Could I-bonds really return >10% in hyperinflation scenarios

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Could I-bonds really return >10% in hyperinflation scenarios

Postby Day9 » Thu Mar 21, 2013 11:22 pm

If inflation gets as high as 7%-10%+ like it did in the 1970s and 1910s will I-bonds bought from treasurydirect seriously yield that much too? It sounds unbelievable. Would TIPS be a better investment in that kind of scenario?

Thanks.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby Khanmots » Fri Mar 22, 2013 12:17 am

Why do you feel that the government would honor TIPs and not I Bonds?
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby bogleblitz » Fri Mar 22, 2013 12:20 am

That's a very good question. Nobody knows because both TIPS and I-bonds have not met those hyper inflated scenarios yet.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby Mel Lindauer » Fri Mar 22, 2013 12:48 am

Day9 wrote:If inflation gets as high as 7%-10%+ like it did in the 1970s and 1910s will I-bonds bought from treasurydirect seriously yield that much too? It sounds unbelievable. Would TIPS be a better investment in that kind of scenario?

Thanks.


Yes, that's the deal; you get the fixed rate PLUS the reported inflation adjustment.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby LH » Fri Mar 22, 2013 12:57 am

Unless they change from the CPI-u, which is allowed under current law I believe the order sec of treasury for TIPS(uncertain about ibonds), I would very reasonably expect ibonds and TIPS to pay out the cpi-u.

(there are other indexes that exist that increase less than cpi-u, like "chained cpi" google it for further info if desired. )

So if by "inflation" you mean the cpi-u, then yes, I would think they would very likely pay out 10 percent if thats what the cpi-u was calculated to be.

But no, its not been tested yet : )
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby happymob » Fri Mar 22, 2013 5:20 am

Consider taxes. I Bonds certainly aren't going to yield 10% after tax in a 10% inflation scenario (absent tax-free education benefit). Same with 0% TIPS held in a taxable account. In a Roth IRA, a 0% TIP would yield exactly the rate of inflation (absent default).
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby Call_Me_Op » Fri Mar 22, 2013 6:43 am

Not sure why there is a question on this. The Treasury spells-out the way I-Bonds work explicitly. If inflation were 10%, why wouldn't I-Bonds return 10+ %? Are you really asking about default?
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby Keep It Simple » Fri Mar 22, 2013 6:49 am

an even better question is:

Why would getting 10% be exciting under the above circumstances?

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Re: Could I-bonds really return >10% in hyperinflation scena

Postby Call_Me_Op » Fri Mar 22, 2013 6:57 am

Keep It Simple wrote:an even better question is:

Why would getting 10% be exciting under the above circumstances?

K.I.S


Indeed. 0% real is hard to get excited about.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby #Cruncher » Fri Mar 22, 2013 8:21 am

happymob wrote:Consider taxes. I Bonds certainly aren't going to yield 10% after tax in a 10% inflation scenario (absent tax-free education benefit). Same with 0% TIPS held in a taxable account.
The tax deferral feature of I Bonds makes them better than TIPS. Assuming a 25% tax rate and a constant 10% increase in the CPI, over 30 years 0% I Bonds would return about 9.0% annually after taxes, while 0% TIPS would return only 7.5% after taxes.

For example, a $1,000 I Bond would grow to $17,449 in 30 years (1000 X 1.1 ^ 30). Taxes would be $4,112 (16449 X 25%). The value after taxes would be $13,337 (17449 - 4112). This is equivalent to an average annual return of approximately 9.0% (1000 X 1.09 ^ 30). On the other hand in 30 years $1,000 of 0% TIPS would be worth only about $8,750 after taxes (1000 X 1.075 ^ 30).
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby staythecourse » Fri Mar 22, 2013 10:16 am

This thread is a classic fallacy of investors of focusing on NOMINAL returns vs. REAL returns.

I can't tell you how many folks I have seen on this site wishing of interest rates back to the gold old days of 1970's. Well the answer it is the same low REAL rates as one had in the hyperinflation days of 1970's and slow economy of the last several years.

What do people expect from cash?? If you are expecting cash to produce high real rates one does not understand basics of pricing of assets.

Good luck.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby dickenjb » Fri Mar 22, 2013 10:30 am

I would hardly call 10% inflation hyperinflation.

If we ever do get hyperinflation, I bonds will be a super deal.

I hope we never have that experience.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby Angst » Fri Mar 22, 2013 10:34 am

I don't think 1970's inflation should be considered as anything close to "hyper-inflation".
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby zaboomafoozarg » Fri Mar 22, 2013 12:38 pm

Call_Me_Op wrote:
Keep It Simple wrote:an even better question is:

Why would getting 10% be exciting under the above circumstances?

K.I.S


Indeed. 0% real is hard to get excited about.


Though it is preferable to -10% real.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby Alex Frakt » Fri Mar 22, 2013 1:35 pm

Day9 wrote:If inflation gets as high as 7%-10%+ like it did in the 1970s and 1910s will I-bonds bought from treasurydirect seriously yield that much too? It sounds unbelievable.

So your question is basically, "Will the Treasury default on I-bonds if inflation goes over 7%?" The answer is that there is absolutely no evidence to suggest they would default and an entire mountain of evidence to suggest they would not. Anyone who tells you otherwise is either trying to sell you something or has ideological beliefs that are strong enough to have blinded them to reality.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby William4u » Fri Mar 22, 2013 1:46 pm

dickenjb wrote:I would hardly call 10% inflation hyperinflation.

If we ever do get hyperinflation, I bonds will be a super deal.

I hope we never have that experience.


Phillip Cagan, in The Monetary Dynamics of Hyperinflation, defined hyperinflation as a monthly inflation rate exceeding 50%. 10% per year is hardly hyperinflation.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby Epsilon Delta » Fri Mar 22, 2013 1:50 pm

happymob wrote:Consider taxes. I Bonds certainly aren't going to yield 10% after tax in a 10% inflation scenario (absent tax-free education benefit). Same with 0% TIPS held in a taxable account. In a Roth IRA, a 0% TIP would yield exactly the rate of inflation (absent default).

Actually the tax deferred feature of I bonds means they behave asymptotically at high inflation rates. Compare this to TIPs in taxable which don't. So I bonds would in theory protect you against hyperinflation for a small (fixed) premium. Of course if we get 50% inflation for 20 years theory isn't going to help.

Asuming a 20% tax rate and 20 years of constant inflation:
Code: Select all
inflation   real         ibonds          tips   
            value        value ratio    value  ratio
   0%       $1,000       $1,000 100%    $1,000  100%
   5%       $2,653       $2,322  88%    $2,191   83%
  10%       $6,727       $5,582  83%    $4,660   69%
  15%      $16,367      $13,293  81%    $9,646   59%
  20%      $38,338      $30,870  81%   $19,460   51%
  25%      $86,736      $69,588  80%   $38,337   44%
  30%     $190,050     $152,239  80%   $73,864   39%
  35%     $404,274     $323,618  80%  $139,379   34%
  40%     $836,683     $669,546  80%  $257,916   31%
  45%   $1,687,952   $1,350,561  80%  $468,573   28%
  50%   $3,325,257   $2,660,405  80%  $836,682   25%
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby Day9 » Fri Mar 22, 2013 2:22 pm

Thanks all for the replies. While I don't think treasurydirect would default, I am worried they might use a lowball metric and I-bonds will yield way less than what my family experiences in inflation.

Can anyone speak to this worry of mine?

Thanks guys you are all great :sharebeer
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby Mel Lindauer » Fri Mar 22, 2013 2:28 pm

Another thing that hasn't been mentioned is DEflation, which could actually INCREASE one's REAL return. That's because the composite rate on I Bonds (fixed rate plus inflation) can never go below 0%. So the greater the DEflation, the greater the real return on I Bonds.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby Alex Frakt » Fri Mar 22, 2013 2:55 pm

Day9 wrote:Thanks all for the replies. While I don't think treasurydirect would default, I am worried they might use a lowball metric and I-bonds will yield way less than what my family experiences in inflation.

Can anyone speak to this worry of mine?

It's been covered here dozens of times. Try searching CPI-U understate. I like this one viewtopic.php?t=68396

But the short answer is that the metric is set by law and the components and prices are publicly published. You can assume that any attempt to game the prices would be quickly uncovered and any attempt to change it would meet with considerable resistance in both the court of public opinion and the actual courts.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby LH » Fri Mar 22, 2013 3:26 pm

Alex Frakt wrote:
Day9 wrote:Thanks all for the replies. While I don't think treasurydirect would default, I am worried they might use a lowball metric and I-bonds will yield way less than what my family experiences in inflation.

Can anyone speak to this worry of mine?

It's been covered here dozens of times. Try searching CPI-U understate. I like this one viewtopic.php?t=68396

But the short answer is that the metric is set by law and the components and prices are publicly published. You can assume that any attempt to game the prices would be quickly uncovered and any attempt to change it would meet with considerable resistance in both the court of public opinion and the actual courts.


Well since Alex brought "resistance in both the court of public opinion and the actual courts" up, you can actually read about a close parallel to this issue by googling "chained cpi" in regards to SS, or just watching current events unfold on this and on other issues. Or reading history like 1933 event that private US gold holders or "hoarders" as per 1933 US law, experienced financially. There are varying degrees of "resistance" that are possible and some are not successful, some are.

You are right to have concerns.

When these things hit, very few likely have concerns beforehand. Its almost unbelievable to the people who experience it I would posit. Imagine someone saying in 1929 that gold would be confiscated at 2/3rds or so of its value within 5years, in the "modern" US of its time, with all the "modern" knowledge they had. Or that stocks would fall what, 90 percent. No way that would happen. They would likely laugh themselves silly at the statements.

Financial history is great. Go back and read the proclamations at that time, nice and authoritative. The thing about "modern" is too, is that its always "modern" in the current time, then 20-50 years later, what was authoritative thought at the "modern" time, ex post, turns out to be authoritatively considered near moronic, and exactly the wrong thing to do.

Humans.

What I really find in common, is the more there is simple ad hominem attack instead of to the point reasoning, the more there is to worry about possibly oftentimes.

I always wonder about the historical question that if one polled about SS being able to pay out as promised in 1950, 1960.1970 etc. what would be the answer? Possibly overwhelmingly, would be that SS was good as gold, or better than gold even, being backed by a "modern" US government ( with a printing press, etc), at first, especially when law was first passed. Somewhere, its gotten to 67 payout projection now though by government SS sheet. When I was paying in first I think in 1986 as a pizza delivery boy, and discussed FICA in that OMFG whats FICA way, my coworker said, dont worry, you will get all that back in retirement.

: P

Say Argentina 2001, people had deposits in banks in dollars. Well, the government force-ably changed them to pesos, then devalued the pesos. Those people thought they were safe almost certainly.

Its kinda like the IMF 2007 report about the economy before the crash, smoooooth sailing ahead in regards to all these issues : )

The US is no longer top rated anymore in credit worthiness, for good reason.

I think you have valid concerns.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby Alex Frakt » Fri Mar 22, 2013 4:11 pm

LH wrote:
Alex Frakt wrote:
Day9 wrote:Thanks all for the replies. While I don't think treasurydirect would default, I am worried they might use a lowball metric and I-bonds will yield way less than what my family experiences in inflation.

Can anyone speak to this worry of mine?

It's been covered here dozens of times. Try searching CPI-U understate. I like this one viewtopic.php?t=68396

But the short answer is that the metric is set by law and the components and prices are publicly published. You can assume that any attempt to game the prices would be quickly uncovered and any attempt to change it would meet with considerable resistance in both the court of public opinion and the actual courts.


Well since Alex brought "resistance in both the court of public opinion and the actual courts" up, you can actually read about a close parallel to this issue by goggling "chained cpi" in regards to SS, or just watching current events unfold on this an other issues. Or reading history like 1933 event that private US gold holders or "hoarders" as per 1933 US law, experienced financially. There are varying degrees of "resistance" that are possible and some are not successful, some are.

You are right to have concerns.

When these things hit, very few likely have concerns beforehand. Its almost unbelievable to the people who experience it I would posit. Imagine someone saying in 1929 that gold would be confiscated at 2/3rds or so of its value within 5years, in the "modern" US of its time, with all the "modern" knowledge they had. Or that stocks would fall what, 90 percent. No way that would happen. They would likely laugh themselves silly at the statements.

Financial history is great. Go back and read the proclamations at that time, nice and authoritative.

What I really find in common, is the more there is simple ad hominem attack instead of to the point reasoning, the more there is to worry about.

I always wonder about the historical question that if one polled about SS being able to pay out as promised in 1950, 1960.1970 etc. what would be the answer? Possibly overwhelmingly, would be that SS was good as gold, or better than gold even, being backed by a "modern" US government ( with a printing press, etc), at first, especially when law was first passed. Somewhere, its gotten to 67 payout projection now though by government SS sheet.

Say Argentina 2001, people had deposits in banks in dollars. Well, the government force-ably changed them to pesos, then devalued the pesos. Those people thought they were safe almost certainly.

Its kinda like the IMF 2007 report about the economy before the crash, smoooooth sailing ahead in regards to all these issues : )

The US is no longer top rated anymore in credit worthiness, for good reason.

I think you have valid concerns.

I think he doesn't. None of the examples you gave include a default on US debt and we have been through far worse troubles than we currently face. And the chained CPI discussion supports my position that public opposition would scuttle attempts to statutorily game I-bond payments. As soon as the public became aware of the chained CPI proposal and started responding, legislators started to run away from it. The same thing happened with the proposed bank account "tax" (i.e., confiscation) in Cyprus.

Note to the OP. Some people always see economic doomsday around the corner. There were thousands of posts on this forum about imminent hyperinflation as the TARP and auto bailouts were underway in 2008/9. I don't recall any of those posters admitting how completely wrong they were. I do see that several of them still think hyperinflation is coming, they have just shifted their rationale and timeframe.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby LH » Sun Mar 24, 2013 2:50 am

Alex Frakt wrote:
LH wrote:
Alex Frakt wrote:
Day9 wrote:Thanks all for the replies. While I don't think treasurydirect would default, I am worried they might use a lowball metric and I-bonds will yield way less than what my family experiences in inflation.

Can anyone speak to this worry of mine?

It's been covered here dozens of times. Try searching CPI-U understate. I like this one viewtopic.php?t=68396

But the short answer is that the metric is set by law and the components and prices are publicly published. You can assume that any attempt to game the prices would be quickly uncovered and any attempt to change it would meet with considerable resistance in both the court of public opinion and the actual courts.


Well since Alex brought "resistance in both the court of public opinion and the actual courts" up, you can actually read about a close parallel to this issue by goggling "chained cpi" in regards to SS, or just watching current events unfold on this an other issues. Or reading history like 1933 event that private US gold holders or "hoarders" as per 1933 US law, experienced financially. There are varying degrees of "resistance" that are possible and some are not successful, some are.

You are right to have concerns.

When these things hit, very few likely have concerns beforehand. Its almost unbelievable to the people who experience it I would posit. Imagine someone saying in 1929 that gold would be confiscated at 2/3rds or so of its value within 5years, in the "modern" US of its time, with all the "modern" knowledge they had. Or that stocks would fall what, 90 percent. No way that would happen. They would likely laugh themselves silly at the statements.

Financial history is great. Go back and read the proclamations at that time, nice and authoritative.

What I really find in common, is the more there is simple ad hominem attack instead of to the point reasoning, the more there is to worry about.

I always wonder about the historical question that if one polled about SS being able to pay out as promised in 1950, 1960.1970 etc. what would be the answer? Possibly overwhelmingly, would be that SS was good as gold, or better than gold even, being backed by a "modern" US government ( with a printing press, etc), at first, especially when law was first passed. Somewhere, its gotten to 67 payout projection now though by government SS sheet.

Say Argentina 2001, people had deposits in banks in dollars. Well, the government force-ably changed them to pesos, then devalued the pesos. Those people thought they were safe almost certainly.

Its kinda like the IMF 2007 report about the economy before the crash, smoooooth sailing ahead in regards to all these issues : )

The US is no longer top rated anymore in credit worthiness, for good reason.

I think you have valid concerns.

I think he doesn't. None of the examples you gave include a default on US debt and we have been through far worse troubles than we currently face. And the chained CPI discussion supports my position that public opposition would scuttle attempts to statutorily game I-bond payments. As soon as the public became aware of the chained CPI proposal and started responding, legislators started to run away from it. The same thing happened with the proposed bank account "tax" (i.e., confiscation) in Cyprus.

Note to the OP. Some people always see economic doomsday around the corner. There were thousands of posts on this forum about imminent hyperinflation as the TARP and auto bailouts were underway in 2008/9. I don't recall any of those posters admitting how completely wrong they were. I do see that several of them still think hyperinflation is coming, they have just shifted their rationale and timeframe.


Well, just because one country has not defaulted, does not mean it will not, just like housing never falling meaning it will not in the future, but I would disagree about the lack of default.

In terms of "default on US debt" that you bring up specifically, I did mentioned 1933 US gold.

http://www.amazon.com/This-Time-Differe ... +different

Is a great book, a bit boring to read compared to say Eichengreen books, but nonetheless a great book. Hey, Paul Krugman even vouches for it here: http://www.nybooks.com/articles/archive ... tion=false

Great book, more than anything else, if you have a bit of background (to the OP), and can slog through it, its a good read.

anyway, I cant pull the text off my kindle version, but here is a NYT economix blog reference to the historical event:

http://economix.blogs.nytimes.com/2011/ ... t-default/

Then in 1933, in the midst of the Great Depression, the United States had another domestic debt default related to the repayment of gold-based obligations.


The 1933 US gold maneuvers, are in fact considered to be a "debt default" by the US, per Reinhart and Rogoff.

So there it is, but not even the lack of it would mean much going forward in a nation with circa 200years of history. Almost all governments default sooner or later historically, its just a matter of when : )

Its interesting to read about creditors to the Kings of old, good way to lose ones head in debt defaults, er "technical restructurings", er, well, beheading of said creditor. fini. no debt....



In terms of "always see economic doomsday", well, thats not me. My allocation speaks for itself: 81 percent stocks, 16 percent bonds, 3 percent gold, and I am not even at 3 percent gold yet.



I will leave the OP with another doom and gloomer, WSJ Jason Zwieg, who appears to have some misgivings, and even talks about US debt default, he touches upon Reinhart as well in:

"Own Government Bonds? Here's Why You Should Be Worried "

http://online.wsj.com/article/SB1000142 ... inance_PF2 (if this link does not work, google the title above)

He mentions the "the U.S. has flirted with technical default before. In April and May 1979, amid computer malfunctions, heavy demand from small investors and in the wake of Congressional debate over raising the debt ceiling, the U.S. failed to make timely payments on some $122 million in Treasury bills. " The bondholders sued, (presumably incurring costs/loss even with back interest due to lawyers etc. fees, unless those fees were covered too along with back interest?, dunno), before they were finally paid with back interest.

Now, primarily in the end, he focuses more on repression, which is spot on, but... he undoubtedly has at least some concerns about default, he is not mentioning default randomly.

So we agree to disagree : )

My position is take heed, keep your eyes open, consider the issue.

Was not too long ago, what 5 years, they were saying US ATMS might not dispense cash on the local news. hmmmm.

Hopefully we turned the corner, that is what I think is most likely, (for what its worth, nothing : )) but its the downside, that one has to consider, more or less, depending on where you are in your lifecycle/earnings ability.

Reading history, just the past 100 years US even, I have little faith in anyones prognostication, and when things go bad, they go bad quickly and unexpectedly.

I enjoy the conversation and my thanks for all you do on this great discussion board,

LH
Last edited by LH on Sun Mar 24, 2013 3:46 am, edited 1 time in total.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby nedsaid » Sun Mar 24, 2013 3:09 am

The United States has its debts in its own currency. It can always issue new currency to service its debts. It isn't a solvency issue but an issue of possible increased inflation.

Individual countries in the Euro don't have the luxury that we have. In the past, a country like Italy could print and inflate itself out of its debt problems. Now that it doesn't have its own currency, Italy really is constrained by the revenue it can raise through taxes and has to be concerned about the interest rates on its debt. Nations like the United States, the U.K., and Japan don't have that issue. If you have your own currency, you don't have revenue constraints but excessive money printing runs the risk of devalueing your currency over time. So there is no free lunch.

So don't lose any sleep over the Government not being able to meet its debt obligations. The thing to be concerned about is the loss of purchasing power of your money.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby Epsilon Delta » Sun Mar 24, 2013 1:50 pm

nedsaid wrote:The United States has its debts in its own currency. It can always issue new currency to service its debts. It isn't a solvency issue but an issue of possible increased inflation.

You can always print your way out of a nominal debt problem. I'm not so sure you can always print your way out of an inflation indexed debt problem. If printing money increases inflation then you need to print yet more money, etc. There is no guarantee the series converges.

To put it another way: The US can always print nominal dollars, but it cannot print real dollars.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby nedsaid » Fri Apr 05, 2013 11:37 pm

You raise a great point about inflation indexed bonds. The Fed can purchase and hold these just like they purchase and hold nominal bonds. The profits from the interest payments and appreciation wind their way back to the Treasury. So inflation indexed bonds are not as big of an obstacle as you think.

If the government needs to print money, they can be amazingly creative in how they do it. They did it during WWII even though we were on the Gold Standard. The purchasing power of a dollar was cut about it half from the immediate pre-war period to right after the war.
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby DiscoBunny1979 » Sat Apr 06, 2013 12:11 am

It's my opinion that instead of the Government trying to decide whether they will honor current debt, the Fed may turn around and just stop issuing I-Bonds and leave EE Bonds as the only savings bonds offered (with an increased maturity to 25 years).
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Re: Could I-bonds really return >10% in hyperinflation scena

Postby Clive » Sat Apr 06, 2013 9:37 am

The UK have provided inflation bonds (index linked gilts) since the early 1980's. ILG's are similar (but different) to US TIPS (one difference is the UK's inflationary uplift element isn't taxable). In 1990 inflation rose to around 10% levels and according to the Barclays Equity Gilt Study index linked gilts yielded 13.8% money yield, 4% real yield.

Image

I see no reason why if the government honour one (TIPS) why they might not honour another (iBonds).

The UK have pulled issues of more recent iBond equivalents. I suspect that if a real SHTF situation arose that they'd continue to honour the inflation bonds, but perhaps adjust taxes/rules in some kind of punitive manner rather than 'default'. Maybe taxing the inflationary uplift element for example. 98% (hyper-)inflation real return bonds paying 100% perhaps, less 30% tax = -28% net real.
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