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vb
Joined: 18 Feb 2008
Posts: 113
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 Posted: Tue Mar 18, 2008 9:32 am Post subject: How does one protect against deflation? |
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| Is having money in a bank account enough? |
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preserve
Joined: 15 Mar 2007
Posts: 560
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| Posted: Tue Mar 18, 2008 9:45 am Post subject: |
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| I-bonds are good also. The government guarantees you will never have a negative return. |
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ken250
Joined: 26 Feb 2007
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| Posted: Tue Mar 18, 2008 9:45 am Post subject: |
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| high quality bonds |
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mas
Joined: 20 Feb 2007
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| Posted: Tue Mar 18, 2008 9:45 am Post subject: Re: How does one protect against deflation? |
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| vb wrote: | | Is having money in a bank account enough? |
Cash certainly helps.
Rid yourself of debt, since future payments would be more expensive.
Buy long term nominal treasury bonds. |
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stratton
Joined: 04 Mar 2007
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| Posted: Tue Mar 18, 2008 9:48 am Post subject: |
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When we start talking deflation I'm almost tempted to sell the TIPS I have with accumulated inflation payments and move to a TIPS fund. During deflation you can lose money from the accumulated inflation portion of TIPS.
Someone correct me if I'm wrong on this.
Paul |
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Drain
Joined: 26 Feb 2007
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Location: Silver Spring, MD
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| Posted: Tue Mar 18, 2008 9:56 am Post subject: |
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What do you mean by protecting against deflation? Do you have a stock-heavy portfolio with lots of unrealized capital gains? How much deflation do you want to protect against? If you're worried about the stocks you own that might drop steeply, none of the suggestions you've gotten so far are necessarily going to help--it depends on your needs. (Do you need to take income from your investments?) You've got to be more specific.
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Darin
Last edited by Drain on Tue Mar 18, 2008 10:25 am; edited 3 times in total |
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mas
Joined: 20 Feb 2007
Posts: 1265
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| Posted: Tue Mar 18, 2008 9:56 am Post subject: |
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| stratton wrote: | When we start talking deflation I'm almost tempted to sell the TIPS I have with accumulated inflation payments and move to a TIPS fund. During deflation you can lose money from the accumulated inflation portion of TIPS.
Someone correct me if I'm wrong on this.
Paul |
Doesn't a TIPs fund just own TIPs bonds with their own accumulated inflation payments? Maybe this strategy would work if you rolled over to newly issued TIPs bonds instead. |
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stratton
Joined: 04 Mar 2007
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Location: Puget Sound
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| Posted: Tue Mar 18, 2008 10:19 am Post subject: |
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| mas wrote: | | stratton wrote: | When we start talking deflation I'm almost tempted to sell the TIPS I have with accumulated inflation payments and move to a TIPS fund. During deflation you can lose money from the accumulated inflation portion of TIPS.
Someone correct me if I'm wrong on this.
Paul |
Doesn't a TIPs fund just own TIPs bonds with their own accumulated inflation payments? Maybe this strategy would work if you rolled over to newly issued TIPs bonds instead. |
TIPS funds pay out the inflation portion of the TIPs too as part of the yield, but how do they implement it? If we do go deflationary do the contents in the TIPS bond fund get eaten away?
Paul |
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mas
Joined: 20 Feb 2007
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| Posted: Tue Mar 18, 2008 10:28 am Post subject: |
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| stratton wrote: | | TIPS funds pay out the inflation portion of the TIPs too as part of the yield, but how do they implement it? If we do go deflationary do the contents in the TIPS bond fund get eaten away? |
My best guess is that they have to sell some assets in order to distribute the inflation adjustment. Otherwise where would it come from? The treasury doesn't issue special TIPs just for funds to buy. |
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stratton
Joined: 04 Mar 2007
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Location: Puget Sound
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| Posted: Tue Mar 18, 2008 10:39 am Post subject: |
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| mas wrote: | | stratton wrote: | | TIPS funds pay out the inflation portion of the TIPs too as part of the yield, but how do they implement it? If we do go deflationary do the contents in the TIPS bond fund get eaten away? |
My best guess is that they have to sell some assets in order to distribute the inflation adjustment. Otherwise where would it come from? The treasury doesn't issue special TIPs just for funds to buy. |
I'll guess they may sell more than you think. They may roll forward to newer ones to keep the inflation portion from accumulating too much.
Paul |
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vb
Joined: 18 Feb 2008
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| Posted: Tue Mar 18, 2008 10:56 am Post subject: |
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| Drain wrote: | | What do you mean by protecting against deflation? Do you have a stock-heavy portfolio with lots of unrealized capital gains? How much deflation do you want to protect against? If you're worried about the stocks you own that might drop steeply, none of the suggestions you've gotten so far are necessarily going to help--it depends on your needs. (Do you need to take income from your investments?) You've got to be more specific. |
I do have a stock-heavy portfolio, but that portion is only in my retirement accounts (401k, Roth IRA). Since I'm regularly contributing to these, I don't expect to touch any of them, even in times of deflation. Having a 30-year investment horizon also helps.
I'm more concerned with preversing my after-tax investments (namely, short and mid-term savings). I've already bought a lot of I-Bonds (which was suggested). I still have left over cash in an online savings account and some CD's. These are the only places that I have after-tax monies. At first it was all being saved for a house (been priced out for last 5 years), but it's really for a combination of early retirement, job loss, or home... whichever comes first.
Aside from my own situation, I was more interested in seeing others' suggestions on the best ways to guard against deflation. |
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Drain
Joined: 26 Feb 2007
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Location: Silver Spring, MD
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| Posted: Tue Mar 18, 2008 11:31 am Post subject: |
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| vb wrote: | | I'm more concerned with preversing my after-tax investments (namely, short and mid-term savings). I've already bought a lot of I-Bonds (which was suggested). I still have left over cash in an online savings account and some CD's. These are the only places that I have after-tax monies. At first it was all being saved for a house (been priced out for last 5 years), but it's really for a combination of early retirement, job loss, or home... whichever comes first. |
So the savings you're talking about is mostly in fixed income already. In that case, it sounds like you're fine and you don't need to do anything. If you wanted to be ready for deflation and not care at all about the yield you're getting, I suppose you could convert as much as you could to LT Treasurys, but I doubt that's what you have in mind. Between bank accounts and I-bonds and such, I don't see a problem.
If you're really worried about bank assets, put everything in Treasurys (including I-bonds).
| Quote: | | Aside from my own situation, I was more interested in seeing others' suggestions on the best ways to guard against deflation. |
Personally, I use Prudent Bear (BEARX) to hedge my equity exposure. It's a good solution if you want to protect against a stock-market disaster (e.g., a depression) but don't care too much one way or the other about minor bear markets. The fund is expensive, but it's well managed and you're talking about a temporary measure, so the unpleasantness of the ER is outweighed (IMO) by the intense diversification. Note that this kind of hedge comes in handy if you're worried about stock prices but you don't want to sell your holdings due to unrealized gains.
If you are more concerned than I am about ordinary bear markets, you are pretty much stuck with lowering your stock exposure more directly, either via sales or by hedging with shorts (perhaps in an ETF so as to save on short interest).
The trouble with just plain lowering your stock exposure is that it increases your inflation risk. You can't protect against everything--you have to prioritize and live with whichever risks you deem not important enough to hedge against.
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ken250
Joined: 26 Feb 2007
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| Posted: Tue Mar 18, 2008 12:02 pm Post subject: |
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| Again, high quality bonds (not IPS) are the best defense against deflation. |
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tfb
Joined: 19 Feb 2007
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| Posted: Tue Mar 18, 2008 1:14 pm Post subject: |
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You are worried about deflation now? It's not happening.
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Drain
Joined: 26 Feb 2007
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Location: Silver Spring, MD
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| Posted: Tue Mar 18, 2008 1:27 pm Post subject: |
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| ken250 wrote: | | Again, high quality bonds (not IPS) are the best defense against deflation. |
Not if you're trying to diversify away from stocks. Bonds aren't volatile enough.
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Darin |
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allenmickers
Joined: 11 Feb 2008
Posts: 427
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| Posted: Tue Mar 18, 2008 1:32 pm Post subject: |
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I thought if you were like most people and owed a lot of money and saved very little then inflation was good for them.
And if your like most of us with little to no debt and save a lot of money then deflation would be good for us. All my saved money is now worth more. Whats wrong with that? Interest rates will be lowered, but they cant go below zero (or I would take them out of the bank) and my cash can increase in value just sitting there doing nothing. Problem? |
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ken250
Joined: 26 Feb 2007
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Location: US-101
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| Posted: Tue Mar 18, 2008 1:42 pm Post subject: |
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I somewhat agree with tfb. I think the Fed has experience and tools to use against inflation, whereas deflation is something of a "novelty". IOW, the odds of inflation vs deflation favors inflation.
Drain...not sure what you mean by "Bonds aren't volatile enough." Comments? |
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craigr
Joined: 13 Mar 2007
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| Posted: Tue Mar 18, 2008 1:44 pm Post subject: |
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| Drain wrote: | | ken250 wrote: | | Again, high quality bonds (not IPS) are the best defense against deflation. |
Not if you're trying to diversify away from stocks. Bonds aren't volatile enough. |
US Treasury Long Term bonds are volatile enough and provide good deflation protection.
Now as to whether inflation or deflation is more likely is anyone's guess. Japan has the same knowledge and tools available as the US but has been in a serious deflationary funk for almost 20 years. Anything can happen in the markets. |
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Drain
Joined: 26 Feb 2007
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Location: Silver Spring, MD
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| Posted: Tue Mar 18, 2008 2:06 pm Post subject: |
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| ken250 wrote: | | Drain...not sure what you mean by "Bonds aren't volatile enough." Comments? |
Bond prices--even for long-term zeroes--don't move enough to hedge a precipitous fall in stock prices. You can prevent huge losses by going 50/50 (stocks/bonds), but if you prefer a higher stock allocation, you need something that will gain more than bonds when stocks lose. Just making up figures here, so don't take them literally...but you could probably get the same downside protection from a 10% allocation to BEARX that you could from a 20% allocation to bonds.
Now, if you have a specific slug of stock that you want to hedge, what you're essentially saying is that you have a 100/0 position you want to hedge. The most efficient way to hedge it is with shorts, not with bonds. You'd need too big a slug in bonds to do the trick. Really, bonds are not the great diversifiers they're made out to be on this forum. They typically dilute more than they diversify. Anyway, one disadvantage of pure shorts is that they increase sensitivity to inflation. BEARX gets around this by including a smattering of long positions in mining stocks. These should also do well in a bad bear market, and they offer some cushion in case of inflation.
As I said, if you're perfectly happy to simply sell part or all of your stock position, then you don't need any of this stuff with shorts. I'm addressing the case in which you have a stock position you don't want to sell, but that you want to hedge, and buying puts isn't practical (e.g., too expensive to keep buying).
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ken250
Joined: 26 Feb 2007
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| Posted: Tue Mar 18, 2008 3:02 pm Post subject: |
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Drain,
Thanks for the excellent explanation.
The defense you outlined makes a lot of sense; however, shorting stocks would be too edgy for me.
(My bond allocation not including TIPS is at 20% of my portfolio, I'm in the process of whittling that down to 15%. I, like you, don't fully buy into the benefits of large bond allocations. This bond allocation is mainly for flat markets, but it may help in case of deflation. All these bonds are IG or better, to minimize default risk during deflationary or inflationary periods. For inflation I use TIPS and REITs.)
So, I'll revise my previous claim...High quality bonds are one way to defend against deflation. |
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stratton
Joined: 04 Mar 2007
Posts: 8172
Location: Puget Sound
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| Posted: Tue Mar 18, 2008 3:09 pm Post subject: |
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| craigr wrote: | | Now as to whether inflation or deflation is more likely is anyone's guess. Japan has the same knowledge and tools available as the US but has been in a serious deflationary funk for almost 20 years. Anything can happen in the markets. |
The WSJ had an article comparing our current situation to Japan's problems. The major difference the Japanese let over priced real estate site on the books with marking to market until 2002. At that point the Japaense equivalent to the Fed, SEC, Treasury forced their banks to start marking it at real value and they supplied liquidity like the US Fed is doing now. It took until 2005 to get everything cleaned up. So it appears we are on the right track.
It appears to be a balancing act. On one hand you want to get it corrected ASAP, but OTOH you need to unwind it slow enough the players don't take the entire hit at once because it would probably bankrupt everyone and bring the whole financial system down in flames.
Paul |
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Drain
Joined: 26 Feb 2007
Posts: 845
Location: Silver Spring, MD
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| Posted: Tue Mar 18, 2008 3:15 pm Post subject: |
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| ken250 wrote: | | The defense you outlined makes a lot of sense; however, shorting stocks would be too edgy for me. |
I felt the same way, and I still would with respect to shorting stocks directly. But you don't have the same risk of unlimited loss in a fund that you do if you short directly. BEARX isn't actually that hard to deal with if you're already accustomed to holding assets even when the returns are negative for awhile.
I'm not trying to convince you to do anything. Just wanted to address your concern because virtually all of us can relate to it.
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allenmickers
Joined: 11 Feb 2008
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| Posted: Tue Mar 18, 2008 3:21 pm Post subject: |
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| If you held $10k of SP500 fund and $10k BEARX, wouldnt you effectively just be down 1% every year for ERs and such? Why not sell the $20k and buy bonds and be up 5% and have the same zero market exposure? |
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Drain
Joined: 26 Feb 2007
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Location: Silver Spring, MD
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| Posted: Tue Mar 18, 2008 3:42 pm Post subject: |
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| allenmickers wrote: | | If you held $10k of SP500 fund and $10k BEARX, wouldnt you effectively just be down 1% every year for ERs and such? |
No, because (a) BEARX is actively managed, so it doesn't mirror the index exactly and (b) it's not 100% short.
| Quote: | | Why not sell the $20k and buy bonds and be up 5% and have the same zero market exposure? |
I have two broad responses. One is that, like I wrote above, I was suggesting BEARX as a vehicle for hedging or diversifying away from stocks. Having half your portfolio in any fund isn't hedging anything--you're making that fund a core asset. I agree that BEARX is inappropriate for this purpose.
The second response is that your proposed bond portfolio is highly sensitive to inflation in a way that a stock/BEARX portfolio is not. For illustrative purposes, imagine inflation were in triple digits. What would happen to your bond portfolio in that case? Answer: It would become pretty worthless pretty quickly. The point is that, again, you can't protect against every risk. You have to choose your battles. Personally, a portfolio comprised entirely of fixed income would be one of the relatively rare allocations (not counting crazy portfolios we wouldn't even discuss) that might affect my sleep.
Back to what I was saying earlier...if you were going to use BEARX, you'd hold maybe 10-20% of your portfolio in it, as opposed to putting 20-35% (I repeat, these are fabricated numbers) into bonds. You would do this if you wanted an 80-90% allocation to stocks, but were afraid of the downside risk. Or...well, several years ago, I showed elsewhere that rebalancing annually between the S&P 500 and BEARX would have given--at that point in time--a greater return than rebalancing between the S&P 500 and TBM, with less volatility. If I recall correctly, the allocation to BEARX or TBM was 20%, a figure I picked arbitrarily prior to running the experiment. It was an interesting result because the return for BEARX alone over that period was negative, but when I combined it with a stock index, the negative correlation gave me a nice outcome. I don't know if I'd get the same result if I ran the numbers now. Plus, a better way to go would be to find allocations such that the volatilities were equal and then see which portfolio gave the better return. But that's another topic, and I don't feel like pulling the numbers together myself.
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timid investor
Joined: 27 Sep 2007
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Location: alabama
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| Posted: Tue Mar 18, 2008 7:58 pm Post subject: |
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In all seriousness I'd say get a federal government job.  |
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bottlecap
Joined: 07 Mar 2007
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Location: Tennessee
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| Posted: Tue Mar 18, 2008 8:21 pm Post subject: |
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| The best protection against deflation seems to me to be to pay off your debts, including your home mortgage. The biggest problem you'll have is when your monthly $1,200 house payment suddenly costs you the equivalent of $3,000. |
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RaleighStClaire
Joined: 18 Jun 2007
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| Posted: Tue Mar 18, 2008 8:55 pm Post subject: |
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| timid investor wrote: | | In all seriousness I'd say get a federal government job. |
I was going to say get a better job but I like your response more.
I'd rather worry about an asteroid hitting the earth than financial ways to protect against deflation.
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preserve
Joined: 15 Mar 2007
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| Posted: Tue Mar 18, 2008 9:13 pm Post subject: |
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| stratton wrote: | | craigr wrote: | | Now as to whether inflation or deflation is more likely is anyone's guess. Japan has the same knowledge and tools available as the US but has been in a serious deflationary funk for almost 20 years. Anything can happen in the markets. |
The WSJ had an article comparing our current situation to Japan's problems. The major difference the Japanese let over priced real estate site on the books with marking to market until 2002. At that point the Japaense equivalent to the Fed, SEC, Treasury forced their banks to start marking it at real value and they supplied liquidity like the US Fed is doing now. It took until 2005 to get everything cleaned up. So it appears we are on the right track.
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I'm with Caigr. The only thing we can really learn from Japan's situation is that deflation can occur in the 21st century.
It is easy to find differences among any economic boom or bust. Simply because the scenario is different does not mean, the results will be. |
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craigr
Joined: 13 Mar 2007
Posts: 2145
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| Posted: Tue Mar 18, 2008 9:25 pm Post subject: |
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| preserve wrote: | | stratton wrote: | | craigr wrote: | | Now as to whether inflation or deflation is more likely is anyone's guess. Japan has the same knowledge and tools available as the US but has been in a serious deflationary funk for almost 20 years. Anything can happen in the markets. |
The WSJ had an article comparing our current situation to Japan's problems. The major difference the Japanese let over priced real estate site on the books with marking to market until 2002. At that point the Japaense equivalent to the Fed, SEC, Treasury forced their banks to start marking it at real value and they supplied liquidity like the US Fed is doing now. It took until 2005 to get everything cleaned up. So it appears we are on the right track.
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I'm with Caigr. The only thing we can really learn from Japan's situation is that deflation can occur in the 21st century.
It is easy to find differences among any economic boom or bust. Simply because the scenario is different does not mean, the results will be. |
The one thing I'll say is I've read analyses that have made convincing cases for inflation and those that made convincing cases for deflation. Someone will be right and someone will be wrong, but that's how markets work.
Inflation and deflation are opposite sides of the same coin. Conditions that cause high inflation can lead to deflation as bankers attempt to control the problem and vice versa. The markets are too unpredictable to rule out any possibility, even those that seem unlikely right now.
The Japanese are certainly not inept and if it can happen there it can happen here (again). The market is one big social psychology experiment and can't be modeled or predicted. Solutions that economists say should work may not work depending on how people feel collectively. So I'm not predicting deflation will or won't happen. I'm simply saying that I don't know (and neither does anyone else) and structure my portfolio accordingly. |
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Valuethinker
Joined: 11 May 2007
Posts: 13357
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| Posted: Wed Mar 19, 2008 6:13 am Post subject: |
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| timid investor wrote: | | In all seriousness I'd say get a federal government job. |
In the 1930s, federal government salaries were lowered, I believe.
In the modern day, there is outsourcing, and it is a growing trend: transfer to a contractor, and then over time the contractor tightens up on the terms and conditions of employment (cutting benefits is a wage cut).
In more recent history, I believe state and local governments have asked employees to take wage cuts.
It's wrong to believe that somehow, being in the government makes you immune if tax revenues are falling.
However employment predictability is higher. Parts of the US (tidewater Virginia etc.) where military and ex-military people have a high concentration, and where there are government contractors (especially defence) have tended to have more stable economic growth and local economies. (this was not the case with Southern California and the aerospace industry in the early 90s, see the movie 'Falling Down'). |
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Valuethinker
Joined: 11 May 2007
Posts: 13357
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| Posted: Wed Mar 19, 2008 6:17 am Post subject: |
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| stratton wrote: | When we start talking deflation I'm almost tempted to sell the TIPS I have with accumulated inflation payments and move to a TIPS fund. During deflation you can lose money from the accumulated inflation portion of TIPS.
Someone correct me if I'm wrong on this.
Paul |
What you really want are individual TIPS trading closer to par: less risk of deflation since TIPS redeem at 100. Logically these would mean newer TIPS.
If deflation is a real threat, then TIPS trading closer to par are going to have a significant premium due to scarcity over TIPS in general.
I don't think a TIPS fund escapes the problem of a declining CPI-- the bonds in the TIPS get hit, and therefore so does the NAV and the payout (coupon is adjusted for the deflation).
If you own a TIPS trading close to 100, you'll take most of the pain in the coupon, *not* the prinicipal. |
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Valuethinker
Joined: 11 May 2007
Posts: 13357
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| Posted: Wed Mar 19, 2008 6:26 am Post subject: |
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| stratton wrote: | | craigr wrote: | | Now as to whether inflation or deflation is more likely is anyone's guess. Japan has the same knowledge and tools available as the US but has been in a serious deflationary funk for almost 20 years. Anything can happen in the markets. |
The WSJ had an article comparing our current situation to Japan's problems. The major difference the Japanese let over priced real estate site on the books with marking to market until 2002. At that point the Japaense equivalent to the Fed, SEC, Treasury forced their banks to start marking it at real value and they supplied liquidity like the US Fed is doing now. It took until 2005 to get everything cleaned up. So it appears we are on the right track.
It appears to be a balancing act. On one hand you want to get it corrected ASAP, but OTOH you need to unwind it slow enough the players don't take the entire hit at once because it would probably bankrupt everyone and bring the whole financial system down in flames.
Paul |
Worth reading Paul Krugman's NYT blog. Krugman is an expert in international financial crises-- he called the Asia crisis well and early in the 90s. Also Dean Baker is a very informed commentator on this.
Krugman mentioned the Swedish remedy in a post in the last couple of days, amongst the most effective in modern times (they went through Japan, but went through it and out in less than 5 years). He is doing more research on it.
However the cost to the Swedish taxpayer of, in effect, nationalising and then denationalising the banking system, was 6.5% of GDP (not all in one year). Ouch.
The S&L debacle was about 1-1.5% of GDP, from memory, that fell on the US taxpayer. So we are perhaps talking about 5 times that scale of recapitalisation. See Northern Rock (£40bn of mortgages now financed by the UK government taxpayer, under public ownership).
We can see why the Fed moved so fast to underwrite the sale of Bear Sterns. The UK government failed to sell NR to Lloyds Bank, and they have a £40bn+ exposure now as a consequence of shilly shallying around.
The point of weakness appears to be our friends the GSEs (Freddie and Fannie and maybe even Sallie) which are highly undercapitalised (4% capital ratios rather than 8% for regulated banks), their debt is owned by foreign investors who view it as tantamount to US government debt. See Barron's this week.
Also keep an eye on the big home mortgage lenders (WaMu?). Plus of course local lenders (business as well as home) in Florida, Colorado, Nevada, California, Ohio, Michigan-- the epicentres of the housing price earthquake.
Fannie Mae has 2.5 trillion of outstanding MBS, half owned by foreign central banks. It could be the next Bear Sterns.
I predict the next US Administration will find it spends a lot of time on the question of the GSEs. |
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Valuethinker
Joined: 11 May 2007
Posts: 13357
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| Posted: Wed Mar 19, 2008 6:31 am Post subject: |
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| stratton wrote: | | craigr wrote: | | Now as to whether inflation or deflation is more likely is anyone's guess. Japan has the same knowledge and tools available as the US but has been in a serious deflationary funk for almost 20 years. Anything can happen in the markets. |
The WSJ had an article comparing our current situation to Japan's problems. The major difference the Japanese let over priced real estate site on the books with marking to market until 2002. At that point the Japaense equivalent to the Fed, SEC, Treasury forced their banks to start marking it at real value and they supplied liquidity like the US Fed is doing now. It took until 2005 to get everything cleaned up. So it appears we are on the right track.
It appears to be a balancing act. On one hand you want to get it corrected ASAP, but OTOH you need to unwind it slow enough the players don't take the entire hit at once because it would probably bankrupt everyone and bring the whole financial system down in flames.
Paul |
It may be the Barron's article (remember the week they called the top of the dot com boom-- it was like it suddenly crystallised the market's worries), but the Credit Default Swaps spreads on Fannie Mae have moved right out, this week.
If you believe the market price is an efficient sum of all the available information on a company, this is a pretty scary statistic.
Remember the market has priced Fannie and Freddie debt as if it was effectively a US treasury, even though in law there is no such guarantee. CDS should therefore be irrelevant...
Fannie Mae getting into trouble would be like the largest US financial institution collapsing. |
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preserve
Joined: 15 Mar 2007
Posts: 560
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| Posted: Sun Mar 23, 2008 12:21 am Post subject: |
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| Valuethinker wrote: |
Remember the market has priced Fannie and Freddie debt as if it was effectively a US treasury, even though in law there is no such guarantee. CDS should therefore be irrelevant...
Fannie Mae getting into trouble would be like the largest US financial institution collapsing. |
Its really not that scary. Laws don't guarantee anything. There are plenty of laws that are unenforced in the US. Yet, there are also plenty of things enforced in the US that has no law written.
2ndly, laws can be re-written over-night. Ie. Come monday the federal government may choose to out-law the ownership of Treasury notes. Its been done before.
The irony out of all this is that MBS is at least partially backed by assets, the treasury is not. |
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wes mantooth
Joined: 09 Nov 2007
Posts: 2
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| Posted: Sun Mar 23, 2008 12:23 pm Post subject: |
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| tfb wrote: | | You are worried about deflation now? It's not happening. |
Tell that to Bear Stearns. |
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tdhg566
Joined: 08 Mar 2007
Posts: 630
Location: Spring, TX - Age: 58
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| Posted: Sun Mar 23, 2008 3:07 pm Post subject: |
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| wes mantooth wrote: | | tfb wrote: | | You are worried about deflation now? It's not happening. |
Tell that to Bear Stearns. |
Bear Stearns didn't suffer from market or wide-spread economic deflation. They simply screwed themselves. They took on too much risk and paid the ultimate price. They forgot that simple axiom: the market can remain irrational longer than you can remain solvent. While not every employee was directly involved in each decision to take on risk, all employees and stockholders ultimately suffered. They should have had to declare bankruptcy, and would have had we not let this counterparty mess get out of control to the point that we risk worldwide financial gridlock if that happened. I don't wish ill on any of the BS employees personally, but I'm very glad it happened. It may be the only wake-up call the markets and investors get before the next ugly surprise.
_________________
My work must be retiree friendly, geographically portable, mentally stimulating and personally profitable |
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brainstem
Joined: 20 Aug 2007
Posts: 276
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| Posted: Sun Mar 23, 2008 3:28 pm Post subject: |
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Protect against deflation?
Easy - have no debt
Deflation favors those with assets, esp cash -- real estate and hard assets probably would not do well
Given demands on commodities, it is unlikely to happen --- moreover, since the US is a debtor nation, the policymakers would rather inflate the value of debt away rather than have deflation make our debt worse. |
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