing a second dollar devaluation in 2010. The action effectively ended the U.S. dollar's status as a reserve currency. The portion of import categories subject to controls rose from 10 percent of the total in 2008 to 24 percent in 2010. The government raised tariffs concurrently to shield domestic producers from foreign competition, further hampering the modernization and competitiveness of U.S. industry. As unemployment rose to more than 20%, government policies to limit immigration fueled further increases in wage rates and inflation.

The macroeconomic policies of the 2000s left the U.S. economy highly vulnerable to external conditions. These turned sharply against the U.S. in the late 2000s, and caused the worst recession since the 1930s. By mid-2010, the U.S. was beset by rising oil prices, higher world interest rates, rising inflation, a chronically overvalued dollar, and a deteriorating balance of payments that spurred massive capital flight. This disequilibrium, along with the virtual disappearance of the U.S. international reserves--by the end of 2010 they were insufficient to cover three weeks' imports--forced the government to devalue the dollar three times during 2012. The devaluation further fueled inflation and prevented short-term recovery. The devaluations depressed real wages and increased the private sector's burden in servicing its dollar-denominated debt. Interest payments on long-term debt alone were equal to 28 percent of export revenue. Cut off from additional credit, the government declared an involuntary moratorium on debt payments in August 2013, and the following month it announced the nationalization of the U.S. private banking system.

- Face of Inflation: Does the U.S. Have a "Peso Problem" (http://www.itulip.com/faceofinflation.htm) (April 9, 2006)


Remembering that thread and the way it developed here, I'm not sure if the US is in a situation similar to what it was here in México in 1981-2 or 1994... As posted there, US has both conditions together: Large amounts of debt, both external (1982) and internal (1994). I do remember that Bart has proved that world situation rhymes with that of 1973, but these two dates related to Mexico mark turning points that had to happen due to the previous conditions.

I'm working on an article about points of this, just will let you see one of the base graphs.

http://img253.imageshack.us/img253/4212/cpimxicoga4.jpg

metalman
09-03-08, 07:39 PM
Remembering that thread and the way it developed here, I'm not sure if the US is in a situation similar to what it was here in México in 1981-2 or 1994... As posted there, US has both conditions together: Large amounts of debt, both external (1982) and internal (1994). I do remember that Bart has proved that world situation rhymes with that of 1973, but these two dates related to Mexico mark turning points that had to happen due to the previous conditions.

I'm working on an article about points of this, just will let you see one of the base graphs.

http://img253.imageshack.us/img253/4212/cpimxicoga4.jpg

nice. usa is looking 1983... shit didn't really hit the fan for mexico until 5 yrs after the first phase. take time, these processes do.

ocelotl
09-03-08, 08:09 PM
nice. usa is looking 1983... shit didn't really hit the fan for mexico until 5 yrs after the first phase. take time, these processes do.

Have you noted the main corner points on my graphs?

- Jan 1973. Beginning of the oil crisis
- June 1976. Devaluation from 12.50 to 22 MXP to the USD
- Jan 1982. Begining of the External debt crisis due to lack of reserves, also North-South conference in Cancun
- September 1982. Nationalization of Banks.
- September 1985. 8.1 Earthquake dismantled communications and disrupted economic activity in south central Mexico.
- February 1988. Beginning of the PECE results
- December 1994. Internal debt crisis due to lack of reserves.
- June 1995. Effect of the bailout on the mexican peso.

Also had to make the INPC graph logarithmic, due to 4 decimal points shift between 1950´s and 2000's.

GeraldRiggs
09-04-08, 06:16 AM
@metalman

thanks for the reminder of that post on the "peso problem"

if this thing comes true and it looks preety good right now, how will the US devalue the currency and won't that make pm's go up in value instantly?

metalman
09-14-08, 08:59 PM
@metalman

thanks for the reminder of that post on the "peso problem"

if this thing comes true and it looks preety good right now, how will the US devalue the currency and won't that make pm's go up in value instantly?

looks that way!!!

http://i36.tinypic.com/2hhd5a8.gif

FRED
10-31-08, 05:51 PM
TIPS toppled! No wonder the Treasury was discouraging us from buying TIPS back in early September. A perfect time to buy.


http://www.itulip.com/images/TIPS2002-2008.gif

goadam1
10-31-08, 09:50 PM
So, is either tips or vipsx a viable inflation hedge?

Andreuccio
11-01-08, 02:31 AM
TIPS toppled! No wonder the Treasury was discouraging us from buying TIPS back in early September. A perfect time to buy.



I don't get it. As I said on another thread, I owned a mutual fund which is invested in 80% tips: FINPX, fidelity inflation-protected bonds. In early September it was trading at about $11.30. I sold Mid-October at about $10.40. It closed today at $9.94.

There's a chart here:

http://finance.yahoo.com/echarts?s=FINPX#symbol=FINPX;range=3m

Here's the first couple of sentences of the Overview on their webpage:


Primarily invests at least 80% of its assets in inflation-protected debt securities of all types and maturities, primarily U.S. dollar-denominated issues with a current focus on U.S. Treasury inflation-protected securities. Investments may also include inflation-protected debt of U.S. Government agencies and instrumentalities and of other entities, such as corporations and foreign governments, as well as non-inflation-protected debt and related instruments.

Granted, it's not exactly like investing in TIPS, but it should be pretty close, shouldn't it?

How was early September the perfect time to buy?

jk
11-01-08, 01:57 PM
How was early September the perfect time to buy?
it wasn't. it was the perfect time to sell. fred just got a little mixed up- happens to all of us once in a while. [there's another thread - '4,3,2,1..deflation' - in which this is dissected]

otoh- we have the question: is NOW is the perfect to buy?

Finster
11-01-08, 04:07 PM
it wasn't. it was the perfect time to sell. fred just got a little mixed up- happens to all of us once in a while. [there's another thread - '4,3,2,1..deflation' - in which this is dissected]

otoh- we have the question: is NOW is the perfect to buy?

If you are generally a fan of TIPS and have been looking for a good time to buy, maybe this is it. They're down, at least! And PIMCO thinks they're a bargain.

Note the if's of course. TIPS. I do not like them, Sam I Am. Just for starters, they're marketed as "Inflation Protected" - but they are not. They're indexed to the CPI, which is not the same thing as inflation. EJ discusses this above. For another thing, like other investments, it is nominal returns that are taxed, not real returns, which means you can easily wind up with a negative after tax return, hardly befitting an ostensibly inflation-protected investment.

Suppose, for example, inflation (and the CPI, by some chance) runs 5%. You earn 7% nominal return, about 2% real. If you pay tax at 30%, it's 2.1% of your investment, leaving you with a nominal after tax return of 4.9%. But since inflation was 5%, that means your actual return was -0.1%.

Looked at another way, your real tax rate was in excess of 100%.

Or another, since you trailed inflation, you were not "inflation protected"!

Contemptuous
11-01-08, 04:30 PM
JK - Was not clarified in that thread whether the only thing worth noting about the TIPS was their premium changes re.long bonds, rather than noting that their yield has netted out (via premium shrinkage to long bonds) quite efficiently after several months to reflect a higher inflation perception. So when TIPS yields change via this repricing, and the direction of those changes is described here being merely a "premium shift" relative to long bonds, that might inadvertently give the impression that TIPS are not talking straight to the changing interest rate environment themselves. If they have come through this past year's market transition to produce a higher yield via repricing themselves then regardless of the finer points of "relativity shifts" and the like, indicating temporary deflation fears, it seems their primary evolution has been a quite coherent response to the same rising rates environment which 30 year mortgages are responding to. That was my understanding of Fred's reference. That TIPS yields and 30 year mortgage rates have each wound up repricing inflation quite coherently to each other.


it wasn't. it was the perfect time to sell. fred just got a little mixed up- happens to all of us once in a while. [there's another thread - '4,3,2,1..deflation' - in which this is dissected]

otoh- we have the question: is NOW is the perfect to buy?

EJ
11-03-08, 09:33 AM
If you are generally a fan of TIPS and have been looking for a good time to buy, maybe this is it. They're down, at least! And PIMCO thinks they're a bargain.

Note the if's of course. TIPS. I do not like them, Sam I Am. Just for starters, they're marketed as "Inflation Protected" - but they are not. They're indexed to the CPI, which is not the same thing as inflation. EJ discusses this above. For another thing, like other investments, it is nominal returns that are taxed, not real returns, which means you can easily wind up with a negative after tax return, hardly befitting an ostensibly inflation-protected investment.

Suppose, for example, inflation (and the CPI, by some chance) runs 5%. You earn 7% nominal return, about 2% real. If you pay tax at 30%, it's 2.1% of your investment, leaving you with a nominal after tax return of 4.9%. But since inflation was 5%, that means your actual return was -0.1%.

Looked at another way, your real tax rate was in excess of 100%.

Or another, since you trailed inflation, you were not "inflation protected"!

Finster,

Regarding the recent spike in TIPS yields, the conclusion that the huge negative increase in the spread between TIPS and bonds yields is due to a rise in deflation expectations makes sense when the two are in equilibrium via arbitrage but clearly today they are not. Some as-yet unknown factor that is distorting TIPS prices.


http://www.itulip.com/images/10yrtipsvsbond2003-2008.gif


A research paper by the St. Louis Fed The Information Content of Treasury Inflation-Indexed Securities (http://research.stlouisfed.org/publications/review/00/11/0011we.pd) in a section titled "Distortions in TIIS Yields and TIIS-Based Indicators" is relevant.
There are several likely differences between the level of TIIS yields and hypothetical ex ante real interest rates that complicate their use as financial indicators. The first two factors cited below should increase TIIS yields relative to the hypothetical default riskfree ex ante real interest rate, while the third and fourth factors can work in either direction, depending on the particular circumstances.

Imperfect indexation

TIIS expose investors to at least three forms of basis risk (that is, the possibility that the financial instrument is an imperfect hedge against the risk the investor faces).

First, TIIS payoffs are pegged to the consumer price index, which is not a good proxy for the price level relevant to all investors (for example, a foreign investor).

Second, the method of calculating the CPI in the future can be altered to the detriment of a TIIS investor. Third, there is a two-month lag between the public announcement of the CPI and the corresponding adjustment in the face value of TIIS (note: the lag is eight months in the United Kingdom). Thus, a TIIS investor is unprotected against inflation risk during the last two months of the security’s life. All three forms of basis risk should cause TIIS yields to be higher than the hypothetical real interest rate, although reliable estimates of these yield premiums are not available.

Other risk and liquidity premiums. As noted above, the off-the-run illiquidity premium in TIIS is likely to be in the range of 5 to 20 basis points. The bid-ask spread in TIIS is likely to add up to another 5 basis points to a trader’s costs (Dupont and Sack, 1999). Evans (1998) identifies a statistically significant and time-varying risk premium unique to British index-linked yields (versus conventional bonds) over the period 1983-95 that averaged about 1.5 basis points. This risk premium is independent of any tax or basis-risk effects; it is essentially the price investors demand for giving up some desirable features of nominal government bonds such as high payoffs under deflation and smaller capital losses when real interest rates rise.

Note that the oft-discussed inflation-risk premium is a component of the nominal yield, not the TIIS yield. Empirical estimates of this premium in the United States and the United Kingdom range from zero to 150 basis points. Evidence from Britain (Evans, 1998) strongly rejects the hypothesis that this risk premium is zero, and the evidence also suggests that it is time-varying. Given the low and stable survey expectations of long-term U.S. inflation from today forward, it is plausible that the inflation-risk premium contained in current nominal Treasury yields is at the lower end of the estimated range.

Tax considerations. Normal increases in the face value of TIIS principal due to inflation indexation are taxable gains to investors, as described above. Hence, required yields should increase on TIIS whenever expected inflation rises and vice versa (Kopcke and Kimball, 1999). This creates a positive correlation between TIIS yields and expected inflation—contrary to the intuition of the Fisher equation, which postulates a zero correlation between the ex ante real rate and expected inflation. A positive correlation biases the spread between nominal and indexed securities—a measure of the inflation premium investors demand—toward zero, reducing its informativeness. This distortion is worse when inflation expectations are changing. It is probably very low now because survey measures of long-term inflation expectations are relatively stable. For example, the 10-year inflation forecast from the Survey of Professional Forecasters has remained in the 2.2 to 2.6 percent range for more than two years.
It will not be known until after the fact but we suspect that several of these factors are contributing to the current spread, but perhaps especially differences in the relative liquidity of TIPS versus bonds, given today's unusual circumstances. Comments on the site of the Cleveland Fed support this idea.
TIPS Expected Inflation Estimates (http://www.clevelandfed.org/research/data/tips/index.cfm)

October 31, 2008

We have discontinued the liquidity-adjusted TIPS expected inflation estimates for the time being. The adjustment was designed for more normal liquidity premiums. We believe that the extreme rush to liquidity is affecting the accuracy of the estimates.

Finster
11-03-08, 03:55 PM
Finster,

Regarding the recent spike in TIPS yields, the conclusion that the huge negative increase in the spread between TIPS and bonds yields is due to a rise in deflation expectations makes sense when the two are in equilibrium via arbitrage but clearly today they are not. Some as-yet unknown factor that is distorting TIPS prices...

A research paper by the St. Louis Fed...

EJ, the Fed paper supports what I've been saying:


Note the if's of course. TIPS. I do not like them, Sam I Am. Just for starters, they're marketed as "Inflation Protected" - but they are not. They're indexed to the CPI, which is not the same thing as inflation. EJ discusses this above...


TIIS payoffs are pegged to the consumer price index, which is not a good proxy for the price level relevant to all investors ... the method of calculating the CPI in the future can be altered to the detriment of a TIIS investor...




For another thing, like other investments, it is nominal returns that are taxed, not real returns, which means you can easily wind up with a negative after tax return, hardly befitting an ostensibly inflation-protected investment...


Tax considerations. Normal increases in the face value of TIIS principal due to inflation indexation are taxable gains to investors, as described above....




The CPI (along with most other government data) are lagging indicators … deflationary-looking CPI readings for a while thereafter will at least partially reflect deflation that has already happened, not necessarily actual future deflation.


Third, there is a two-month lag between the public announcement of the CPI and the corresponding adjustment in the face value of TIIS...