Tips hyperinflation?

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owenmia
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Tips hyperinflation?

Post by owenmia »

Do tips protect against hyperinflation or a “debt crisis” or only against normal inflation?

Would total international stock or total international developer protect against us hyperinflation or debt crisis?

I know I am reacting to market noise, but I feel like the old rules have changed.
QBoy
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Re: Tips hyperinflation?

Post by QBoy »

I believe that TIPS would protect the real value of the bond under hyperinflation in principle. In practice is another story. Governments that produce hyperinflation are highly dysfunctional, so I would not be surprised to see them change the rules of the game under that circumstance. An example of such a rules change is the rewriting of the gold clauses in bond contracts when the US went off the gold standard in the 1930s (discussed in the book American Default).
000
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Re: Tips hyperinflation?

Post by 000 »

I personally would not hold TIPS as a hyperinflation hedge.

For one thing, the CPI adjustment is only given every six months. A lot can happen in six months during a hyperinflation event.

For another, if US institutions cannot prevent hyperinflation from happening, the ability of the TIPS issuer to make good on them may be limited.

OTOH, TIPS and Series I Bonds are really the only liquid investment that come with some kind of an inflation guarantee. Gold is only liquid with an ETF, and comes with no guarantee that it will track consumer inflation. The same is true of other hard assets like land.
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Re: Tips hyperinflation?

Post by nisiprius »

You really can't say what will happen in true hyperinflation, because it is a breakdown in the economy.

So far we've never seen anything remotely approaching hyperinflation in the United States.

It is hard to say what would protect against it. It's sort of saying "if I drive off the edge of a cliff, which way should I steer?" I don't believe there's any simple, cheap, easy thing to do that will let you glide unscathed through hyperinflation.

The Venezuelan approach to hyperinflation seems to be to get out of Venezuela... if possible.
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Valuethinker
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Re: Tips hyperinflation?

Post by Valuethinker »

nisiprius wrote: Mon Aug 31, 2020 5:25 pm You really can't say what will happen in true hyperinflation, because it is a breakdown in the economy.

So far we've never seen anything remotely approaching hyperinflation in the United States.
Perhaps during the Revolutionary War years?

Would we count the Confederate States of America? The various states endured hyperinflation (they printed their own currencies, I believe) 1864-65 if not 1863, even.
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Re: Tips hyperinflation?

Post by Day9 »

Could someone please define "hyperinflation" in this context? Just so we are all on the same page.
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Re: Tips hyperinflation?

Post by Valuethinker »

Day9 wrote: Tue Sep 01, 2020 8:24 am Could someone please define "hyperinflation" in this context? Just so we are all on the same page.
Nobody ever does but I am guessing 100% or more p.a?

Not sure if economists use that definition, which would capture Israel & Turkey in the 1980s.

By contrast, 1924 Germany endured several million per cent pa inflation, as did I believe Zimbabwe (a few years ago) & Venezuela (now).
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Re: Tips hyperinflation?

Post by Day9 »

Valuethinker wrote: Tue Sep 01, 2020 8:34 am
Day9 wrote: Tue Sep 01, 2020 8:24 am Could someone please define "hyperinflation" in this context? Just so we are all on the same page.
Nobody ever does but I am guessing 100% or more p.a?

Not sure if economists use that definition, which would capture Israel & Turkey in the 1980s.

By contrast, 1924 Germany endured several million per cent pa inflation, as did I believe Zimbabwe (a few years ago) & Venezuela (now).
Thanks. The first result on google for me was Investopedia which says "typically measuring more than 50% per month." But I would guess it varies wildly from person-to-person what they would call hyperinflation. I bet there are some people out there who would call 8% inflation in a year "hyperinflation", maybe less. Good to have a working definition out there before we start a discussion like this.
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Re: Tips hyperinflation?

Post by Whakamole »

Would you trust a government suffering from hyperinflation to make sure the bonds were properly inflation adjusted?
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Re: Tips hyperinflation?

Post by alfaspider »

Hyperinflation occurs when a government must pay debts or purchase goods/services denominated in a foreign currency and attempts to do so by printing more of their own currency.

As long as the U.S. dollar functions as a global reserve currency, there is effectively no chance of the U.S. needing to assume foreign-denominated debt. If the dollar starts losing its status as a global reserve currency, you'll have quite a bit of warning that it's happening before hyperinflation becomes possible.

Regular bad inflation (in the 10-20% per year range) is certainly possible (and has happened in the past). But hyperinflation (where prices are escalating on a monthly, weekly, or even daily basis) is an entirely different kettle of fish. As others have stated, true hyperinflation implies a substantive breakdown of the entire country, and there is little that can be done about it other than leaving the country.
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Re: Tips hyperinflation?

Post by vineviz »

Whakamole wrote: Tue Sep 01, 2020 9:00 am Would you trust a government suffering from hyperinflation to make sure the bonds were properly inflation adjusted?
Probably. Such a government would have a long list of problems and dysfunctions that would push any concerns about reneging on the CPI adjustment in TIPS so far down the list of problems to address that I can’t imagine it being a reasonable source of concern.

Plus, wouldn’t an imperfect inflation adjustment be better than NO inflation adjustment?
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Re: Tips hyperinflation?

Post by alfaspider »

vineviz wrote: Tue Sep 01, 2020 9:09 am
Whakamole wrote: Tue Sep 01, 2020 9:00 am Would you trust a government suffering from hyperinflation to make sure the bonds were properly inflation adjusted?
Probably. Such a government would have a long list of problems and dysfunctions that would push any concerns about reneging on the CPI adjustment in TIPS so far down the list of problems to address that I can’t imagine it being a reasonable source of concern.

Plus, wouldn’t an imperfect inflation adjustment be better than NO inflation adjustment?
It could be effectively useless depending on how the adjustment is done. Many governments experiencing hyperinflation fudge the numbers. Often, the "official" figures are an order of magnitude off from the real figures. Or, if the inflation index is only updated annually, that may not help much when prices are increasing daily, so the adjustment won't capture most of the inflation.

I don't see we've ever seen an example of a government experiencing hyperinflation that had TIPS-like instruments outstanding.
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Re: Tips hyperinflation?

Post by vineviz »

alfaspider wrote: Tue Sep 01, 2020 9:16 am
vineviz wrote: Tue Sep 01, 2020 9:09 am
Whakamole wrote: Tue Sep 01, 2020 9:00 am Would you trust a government suffering from hyperinflation to make sure the bonds were properly inflation adjusted?
Probably. Such a government would have a long list of problems and dysfunctions that would push any concerns about reneging on the CPI adjustment in TIPS so far down the list of problems to address that I can’t imagine it being a reasonable source of concern.

Plus, wouldn’t an imperfect inflation adjustment be better than NO inflation adjustment?
It could be effectively useless depending on how the adjustment is done. Many governments experiencing hyperinflation fudge the numbers. Often, the "official" figures are an order of magnitude off from the real figures. Or, if the inflation index is only updated annually, that may not help much when prices are increasing daily, so the adjustment won't capture most of the inflation.

I don't see we've ever seen an example of a government experiencing hyperinflation that had TIPS-like instruments outstanding.
Okay, but what’s the scenario in which TIPS are worse than nominal Treasury bonds?

They have the same expected return at purchase, so what has to happen for TIPS to be worse than nominal bonds in hyperinflation?
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Re: Tips hyperinflation?

Post by UpsetRaptor »

Don't fear the boogeyman OP. The Fed's tools may be crude, but they can be effective enough. If they had to raise rates to ward off hyperinflation they would, and there's no reasonable reason they couldn't continue doing so until effective. And right now we're at the completely opposite side of the spectrum from any of that.
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Re: Tips hyperinflation?

Post by Whakamole »

alfaspider wrote: Tue Sep 01, 2020 9:16 am I don't see we've ever seen an example of a government experiencing hyperinflation that had TIPS-like instruments outstanding.
I'm not certain we have either. However, many governments do adjust benefits, including worker pay, state pensions (social security equivalent), etc. to account for inflation.

And indeed, we can see what happened in Zimbabwe:

https://www.bloomberg.com/news/articles ... -yet-again
If there is cash available, he will collect the equivalent of just $26, down from the $400 he was getting a few months back.
And what if the government just stops publishing inflation data?

https://www.bloomberg.com/news/articles ... ation-data
The Zimbabwe National Statistics Agency won’t report year-on-year inflation figures until February 2020, Finance Minister Mthuli Ncube told lawmakers Thursday in the capital, Harare.
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Re: Tips hyperinflation?

Post by alfaspider »

vineviz wrote: Tue Sep 01, 2020 9:22 am
alfaspider wrote: Tue Sep 01, 2020 9:16 am
vineviz wrote: Tue Sep 01, 2020 9:09 am
Whakamole wrote: Tue Sep 01, 2020 9:00 am Would you trust a government suffering from hyperinflation to make sure the bonds were properly inflation adjusted?
Probably. Such a government would have a long list of problems and dysfunctions that would push any concerns about reneging on the CPI adjustment in TIPS so far down the list of problems to address that I can’t imagine it being a reasonable source of concern.

Plus, wouldn’t an imperfect inflation adjustment be better than NO inflation adjustment?
It could be effectively useless depending on how the adjustment is done. Many governments experiencing hyperinflation fudge the numbers. Often, the "official" figures are an order of magnitude off from the real figures. Or, if the inflation index is only updated annually, that may not help much when prices are increasing daily, so the adjustment won't capture most of the inflation.

I don't see we've ever seen an example of a government experiencing hyperinflation that had TIPS-like instruments outstanding.
Okay, but what’s the scenario in which TIPS are worse than nominal Treasury bonds?

They have the same expected return at purchase, so what has to happen for TIPS to be worse than nominal bonds in hyperinflation?
Sure, but the difference could be between loosing 99.9% and 99% of value.
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Re: Tips hyperinflation?

Post by JoMoney »

If we have unexpected inflation, TIPS offer a benefit.
If the market expects the inflation and prices that into nominal bonds, TIPS and nominal bonds should perform similarly.

"Hyperinflation" might suggest some sort of economic and government breakdown where the government guarantee/backing is questioned. It might be worthy of consideration that the U.S. Government did effectively default on the terms of the gold clause of some Liberty Bonds, it's also worth noting that period was a deflationary crisis.
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Re: Tips hyperinflation?

Post by bigskyguy »

TIPS are presently adjusted for CPI. If you want to see how they are structured to respond, just pull up a CPI-U historical table (I just pulled one up that goes back 100 years - usinflationcalculator.com) and you can get a sense of what would happen, given the present structure of TIPS.

TIPS are tied to the CPI-U. When purchasing them, one needs to understand that. The CPI-U is one of the indices that the Bureau of Labor Statistics provides and calculates, and the methodology is clearly outlined at bls.gov. One can choose to accept their methodology or not. Hyperinflation is a subjective term, CPI-U is an objective metric.
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Re: Tips hyperinflation?

Post by nisiprius »

bigskyguy wrote: Tue Sep 01, 2020 11:22 am TIPS are presently adjusted for CPI. If you want to see how they are structured to respond, just pull up a CPI-U historical table (I just pulled one up that goes back 100 years - usinflationcalculator.com) and you can get a sense of what would happen, given the present structure of TIPS.

TIPS are tied to the CPI-U. When purchasing them, one needs to understand that. The CPI-U is one of the indices that the Bureau of Labor Statistics provides and calculates, and the methodology is clearly outlined at bls.gov. One can choose to accept their methodology or not. Hyperinflation is a subjective term, CPI-U is an objective metric.
Furthermore, according to TreasuryDirect,
If, while an inflation-protected security is outstanding, the CPI is (1) discontinued, (2) in the judgment of the Secretary, fundamentally altered in a manner materially adverse to the interests of an investor in the security, or (3) in the judgment of the Secretary, altered by legislation or Executive Order in a manner materially adverse to the interests of an investor in the security, Treasury, after consulting with the BLS, will substitute an appropriate alternative index.
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Re: Tips hyperinflation?

Post by Coltrane75 »

Yes, they will protect against hyperinflation.

If you do a search on this forum, someone researched countries that had TIPS for much longer than the US that has experienced massive financial issues and hyperinflation. The conclusion was that all those countries continued to pay out their TIPS bonds. Once example was Argentina.
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Re: Tips hyperinflation?

Post by nisiprius »

Day9 wrote: Tue Sep 01, 2020 8:24 am Could someone please define "hyperinflation" in this context? Just so we are all on the same page.
Wikipedia: Hyperinflation
In 1956, Phillip Cagan wrote The Monetary Dynamics of Hyperinflation, the book often regarded as the first serious study of hyperinflation and its effects (though The Economics of Inflation by C. Bresciani-Turroni on the German hyperinflation was published in Italian in 1931). In his book, Cagan defined a hyperinflationary episode as starting in the month that the monthly inflation rate exceeds 50%, and as ending when the monthly inflation rate drops below 50% and stays that way for at least a year. Economists usually follow Cagan's description that hyperinflation occurs when the monthly inflation rate exceeds 50% (this is equivalent to a yearly rate of 12,874.63%).
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Re: Tips hyperinflation?

Post by Blue456 »

nisiprius wrote: Tue Sep 01, 2020 12:17 pm
bigskyguy wrote: Tue Sep 01, 2020 11:22 am
Furthermore, according to TreasuryDirect,
If, while an inflation-protected security is outstanding, the CPI is (1) discontinued, (2) in the judgment of the Secretary, fundamentally altered in a manner materially adverse to the interests of an investor in the security, or (3) in the judgment of the Secretary, altered by legislation or Executive Order in a manner materially adverse to the interests of an investor in the security, Treasury, after consulting with the BLS, will substitute an appropriate alternative index.
Translation: If SHTF, all bets are off.

Not very reassuring. But even without this clause, the US government can always default on its debt so really doesn’t matter. To really protect against hyperinflation one needs assets in another country. I am fortunate enough to be dual EU-US citizen.
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Re: Tips hyperinflation?

Post by ResearchMed »

Does the CPI-U represent *unexpected inflation"?

If so, what would "expected inflation be?
Is the distinction only determined after the fact?

I'm still having some trouble distinguishing between the two, in terms of just what TIPS "protect against", etc.

RM
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Re: Tips hyperinflation?

Post by Whakamole »

Coltrane75 wrote: Tue Sep 01, 2020 12:19 pm Yes, they will protect against hyperinflation.

If you do a search on this forum, someone researched countries that had TIPS for much longer than the US that has experienced massive financial issues and hyperinflation. The conclusion was that all those countries continued to pay out their TIPS bonds. Once example was Argentina.
Maybe paid out, but at quite the haircut (and this doesn't include Argentina's defaults and settlements to pay for pennies on the dollar.)

https://www.economist.com/the-americas/ ... statistics
MOST Argentines reacted with a shrug when their government began doctoring its consumer-price index in 2007. Cooking the books cost holders of the country's inflation-linked bonds at least $2.3 billion last year.
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Re: Tips hyperinflation?

Post by TheTimeLord »

owenmia wrote: Mon Aug 31, 2020 11:52 am Do tips protect against hyperinflation or a “debt crisis” or only against normal inflation?

Would total international stock or total international developer protect against us hyperinflation or debt crisis?

I know I am reacting to market noise, but I feel like the old rules have changed.
Isn't this at least the third thread you have had on this topic. I think you need to find a way to make at least a little peace with the fact there are a lot of things in life beyond your control.
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Hyperinflation?

Post by Taylor Larimore »

owenmia wrote: Mon Aug 31, 2020 11:52 am Do tips protect against hyperinflation or a “debt crisis” or only against normal inflation?

Would total international stock or total international developer protect against us hyperinflation or debt crisis?

I know I am reacting to market noise, but I feel like the old rules have changed.
owenmia:

I may be paraphrasing, but I believe that more money has been lost preparing for hyperinflation than has been lost in hyperinflation itself.

In the late 70s we had the worst inflation in a hundred years. Most portfolios containing stocks and bonds had positive returns. Read actual returns of stocks, bonds with inflation here:

https://www.bogleheads.org/forum/viewtopic.php?t=315786

Best wishes.
Taylor
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Re: Hyperinflation?

Post by Whakamole »

Taylor Larimore wrote: Tue Sep 01, 2020 12:43 pm
owenmia wrote: Mon Aug 31, 2020 11:52 am Do tips protect against hyperinflation or a “debt crisis” or only against normal inflation?

Would total international stock or total international developer protect against us hyperinflation or debt crisis?

I know I am reacting to market noise, but I feel like the old rules have changed.
owenmia:

I may be paraphrasing, but I believe that more money has been lost preparing for hyperinflation than has been lost in hyperinflation itself.

In the late 70s we had the worst inflation in a hundred years. Most portfolios containing stocks and bonds had positive returns. Read actual returns of stocks, bonds with inflation here:

https://www.bogleheads.org/forum/viewtopic.php?t=315786

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The ultimate focus of the long-term investor must be on real, not nominal returns."

YEAR--INFLATION--BOND INDEX--S&P 500 T.R. INDEX--MSCI EAFE T.R.INDEX
1977-------6.7-----------3.0-------------(-7.2)-------------------17.5
1978-------9.0-----------1.4---------------6.6--------------------33.1
1979------13.3-----------1.9--------------18.4-------------------10.9 (Highest Annual Inflation Rate)
1980------12.5-----------2.7--------------32.4-------------------25.4

Those are negative real returns for bonds.
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Re: Tips hyperinflation?

Post by ResearchMed »

TheTimeLord wrote: Tue Sep 01, 2020 12:35 pm
owenmia wrote: Mon Aug 31, 2020 11:52 am Do tips protect against hyperinflation or a “debt crisis” or only against normal inflation?

Would total international stock or total international developer protect against us hyperinflation or debt crisis?

I know I am reacting to market noise, but I feel like the old rules have changed.
Isn't this at least the third thread you have had on this topic. I think you need to find a way to make at least a little peace with the fact there are a lot of things in life beyond your control.
Ha! I immediately thought this reply was directed at me, but then did a double take (even though this wasn't "my" thread).
(You know, the "when in doubt, take it personally" syndrome, eh? :wink: )

So I had written the following, which might also/still be à propos...

"Thanks (and I'm not being snarky).

If it really isn't that clear cut, then that answers addresses my question, too.
I had been interpreting the two terms (expected vs unexpected) as being more specific.
I won't ask again here."

RM
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Re: Tips hyperinflation?

Post by TheTimeLord »

ResearchMed wrote: Tue Sep 01, 2020 12:49 pm
TheTimeLord wrote: Tue Sep 01, 2020 12:35 pm
owenmia wrote: Mon Aug 31, 2020 11:52 am Do tips protect against hyperinflation or a “debt crisis” or only against normal inflation?

Would total international stock or total international developer protect against us hyperinflation or debt crisis?

I know I am reacting to market noise, but I feel like the old rules have changed.
Isn't this at least the third thread you have had on this topic. I think you need to find a way to make at least a little peace with the fact there are a lot of things in life beyond your control.
Ha! I immediately thought this reply was directed at me, but then did a double take (even though this wasn't "my" thread).
(You know, the "when in doubt, take it personally" syndrome, eh? :wink: )

So I had written the following, which might also/still be à propos...

"Thanks (and I'm not being snarky).

If it really isn't that clear cut, then that answers addresses my question, too.
I had been interpreting the two terms (expected vs unexpected) as being more specific.
I won't ask again here."

RM
There is no problem with someone asking multiple times, at least not in my mind. I was just taking it as a sign of stress and concern that was not likely going to have a positive impact on their decision making ability.
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Re: Tips hyperinflation?

Post by nisiprius »

ResearchMed wrote: Tue Sep 01, 2020 12:27 pm Does the CPI-U represent *unexpected inflation"?

If so, what would "expected inflation be?
Is the distinction only determined after the fact?

I'm still having some trouble distinguishing between the two, in terms of just what TIPS "protect against", etc.

RM
The argument is that investors demand compensation for expected inflation. Bonds are sold on the free market and nobody will buy them if they don't meet the demand, and the demand includes an expectation of inflation. Thus, for example, the bank CD I bought in 1982 had a 13% APY.

So, you don't need TIPS to compensate for expected inflation, it's baked into the interest rate of nominal bonds. But if there is unexpected inflation, the interest rate of nominal bonds is locked in and may fall short, while the coupon interest and principal of TIPS will track with inflation and protect you.

In other words, TIPS protect you against inflation, period. But since you don't need protection against expected inflation, the value of TIPS is in their protection against unexpected inflation.
Last edited by nisiprius on Tue Sep 01, 2020 6:06 pm, edited 1 time in total.
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Re: Tips hyperinflation?

Post by JoMoney »

CPI-U is the Consumer Price Index -for all Urban consumers, it represents the buying habits of the residents of urban or metropolitan areas in the United States.
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Re: Tips hyperinflation?

Post by JackoC »

Whakamole wrote: Tue Sep 01, 2020 12:32 pm
Coltrane75 wrote: Tue Sep 01, 2020 12:19 pm Yes, they will protect against hyperinflation.

If you do a search on this forum, someone researched countries that had TIPS for much longer than the US that has experienced massive financial issues and hyperinflation. The conclusion was that all those countries continued to pay out their TIPS bonds. Once example was Argentina.
Maybe paid out, but at quite the haircut (and this doesn't include Argentina's defaults and settlements to pay for pennies on the dollar.)

https://www.economist.com/the-americas/ ... statistics
MOST Argentines reacted with a shrug when their government began doctoring its consumer-price index in 2007. Cooking the books cost holders of the country's inflation-linked bonds at least $2.3 billion last year.
Yes Argentina is an example of the risk to inflation indexed bonds of false stats even in an above world average GDP PPP per capita country. The inflation stats were deliberately cooked for around 7 yrs, with official numbers eventually showing a rate around 10% per year v a real level more like 30% per year. But both are far from hyperinflation, which is generally defined as 50% rise in the price level *per month*.

In true hyperinflation TIPS would lose a lot of their value in the period when inflation accelerated to 50%+ per month if that happened any less than very slowly and hyperinflation has never accelerated slowly. Because of the ~3 month lag applying the correction. This doesn't matter at constant inflation, but in transition to hyperinflation would matter a lot. Say inflation was very high, 2% per month (~30% per year) in the 6 mo reference period but then accelerated to hyperinflation (50% per month) in the 3 month lag period. The bond principal would be adjusted up to 1.02^6=1.13, but prices increased (1.02^3)*(1.5)^3=3.6 times, bond loses 2/3's of its purchasing power in that transition. In real cases the acceleration might be slower, but also probably continue accelerating when beyond 50%.

So in math/technical terms inflation indexed bonds would not protect well against very rapid rise in inflation (which almost always characterizes hyperinflation) because there has to be a lag in application of the data for operational reasons, even if accurate. Whether a fast enough acceleration of inflation to seriously damage the value of TIPS is 'possible' in the US is probably better left as exercise for the reader.
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Re: Tips hyperinflation?

Post by 000 »

nisiprius wrote: Tue Sep 01, 2020 12:17 pm
bigskyguy wrote: Tue Sep 01, 2020 11:22 am TIPS are presently adjusted for CPI. If you want to see how they are structured to respond, just pull up a CPI-U historical table (I just pulled one up that goes back 100 years - usinflationcalculator.com) and you can get a sense of what would happen, given the present structure of TIPS.

TIPS are tied to the CPI-U. When purchasing them, one needs to understand that. The CPI-U is one of the indices that the Bureau of Labor Statistics provides and calculates, and the methodology is clearly outlined at bls.gov. One can choose to accept their methodology or not. Hyperinflation is a subjective term, CPI-U is an objective metric.
Furthermore, according to TreasuryDirect,
If, while an inflation-protected security is outstanding, the CPI is (1) discontinued, (2) in the judgment of the Secretary, fundamentally altered in a manner materially adverse to the interests of an investor in the security, or (3) in the judgment of the Secretary, altered by legislation or Executive Order in a manner materially adverse to the interests of an investor in the security, Treasury, after consulting with the BLS, will substitute an appropriate alternative index.
Yikes!

In addition to trusting the money supplier to accurately calculate CPI, a TIPS investor also has to trust their arbitrary fiat in index substitution.
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Watty
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Re: Tips hyperinflation?

Post by Watty »

Just a reminder, you likely know that TIPS are usually a poor choice in a taxable account because of the way that you are taxed each year on the inflation adjustment even if you did not receive it.

If inflation is very high or hyperinflation is happening then owning TIPS in a taxable account could be toxic since you would be taxed so much on the inflation adjustments.
Lynx310650
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Re: Tips hyperinflation?

Post by Lynx310650 »

In the fairly recent experiences of Zimbabwe and/or Venezuela, it seems like during times of hyperinflation the only true hedge is the USD. May not be those countries, but I believe reading that in other countries like Argentina or Brazil during times of really high inflation, the rich not only tried to get their hands on USD but tried to buy US stocks as well.

So international diversification along with some TIPS in the hope that the US gov't will retain some sort of order and fulfill its promises would make the most sense and that's personally how I'm "hedging" such a scenario.

Realistically speaking, the political/economic calamities that need to occur to result in hyperinflation in the USA are frightening to imagine and I don't know where in the World would be immune to such events. Probably nowhere. But I'd probably rather look to Asia (including Australia) than Europe for diversification in that specific scenario.
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Re: Tips hyperinflation?

Post by ScubaHogg »

Worrying about hyperinflation happening in anything resembling the near term is like worrying about burning to death while you are in the middle of drowning. But that’s just my humble opinion.
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flaccidsteele
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Re: Tips hyperinflation?

Post by flaccidsteele »

“Hyper” inflation?

What’s inflation even?
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Blueskies123
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Re: Tips hyperinflation?

Post by Blueskies123 »

The FASB does not use the word hyperinflation but they use this word:
A currency in a highly inflationary environment (3-year inflation rate of approximately 100 percent or more) is not considered stable.
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NoRegret
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Re: Tips hyperinflation?

Post by NoRegret »

owenmia wrote: Mon Aug 31, 2020 11:52 am Do tips protect against hyperinflation or a “debt crisis” or only against normal inflation?

Would total international stock or total international developer protect against us hyperinflation or debt crisis?

I know I am reacting to market noise, but I feel like the old rules have changed.
OP,

I'd like to dissuade you of the notion that hyperinflation or even double digit inflation is a high probability in the US. Is it possible? Sure, never say never. But it ought not be your base case.

More debt makes interest rate lower not higher -- you should read some Lacy Hunt -- to the extent that the proceeds are not invested in productive enterprises that can service the debt. The common argument for inflation, that government has to "inflate the debt away" is predicated upon the notion that governments will even nominally reduce total debt outstanding when it's far more likely to issue new debt to repay the old and then some.

IMO, growth dynamics in the US and the world is too weak to support 70's like inflation, much less hyperinflation.

Cheers,
NR
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#Cruncher
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Re: Tips hyperinflation?

Post by #Cruncher »

4:00 PM. Please ignore this post. My logic is wrong. :oops: See my later post. Thanks JackoC!
JackoC wrote: Tue Sep 01, 2020 2:00 pmIn true hyperinflation TIPS would lose a lot of their value in the period when inflation accelerated to 50%+ per month if that happened any less than very slowly and hyperinflation has never accelerated slowly. Because of the ~3 month lag applying the correction. This doesn't matter at constant inflation, but in transition to hyperinflation would matter a lot. Say inflation was very high, 2% per month (~30% per year) in the 6 mo reference period but then accelerated to hyperinflation (50% per month) in the 3 month lag period. The bond principal would be adjusted up to 1.02^6=1.13, but prices increased (1.02^3)*(1.5)^3=3.6 times, bond loses 2/3's of its purchasing power in that transition. (underline added)
The underlined portion is incorrect, JackoC. The shortfall in inflation protection you mention obtains regardless of how fast the hyperinflation ramps up. It results simply from the approximate 2-1/2 month lag in applying the CPI. Also, I don't know what you mean by the "6 mo reference period". Are you thinking of the way inflation is applied to I Bonds?

The following confirms your calculation of a 2/3 loss in purchasing power if the CPI increases 50% per month. It assumes the CPI reported for a month represents prices on the 15th of the month. The CPI for any month becomes the Reference CPI for the first day of the month three months later. So for example the CPI for September will become the Reference CPI for December 1st and the CPI for October the Reference CPI for January 1st. The Reference CPI for December 2nd to December 31st will be calculated by a linear interpolation between the two values.

Here is an example assuming prices increase 50% per month from September 15th to January 1st at a constant daily rate. It shows that the inflation adjustment applied during December will be about 65% less than the actual increase in prices. For simplicity I set the CPI for September to 100.

Code: Select all

Row       Col A     Col B     Col C    Col D
  1     1.3607%   CPI increase per day = 1.5 ^ (1 / 30) - 1
  2          31   Days in December
  3      1.6129   Ref CPI increase per day = 50 / 31
  4        Date       CPI   Ref CPI     Loss

Code: Select all

  5   9/15/2020   100.000
  6  10/15/2020   150.000                    (150 CPI = 100 * 1.013607 ^ 30 days)
  7  12/01/2020   283.118   100.000    64.7% (283 CPI = 100 * 1.013607 ^ 77 days)
  8  12/02/2020   286.971   101.613    64.6%
  9  12/03/2020   290.875   103.226    64.5%
 10  12/04/2020   294.833   104.839    64.4%
 11  12/05/2020   298.845   106.452    64.4%
 12  12/06/2020   302.912   108.065    64.3%
 13  12/07/2020   307.034   109.677    64.3%
 14  12/08/2020   311.211   111.290    64.2%
 15  12/09/2020   315.446   112.903    64.2%
 16  12/10/2020   319.739   114.516    64.2%
 17  12/11/2020   324.089   116.129    64.2%
 18  12/12/2020   328.499   117.742    64.2%
 19  12/13/2020   332.969   119.355    64.2%
 20  12/14/2020   337.500   120.968    64.2%
 21  12/15/2020   342.092   122.581    64.2%
 22  12/16/2020   346.747   124.194    64.2%
 23  12/17/2020   351.466   125.806    64.2%
 24  12/18/2020   356.248   127.419    64.2%
 25  12/19/2020   361.096   129.032    64.3%
 26  12/20/2020   366.009   130.645    64.3%
 27  12/21/2020   370.990   132.258    64.3%
 28  12/22/2020   376.038   133.871    64.4%
 29  12/23/2020   381.155   135.484    64.5%
 30  12/24/2020   386.341   137.097    64.5%
 31  12/25/2020   391.598   138.710    64.6%
 32  12/26/2020   396.927   140.323    64.6%
 33  12/27/2020   402.328   141.935    64.7%
 34  12/28/2020   407.802   143.548    64.8%
 35  12/29/2020   413.351   145.161    64.9%
 36  12/30/2020   418.976   146.774    65.0%
 37  12/31/2020   424.677   148.387    65.1%
 38   1/01/2021   430.456   150.000    65.2% (430 CPI = 100 * 1.013607 ^ 108 days)
Last edited by #Cruncher on Wed Sep 02, 2020 2:59 pm, edited 1 time in total.
JackoC
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Re: Tips hyperinflation?

Post by JackoC »

#Cruncher wrote: Wed Sep 02, 2020 8:14 am
JackoC wrote: Tue Sep 01, 2020 2:00 pmIn true hyperinflation TIPS would lose a lot of their value in the period when inflation accelerated to 50%+ per month if that happened any less than very slowly and hyperinflation has never accelerated slowly. Because of the ~3 month lag applying the correction. This doesn't matter at constant inflation, but in transition to hyperinflation would matter a lot. Say inflation was very high, 2% per month (~30% per year) in the 6 mo reference period but then accelerated to hyperinflation (50% per month) in the 3 month lag period. The bond principal would be adjusted up to 1.02^6=1.13, but prices increased (1.02^3)*(1.5)^3=3.6 times, bond loses 2/3's of its purchasing power in that transition. (underline added)
The underlined portion is incorrect, JackoC. The shortfall in inflation protection you mention obtains regardless of how fast the hyperinflation ramps up. It results simply from the approximate 2-1/2 month lag in applying the CPI. Also, I don't know what you mean by the "6 mo reference period". Are you thinking of the way inflation is applied to I Bonds?

The following confirms your calculation of a 2/3 loss in purchasing power if the CPI increases 50% per month. It assumes the CPI reported for a month represents prices on the 15th of the month. The CPI for any month becomes the Reference CPI for the first day of the month three months later. So for example the CPI for September will become the Reference CPI for December 1st and the CPI for October the Reference CPI for January 1st. The Reference CPI for December 2nd to December 31st will be calculated by a linear interpolation between the two values.
Thanks for further explaining details I was mashing up when it comes to TIPS. But, I do not think the basic idea in the underlined part is incorrect. Rather than purely hypothetical lets take a real TIPS index factors as seen on Treasury Direct's page:
https://www.treasurydirect.gov/instit/a ... =912828ZZ6

Consider the 0.125% of 4/15/2025 issued 4/15/2020, almost new and index factor near 1. The reference CPI for 7/1/2020 was 256.389, which is the nominal 'April CPI'*. The index factor was .99260. The reference CPI for 8/1/2020 was 256.394 (the 'May' CPI release number), index factor .99262. (256.394/256.389)*.99260=.99262
*CPI-U not seasonally adjusted, as per:
https://data.bls.gov/cgi-bin/surveymost

The example has a tiny CPI increase but we can still see that's how the index factor progresses. Inflation 'April'>'May' was 0.002% per month. But it doesn't directly matter what dates those numbers comes from: as long as inflation was 0.0002% from 7/1/2020>8/1/2020 the correction is accurate, if not it isn't. Actually, inflation in 7/1>8/1 was almost certainly more than that (given the general pick up in CPI thru Jul release). But in relatively steady and low inflation this lag effect is noise: sometimes inflation goes up a little, sometimes down a little between reference period and application of adjustment.

How about if inflation was high and steady, lets' say 2% per month between 'Apr' and 'May'. It's not a drag on TIPS return just because inflation is high, as long as actual inflation in 7/1>8/1 was also 2%.

Likewise I believe this still holds in my example. If the May CPI release is 50% more than the Apr release (256.389 to 384.583), the index factor change provides protection against a 50% increase in prices in 7/1 to 8/1. It's only in the (very likely, in hyperinflation) case where there's suddenly much higher inflation at certain point, say a 2% change in index factor based on Apr>May, but prices increase 50% in Jul>Aug as the inflation accelerates, that TIPS lose 2/3's (or so, in that example) of their real value. And actually this would in theory reverse if inflation was corralled back to 'only' 2% a month in the following year's 7/1>8/1 period, but the index factor jumped 50% based on still 50% per mo hyperinflation in Apr>May releases. However, given the tendency of hyperinflation to end in monetary collapse, inaccurate price data (on purpose, or it just becomes impossible to accurately gather), etc. this theoretical bounce back would not be of much comfort (to the extent one thinks USD hyperinflation is a real risk).

But I believe I was correct to say that the problem with the lag is when inflation in the period of the index adjustment is much higher than inflation in the reference period (CPI releases from 3 months ago), not extremely high inflation per se.
dml130
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Re: Tips hyperinflation?

Post by dml130 »

Blue456 wrote: Tue Sep 01, 2020 12:26 pm Translation: If SHTF, all bets are off.

Not very reassuring. But even without this clause, the US government can always default on its debt so really doesn’t matter. To really protect against hyperinflation one needs assets in another country. I am fortunate enough to be dual EU-US citizen.
On that point, do you have to be a dual citizen to own assets in another country? Wouldn't foreign equities (for example VXUS) and equities in general (even domestic) provide some protection in such a situation? I recall seeing a graph of Germany's stock market during their hyperinflationary period as priced in their currency and it appreciated tremendously, if I remember correctly.
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Re: Tips hyperinflation?

Post by Blue456 »

dml130 wrote: Wed Sep 02, 2020 11:54 am
Blue456 wrote: Tue Sep 01, 2020 12:26 pm Translation: If SHTF, all bets are off.

Not very reassuring. But even without this clause, the US government can always default on its debt so really doesn’t matter. To really protect against hyperinflation one needs assets in another country. I am fortunate enough to be dual EU-US citizen.
On that point, do you have to be a dual citizen to own assets in another country? Wouldn't foreign equities (for example VXUS) and equities in general (even domestic) provide some protection in such a situation? I recall seeing a graph of Germany's stock market during their hyperinflationary period as priced in their currency and it appreciated tremendously, if I remember correctly.
You don’t have to be a dual citizen but it is a nice option to leave an economic disaster area. Being an EU citizen provides you certain benefits that typical refugee would have difficulty obtaining. Furthermore I am inclined obtaining a condo in Europe, not only for my frequent travels there but also to protect myself from creditors and as an inflation hedge.
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arcticpineapplecorp.
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Re: Tips hyperinflation?

Post by arcticpineapplecorp. »

Valuethinker wrote: Tue Sep 01, 2020 8:23 am
nisiprius wrote: Mon Aug 31, 2020 5:25 pm You really can't say what will happen in true hyperinflation, because it is a breakdown in the economy.

So far we've never seen anything remotely approaching hyperinflation in the United States.
Perhaps during the Revolutionary War years?

Would we count the Confederate States of America? The various states endured hyperinflation (they printed their own currencies, I believe) 1864-65 if not 1863, even.
The printing of money in the confederacy wasn't the problem, per se, but rather the counterfeiting. I found this episode called "The Paper" on the podcast Uncivil very interesting (source: https://gimletmedia.com/shows/uncivil/episodes):

[Content in excess of copyright fair-use removed by admin LadyGeek. Here's the link: The Paper | Uncivil ]
The President of the Confederacy, Jefferson Davis, was so worried about this store that he placed a 10,000 dollar bounty on the owner's head — dead or alive.

Today on the show... how a small shopkeeper named Samuel C. Upham shook people's faith in the Confederacy...to the core. And what the Confederacy did to shut him down…

...
source: https://gimletmedia.com/shows/uncivil/episodes
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Re: Tips hyperinflation?

Post by vineviz »

JackoC wrote: Wed Sep 02, 2020 11:15 am But I believe I was correct to say that the problem with the lag is when inflation in the period of the index adjustment is much higher than inflation in the reference period (CPI releases from 3 months ago), not extremely high inflation per se.
I agree with your assessment and just wanted to add that this "lag" issue is proportionally much more consequential with shorter maturity TIPS. For short-term TIPS (e.g. where the "lag" is a significant portion of the total duration), the ability of the instrument to keep up with unexpected inflation is greatly diminished. For this reason, short-term TIPS do not offer significantly better inflation protection than short-term nominal bonds.

This is one reason that I believe duration-matching is important with TIPS. By using a duration matching or cash flow matching strategy, we are really only exposed to CPI "lag" for the last 6-12 months of our withdrawal period for each period of consumption. With a rolling short-term ladder or short-term TIPS fund, the investor perpetually exposed to this "lag" risk for much more of the portfolio.
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Re: Tips hyperinflation?

Post by #Cruncher »

JackoC wrote: Wed Sep 02, 2020 11:15 amRather than purely hypothetical lets take a real TIPS index factors as seen on Treasury Direct's page:
https://www.treasurydirect.gov/instit/a ... =912828ZZ6
Consider the 0.125% of 4/15/2025 ...
That link is to the July 2030 maturity. I believe you intended this link.
JackoC in same post wrote:But I believe I was correct to say that the problem with the lag is when inflation in the period of the index adjustment is much higher than inflation in the reference period (CPI releases from 3 months ago), not extremely high inflation per se.
Glad you stuck to your guns, JackoC! In trying to answer you, I realized my logic was wrong in my previous post. :oops: To paraphrase what you say, if I own a TIPS at time T1 and the index ratio at time T2 is X% higher, then I'm fully protected if prices actually increase X% between T1 and T2. I only lose when X% is less than the actual price increase.

This can be seen in the case where I buy a TIPS month 3 and the CPI rises 50% in months 1, 2, and 3. My TIPS principal will go up 50% (1.5 / 1.0 - 1) and the CPI also goes up 50% (5.063 / 3.375 - 1). (For simplicity I'm assuming the lag between the actual CPI and the Reference CPI used to adjust TIPS principal is exactly 3 months.) Therefore I'm completely covered.

Code: Select all

        CPI                         -  vs Month 3 -
Month  Incr       CPI   Ref CPI       CPI   Ref CPI    Loss
    0           1.000
    1   50%     1.500
    2   50%     2.250
    3   50%     3.375     1.000
    4   50%     5.063     1.500     1.500     1.500    0.0%
    5   50%     7.594     2.250     2.250     2.250    0.0%
    6   50%    11.391     3.375     3.375     3.375    0.0%
As you say, the shortfall only occurs when the increase in the Reference CPI is less than the actual CPI increase. Suppose the CPI only rose 2% in month 1 instead of 50%. The Reference CPI would then only increase 2% in month 3 instead of 50%. Then the principal value of the TIPS I own at month 3 will fall 32% short of offsetting inflation.

Code: Select all

        CPI                         -  vs Month 3 -
Month  Incr       CPI   Ref CPI       CPI   Ref CPI    Loss
    0           1.000
    1    2%     1.020
    2   50%     1.530
    3   50%     2.295     1.000
    4   50%     3.443     1.020     1.500     1.020   32.0%
    5   50%     5.164     1.530     2.250     1.530   32.0%
    6   50%     7.746     2.295     3.375     2.295   32.0%
If the CPI only rose 2% in months 1 and 2, the TIPS principal would fall 53.8% short.

Code: Select all

        CPI                         -  vs Month 3 -
Month  Incr       CPI   Ref CPI       CPI   Ref CPI    Loss
    0           1.000
    1    2%     1.020
    2    2%     1.040
    3   50%     1.561     1.000
    4   50%     2.341     1.020     1.500     1.020   32.0%
    5   50%     3.511     1.040     2.250     1.040   53.8%
    6   50%     5.267     1.561     3.375     1.561   53.8%
And if the CPI only rose 2% in months 1, 2, and 3, the TIPS' principal would fall 68.6% short.

Code: Select all

        CPI                         -  vs Month 3 -
Month  Incr       CPI   Ref CPI       CPI   Ref CPI    Loss
    0           1.000
    1    2%     1.020
    2    2%     1.040
    3    2%     1.061     1.000
    4   50%     1.592     1.020     1.500     1.020   32.0%
    5   50%     2.388     1.040     2.250     1.040   53.8%
    6   50%     3.582     1.061     3.375     1.061   68.6%
    7   50%     5.372     1.592     5.063     1.592   68.6%
Theoretical
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Re: Tips hyperinflation?

Post by Theoretical »

I think Bill Bernstein mentioned in Deep Risk that German Gold-backed Bunds in the Weimar Republic returned 25% of the asset's value in real terms, which was a whole lot better than the fractions of fractions of fractions of pennies that the unbacked bonds did. I'd expect in a non-Weimar/Zimbabwe/Venezuela scenario, you'd get closer to 50-66% of the value back unless the government decided to play a cute tax game where the inflation adjustment is taxed at 100% for domestic holders but foreign ones are exempt.

In scenarios like the late 60s/early 70s UK, where inflation came awfully close to the magic 25% where real instability shows up, I suspect most governments would just pay the debt. I'm not too worried about it being an issue for the US market since TIPS have a demonstrated lack of crisis liquidity and are far less than nominal debt.
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