Will TIPS protect you if there is disastrous hyperinflation?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
teelainen
Posts: 331
Joined: Fri Feb 01, 2019 1:17 am

Will TIPS protect you if there is disastrous hyperinflation?

Post by teelainen »

We have never owned any type of TIPS before, but we are thinking about it. Currently, we only own BND and BNDW right now, but we are thinking about adding some TIPS just for peace of mind.

Do TIPS actually work if there is a super crazy hyperinflation scenario? For example, like in Germany after World War I.

Massive hyperinflation has never happened before in America, so how do we know if TIPS will truly do its job in that kind of scenario?
User avatar
dodecahedron
Posts: 6044
Joined: Tue Nov 12, 2013 12:28 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by dodecahedron »

teelainen wrote: Tue Nov 23, 2021 5:40 pm We have never owned any type of TIPS before, but we are thinking about it. Currently, we only own BND and BNDW right now, but we are thinking about adding some TIPS just for peace of mind.

Do TIPS actually work if there is a super crazy hyperinflation scenario? For example, like in Germany after World War I.

Massive hyperinflation has never happened before in America, so how do we know if TIPS will truly do its job in that kind of scenario?
Massive hyperinflation can cause so much social and geopolitical upheaval (revolutions, coup d'etat, etc.) that no financial investment can be guaranteed to be useful in that environment. Hopefully, the US has strong enough institutions and norms in place to prevent massive hyperinflation, but *nothing* can be guaranteed 100%. This is an example of what Bill Bernstein calls "deep risk." Read his books to learn more.
Last edited by dodecahedron on Tue Nov 23, 2021 5:50 pm, edited 1 time in total.
Leesbro63
Posts: 7449
Joined: Mon Nov 08, 2010 4:36 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Leesbro63 »

I've been concerned from the getgo about this: For large taxable account investors, "taxflation" will prevent TIPS from doing the very thing that you buy them to do, if we ever get a huge inflation problem.
000
Posts: 6051
Joined: Thu Jul 23, 2020 12:04 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by 000 »

Probably not.

TIPS are more for (unexpectedly) high inflation than anything else.

If you're really worried about taxflation I will observe that TIPS could be placed in a Roth and that gold has no (or little in an ETF) tax drag.
Capitulation of bears is part of the market topping process.
User avatar
Ocean77
Posts: 516
Joined: Wed Oct 23, 2019 3:20 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Ocean77 »

In case of hyper inflation, I'd rather own something of substance (companies, real estate), instead of any government IOU (inflation indexed or not).
20% US Stocks | 30% Int Stocks | 10% EM Stocks | 20% Bonds | 20% Gold
illumination
Posts: 1818
Joined: Tue Apr 02, 2019 6:13 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by illumination »

Probably not, I could see some sort of law passed that forced a liquidation. If they can confiscate private gold ownership, they can force you to hand in your government bonds at some pre-determined price.

If we truly do experience actual hyperinflation like the Weimar Republic, I would wager the government and currency falls apart pretty quickly anyway and it won't matter.

But we have experienced painful inflation of the double digit kind not that long ago, and in that scenario, I think TIPS would work.
AlohaJoe
Posts: 6204
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by AlohaJoe »

teelainen wrote: Tue Nov 23, 2021 5:40 pm how do we know if TIPS will truly do its job in that kind of scenario?
Because we can read the terms of the bonds. There's nothing about them that stops working just because inflation is above a certain point.
UpperNwGuy
Posts: 6706
Joined: Sun Oct 08, 2017 7:16 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by UpperNwGuy »

What prompted this thread? Seems to me that a lot of bogleheads are very very pessimistic about the future.
jebmke
Posts: 14052
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by jebmke »

UpperNwGuy wrote: Tue Nov 23, 2021 6:38 pm What prompted this thread? Seems to me that a lot of bogleheads are very very pessimistic about the future.
Media (and probably social media, but I wouldn’t know about that).
When you discover that you are riding a dead horse, the best strategy is to dismount.
Northern Flicker
Posts: 8951
Joined: Fri Apr 10, 2015 12:29 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Northern Flicker »

teelainen wrote: Tue Nov 23, 2021 5:40 pm We have never owned any type of TIPS before, but we are thinking about it. Currently, we only own BND and BNDW right now, but we are thinking about adding some TIPS just for peace of mind.

Do TIPS actually work if there is a super crazy hyperinflation scenario? For example, like in Germany after World War I.

Massive hyperinflation has never happened before in America, so how do we know if TIPS will truly do its job in that kind of scenario?
TIPS have only been around since their first auction by the treasury in January 1997. If we had 1970's style inflation, it is unclear how they would perform, but I'm confident that they would have performed better than duration-matched nominal bonds in the 1970's.

An even much bigger unknown is how TIPS would perform if we had 1930's style deflation.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
moneyflowin
Posts: 44
Joined: Sat Oct 16, 2021 6:14 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by moneyflowin »

If you're worried about Germany- or Venezuela-type hyperinflation, then you should not hold US dollars because in every case of extreme hyperinflation, that country issued new currency. Bonds, including TIPs, would become worthless. (Do you think that if a government issued new currency, it would make good on its IOUs? Of course not.)

In fact, if you were that worried about a Germany-type event, you shouldn't even be living in the US let alone hold US dollars.
UpperNwGuy
Posts: 6706
Joined: Sun Oct 08, 2017 7:16 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by UpperNwGuy »

Northern Flicker wrote: Tue Nov 23, 2021 6:44 pm
teelainen wrote: Tue Nov 23, 2021 5:40 pm We have never owned any type of TIPS before, but we are thinking about it. Currently, we only own BND and BNDW right now, but we are thinking about adding some TIPS just for peace of mind.

Do TIPS actually work if there is a super crazy hyperinflation scenario? For example, like in Germany after World War I.

Massive hyperinflation has never happened before in America, so how do we know if TIPS will truly do its job in that kind of scenario?
TIPS have only been around since their first auction by the treasury in January 1997. If we had 1970's style inflation, it is unclear how they would perform, but I'm confident that they would have performed better than duration-matched nominal bonds in the 1970's.

An even much bigger unknown is how TIPS would perform if we had 1930's style deflation.
1970s style inflation seemed onerous to us at the time, but it definitely wasn't hyperinflation. I visited a South American country in the early 1990s and watched the exchange rate change dramatically by the hour. If that happens here, I'm sure you can kiss TIPS good bye. But, I don't see hyperinflation happening here.
Northern Flicker
Posts: 8951
Joined: Fri Apr 10, 2015 12:29 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Northern Flicker »

I wasn't claiming it was hyperinflation. It nonetheless is a legitimate risk to bondholders, and the type of scenario that is a more plausible risk, though with what seems like a very low likelihood at present.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
User avatar
tooluser
Posts: 1035
Joined: Sat Oct 01, 2011 7:04 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by tooluser »

A recent exercise I did is to use portfoliovisualizer to compare an intermediate Total Bond fund to a TIPS fund of approximately the same duration. Over the timeframe of data available, they ended up in about the same place, occasionally switching places for which was best, so it was not clear to me that a TIPS fund protects for anything other than the short term. However, the timeframe of data available did not include any period of high or hyper inflation.

One of the features of TIP funds I don't like is that the government can always redefine the inflation measure to suit its interests, rather than the interests of the investor. During high or hyper inflation I believe this could be a major issue. With actual bonds there may be more protections, much harder to change the terms after the fact.

Hyperinflation surely indicates that many other things have gone wrong, and your bond holdings may be the least of your worries.
User avatar
2pedals
Posts: 1498
Joined: Wed Dec 31, 2014 12:31 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by 2pedals »

Only the portion of the portfolio that is invested in TIPS is protected. Taxable accounts are not preferred for TIPS investments. Taxes on TIPS coupon interest and principal increases could exceed coupon interest. Real TIPS portfolio values most likely will not keep pace with inflation after taxes if unexpected inflation happens.

I view TIPS are like an insurance policy that you can use to help protect part of your portfolio if you are risk-averse (you have enough stocks). You pay for lower coupon yields and the insured event (future inflation) may or may not occur. Some people choose to mix bonds and TIPS as part of their income portfolio. When you do this only the portion that is invested in TIPS is protected from unexpected inflation.
User avatar
nisiprius
Advisory Board
Posts: 45169
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by nisiprius »

[I corrected the dates of the highest inflation, see below ]

There's no way to know.

I think not, but I also think talk of hyperinflation is overheated rhetoric.

Hyperinflation is inflation at the rate of 50% per month.

The worst inflation in the history of the CPI occurred from 1920-1925; 1915-1920 prices roughly doubled in five years. That works out to less than 1.2% per month: far, far short of hyperinflation. The "double-digit inflation" around 1980 was less.

In Venezuela, inflation in 2018 is estimated to have been 65,384%. That is, prices multiplied 650X in 2018 = 72%/month. So that's hyperinflation. That means that prices were almost doubling every five weeks.

Hyperinflation is a breakdown. Things have snapped. Promises can't be kept. So, probably not.
Last edited by nisiprius on Fri Nov 26, 2021 8:22 am, edited 4 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Northern Flicker
Posts: 8951
Joined: Fri Apr 10, 2015 12:29 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Northern Flicker »

Only the portion of the portfolio that is invested in TIPS is protected. Taxable accounts are not preferred for TIPS investments. Taxes on TIPS coupon interest and principal increases could exceed coupon interest.
TIPS mutual funds and ETFs distribute principal adjustments as dividends. I believe they are required to becsuse otherwise the adjustments would only become taxable at redemption, and would be turned into capital gains.

TIPS interest and principal correction is exempt from state and local income tax.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
fortunefavored
Posts: 796
Joined: Tue Jun 02, 2015 8:18 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by fortunefavored »

True "hyperinflation" scenario is basically a societal/government breakdown. In that scenario, no traditional investments will save you.

Most of us living a comfortable urban/suburban lifestyle require a functioning society. Investing is inherently optimistic about the future.

If you really think hyperinflation is a likely risk, you would need to shift to building a rural compound, self-sufficiency, ammo and guns.

In short, either don't worry about it.. or change your plan significantly (and that's not TIPS.)
FinanceGeek
Posts: 895
Joined: Sun Jul 01, 2007 5:27 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by FinanceGeek »

fortunefavored wrote: Tue Nov 23, 2021 7:48 pm If you really think hyperinflation is a likely risk, you would need to shift to building a rural compound, self-sufficiency, ammo and guns.

In short, either don't worry about it.. or change your plan significantly (and that's not TIPS.)
Work towards acquiring a second citizenship in a country that you think will avoid the hyperinflation calamity.

IMHO, the catalyst for hyperinflation in the US will be if / when the US dollar loses its standing as reserve currency. At that point, foreign investors will demand higher interest rates on our debt, I can see this leading to hyperinflation.
User avatar
nisiprius
Advisory Board
Posts: 45169
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by nisiprius »

FinanceGeek wrote: Tue Nov 23, 2021 8:30 pm...IMHO, the catalyst for hyperinflation in the US will be if / when the US dollar loses its standing as reserve currency...
There isn't any single "reserve currency," the US dollar is simply the largest of many:

Currency Composition of Official Foreign Exchange Reserve (COFER)

Image

Things can change quickly, of course, but it looks as if there is quite a way to go before any other currency would become a bigger reserve than the US dollar. And since it would still be a reserve currency, it wouldn't be an instantaneous event. There wouldn't be any headline, "IMF strips US dollar of reserve status." (Not like the day in 2011 when Treasury securities lost their S&P AAA rating, had it one day and didn't have it the next).
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Topic Author
teelainen
Posts: 331
Joined: Fri Feb 01, 2019 1:17 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by teelainen »

FinanceGeek wrote: Tue Nov 23, 2021 8:30 pm
fortunefavored wrote: Tue Nov 23, 2021 7:48 pm If you really think hyperinflation is a likely risk, you would need to shift to building a rural compound, self-sufficiency, ammo and guns.

In short, either don't worry about it.. or change your plan significantly (and that's not TIPS.)
Work towards acquiring a second citizenship in a country that you think will avoid the hyperinflation calamity.
Any recommendations for a good backup country?
Katoswims
Posts: 44
Joined: Fri Nov 06, 2020 9:44 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Katoswims »

jebmke wrote: Tue Nov 23, 2021 6:42 pm
UpperNwGuy wrote: Tue Nov 23, 2021 6:38 pm What prompted this thread? Seems to me that a lot of bogleheads are very very pessimistic about the future.
Media (and probably social media, but I wouldn’t know about that).
Watch an administrative address vs data and metrics. Go shopping. Many other things to give a sense of the actual state of the union. Watching Cramer or Jenn probably not that reliable
User avatar
#Cruncher
Posts: 3311
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by #Cruncher »

nisiprius wrote: Tue Nov 23, 2021 7:46 pmThe worst inflation in the history of the CPI occurred from 1920-1925; prices roughly doubled in five years.
The CPI did double in five years, Nisi; but from 1915 to 1920. From 1920 to 1925 it declined about 12%.
Image

From BLS Consumer Price Index series CUUR0000SA0:

Code: Select all

Year   Jan  Feb  Mar   Apr  May  Jun   Jul  Aug  Sep   Oct  Nov  Dec   Avg

Code: Select all

1913   9.8  9.8  9.8   9.8  9.7  9.8   9.9  9.9 10.0  10.0 10.1 10.0   9.9
1914  10.0  9.9  9.9   9.8  9.9  9.9  10.0 10.2 10.2  10.1 10.2 10.1  10.0
1915  10.1 10.0  9.9  10.0 10.1 10.1  10.1 10.1 10.1  10.2 10.3 10.3  10.1

1916  10.4 10.4 10.5  10.6 10.7 10.8  10.8 10.9 11.1  11.3 11.5 11.6  10.9
1917  11.7 12.0 12.0  12.6 12.8 13.0  12.8 13.0 13.3  13.5 13.5 13.7  12.8
1918  14.0 14.1 14.0  14.2 14.5 14.7  15.1 15.4 15.7  16.0 16.3 16.5  15.1
1919  16.5 16.2 16.4  16.7 16.9 16.9  17.4 17.7 17.8  18.1 18.5 18.9  17.3
1920  19.3 19.5 19.7  20.3 20.6 20.9  20.8 20.3 20.0  19.9 19.8 19.4  20.0

1921  19.0 18.4 18.3  18.1 17.7 17.6  17.7 17.7 17.5  17.5 17.4 17.3  17.9
1922  16.9 16.9 16.7  16.7 16.7 16.7  16.8 16.6 16.6  16.7 16.8 16.9  16.8
1923  16.8 16.8 16.8  16.9 16.9 17.0  17.2 17.1 17.2  17.3 17.3 17.3  17.1
1924  17.3 17.2 17.1  17.0 17.0 17.0  17.1 17.0 17.1  17.2 17.2 17.3  17.1
1925  17.3 17.2 17.3  17.2 17.3 17.5  17.7 17.7 17.7  17.7 18.0 17.9  17.5

1926  17.9 17.9 17.8  17.9 17.8 17.7  17.5 17.4 17.5  17.6 17.7 17.7  17.7
1927  17.5 17.4 17.3  17.3 17.4 17.6  17.3 17.2 17.3  17.4 17.3 17.3  17.4
1928  17.3 17.1 17.1  17.1 17.2 17.1  17.1 17.1 17.3  17.2 17.2 17.1  17.1
1929  17.1 17.1 17.0  16.9 17.0 17.1  17.3 17.3 17.3  17.3 17.3 17.2  17.1
1930  17.1 17.0 16.9  17.0 16.9 16.8  16.6 16.5 16.6  16.5 16.4 16.1  16.7
You can use my spreadsheet, CPI-U since 1913, to find the greatest increase and decrease in the CPI for any specified number of years. (I'll add 2021 in a couple of months.)

Edited 11/26/2021 11:05 AM to replace BLS CPI graph (which no longer displays) with graph from FRED website. (I couldn't find a straight CPI going back to 1913 so I inverted the purchasing power graph by editing graph and changing "a" to "10000/a".)
Last edited by #Cruncher on Fri Nov 26, 2021 11:04 am, edited 1 time in total.
Ed 2
Posts: 2022
Joined: Sat May 15, 2010 9:34 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Ed 2 »

teelainen wrote: Tue Nov 23, 2021 5:40 pm We have never owned any type of TIPS before, but we are thinking about it. Currently, we only own BND and BNDW right now, but we are thinking about adding some TIPS just for peace of mind.

Do TIPS actually work if there is a super crazy hyperinflation scenario? For example, like in Germany after World War I.

Massive hyperinflation has never happened before in America, so how do we know if TIPS will truly do its job in that kind of scenario?
No. Will not protect. I was born in former USSR. I as young 20 years old person experience it for long enough to know. Not many who lived here experienced hyperinflation. Do you know what hypertension even is? It is when you wake up in the morning and instead of going to work running to the grocery store to buy bag of sugar, standing in big line to get lucky because if you don’t buy in the morning by the end of the day same bag of sugar will cost you twice more.
So, no there is no such thing anything can solve this problem if it comes. Stop listening too much news, we not even close .
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
UpperNwGuy
Posts: 6706
Joined: Sun Oct 08, 2017 7:16 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by UpperNwGuy »

teelainen wrote: Tue Nov 23, 2021 10:12 pm
FinanceGeek wrote: Tue Nov 23, 2021 8:30 pm
fortunefavored wrote: Tue Nov 23, 2021 7:48 pm If you really think hyperinflation is a likely risk, you would need to shift to building a rural compound, self-sufficiency, ammo and guns.

In short, either don't worry about it.. or change your plan significantly (and that's not TIPS.)
Work towards acquiring a second citizenship in a country that you think will avoid the hyperinflation calamity.
Any recommendations for a good backup country?
There is no good backup country. If the US economy goes under, so will the rest of the world.
User avatar
nisiprius
Advisory Board
Posts: 45169
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by nisiprius »

teelainen wrote: Tue Nov 23, 2021 10:12 pmAny recommendations for a good backup country?
In Ian Fleming's 1961 novel, "Thunderball," supervillain Ernst Stavro Blofeld says:
the total income to date... has amounted to approximately one and a half million pounds sterling in the Swiss francs and Venezuelan bolivars in which for reasons of prudence--they continue to be the hardest currencies in the world--we convert all our takings.
Oops.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Jack56
Posts: 65
Joined: Thu Jun 30, 2016 3:27 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Jack56 »

No one knows the answer to this question because TIPS have never been tested in that sort of environment.
BrooklynInvest
Posts: 491
Joined: Sun Jul 28, 2013 9:23 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by BrooklynInvest »

Hyperinflation is #237 on my current worries list. I don't watch a lot of "financial" news.

It's not clear to me how TIPS would "protect" in this scenario. To what degree are future inflation expectations baked in to the transaction and so you're paying upfront for the inflation increase protection? Ie. There's no free lunch. Would you have to buy at issuance and hold?
dbr
Posts: 37954
Joined: Sun Mar 04, 2007 9:50 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by dbr »

Hyperinflation is conventionally defined as >50% per month. Compounded that is about 13,000% per year. Do you really mean that? What sort of circumstances do you imagine that would happen in the US that there would be hyperinflation?

The answer is that certainly they would not protect you. What would protect you is shear speculation. You can check historical situations in other economies for examples. Most probably the only sure thing would be to have exported your wealth to a stable economy beforehand. Once conditions for hyperinflation are realized it is no longer possible to export wealth.
User avatar
JoeRetire
Posts: 10286
Joined: Tue Jan 16, 2018 2:44 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by JoeRetire »

teelainen wrote: Tue Nov 23, 2021 5:40 pm Massive hyperinflation has never happened before in America, so how do we know if TIPS will truly do its job in that kind of scenario?
We don't.

In that scenario, all bets are off.

This might help: https://en.wikipedia.org/wiki/Hyperinflation
I love a good nap. Sometimes it’s the only thing getting me out of bed in the morning.
Northern Flicker
Posts: 8951
Joined: Fri Apr 10, 2015 12:29 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Northern Flicker »

nisiprius wrote: Tue Nov 23, 2021 10:06 pm
FinanceGeek wrote: Tue Nov 23, 2021 8:30 pm...IMHO, the catalyst for hyperinflation in the US will be if / when the US dollar loses its standing as reserve currency...
There isn't any single "reserve currency," the US dollar is simply the largest of many:

Currency Composition of Official Foreign Exchange Reserve (COFER)

Image

Things can change quickly, of course, but it looks as if there is quite a way to go before any other currency would become a bigger reserve than the US dollar. And since it would still be a reserve currency, it wouldn't be an instantaneous event. There wouldn't be any headline, "IMF strips US dollar of reserve status." (Not like the day in 2011 when Treasury securities lost their S&P AAA rating, had it one day and didn't have it the next).
Oil is priced in USD and bought with USD. If we transition our energy "production" and transportarion away from burning petrochemicals, it will create a material change in demand for USD. I have no idea how that would play out.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
Leesbro63
Posts: 7449
Joined: Mon Nov 08, 2010 4:36 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Leesbro63 »

Reminds me of all the times the oil producing countries threatened to price oil in something other than dollars. Never happened.
User avatar
Rainier
Posts: 1605
Joined: Thu Jun 14, 2012 5:59 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Rainier »

Capitalism is the antidote for hyperinflation.
User avatar
Fat-Tailed Contagion
Posts: 1088
Joined: Fri Mar 02, 2007 11:49 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Fat-Tailed Contagion »

Rents for apartments is our area are up 65-95% year over year.

Makes the fuel price increases look like no big deal.

People are pretty concerned.

Apartment Owner would have been a fantastic hedge against hyperinflation.
“The intelligent investor is a realist who sells to optimists and buys from pessimists.” | ― Benjamin Graham, The Intelligent Investor (75/25 - 50/50 - 25/75)
MIretired
Posts: 957
Joined: Fri Sep 06, 2013 12:35 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by MIretired »

Isn't it fair to say that hyperinflation is not inflation at all? But a devaluation of local currency?
And in any other normal range of inflation, aren't TIPS holders (as are ibond holders) getting inflation adjustments that are 6 months stale; and that is all the drawback? And if inflation finally decreases, TIPS holders then get their 6 month backpay?
Just curious if I get that right.
Lynx310650
Posts: 287
Joined: Fri Sep 15, 2017 1:33 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Lynx310650 »

Not an apples to apples comparison, but are there countries that issue TIPS like securities that have suffered fairly high inflation? Did they fulfill their obligations? I'm curious about a country like Turkey, for example.

I'd want to say even if we saw inflation along the lines of what Turkey is going through (20-25%), TIPS would pay out. There doesn't seem to be a gov't/societal collapse over there, and I doubt we'd see that here even if inflation got that high.

Now, for true post WWI Weimar style hyperinflation, I seriously doubt TIPS would protect you. For that you'd probably want to get out of the country, ASAP. Maybe gold and crypto?
grok87
Posts: 9753
Joined: Tue Feb 27, 2007 9:00 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by grok87 »

Rainier wrote: Wed Nov 24, 2021 8:59 pm Capitalism is the antidote for hyperinflation.
i think this is a good observation. the high inflation of the 70s was arguably caused in part by high oil prices/oil shortage. our economy adjusted in the medium term, along with strong action by the fed (volker) and the problem was solved.
today at least part of the inflation seems to be from the "chip shortage". as discussed in this article
https://www.barrons.com/articles/chip-s ... 1629507891
eventually more chips will be produced, the economy will adjust and the problem will solve itself.
in the mean time, those of us who bought tips as insurance or as a liability matching asset (especially in tax sheltered accounts) will see that insurance payoff.
cheers,
grok
RIP Mr. Bogle.
User avatar
nisiprius
Advisory Board
Posts: 45169
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by nisiprius »

Dual posted in another thread... Turkey is experiencing high inflation, and apparently issues inflation-linked bonds, so there's an opportunity to watch and see what happens.

There is a S&P Turkey Sovereign Inflation-linked Bond Index, but I can't find any ETF that tracks it.

It might be interesting to try to find out how the value of the bonds themselves track Turkish inflation, with particular emphasis on bonds as they mature. Not sure how to go about that myself. But in order to judge whether TIPS will protect against US inflation, it would be nice to know if Turkish inflation-linked bonds are protecting against Turkish inflation.

Image

Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
000
Posts: 6051
Joined: Thu Jul 23, 2020 12:04 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by 000 »

Look at Argentina inflation-linked bonds.
Capitulation of bears is part of the market topping process.
User avatar
willthrill81
Posts: 27092
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by willthrill81 »

nisiprius wrote: Tue Nov 23, 2021 7:46 pm There's no way to know.

I think not, but I also think talk of hyperinflation is overheated rhetoric.

Hyperinflation is inflation at the rate of 50% per month.

The worst inflation in the history of the CPI occurred from 1920-1925; prices roughly doubled in five years. That works out to less than 1.2% per month: far, far short of hyperinflation. The "double-digit inflation" around 1980 was less.

In Venezuela, inflation in 2018 is estimated to have been 65,384%. That is, prices multiplied 650X in 2018 = 72%/month. So that's hyperinflation. That means that prices were almost doubling every five weeks.

Hyperinflation is a breakdown. Things have snapped. Promises can't be kept. So, probably not.
Very well said! :thumbsup
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
Dottie57
Posts: 10523
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Dottie57 »

willthrill81 wrote: Thu Nov 25, 2021 10:07 pm
nisiprius wrote: Tue Nov 23, 2021 7:46 pm There's no way to know.

I think not, but I also think talk of hyperinflation is overheated rhetoric.

Hyperinflation is inflation at the rate of 50% per month.

The worst inflation in the history of the CPI occurred from 1920-1925; prices roughly doubled in five years. That works out to less than 1.2% per month: far, far short of hyperinflation. The "double-digit inflation" around 1980 was less.

In Venezuela, inflation in 2018 is estimated to have been 65,384%. That is, prices multiplied 650X in 2018 = 72%/month. So that's hyperinflation. That means that prices were almost doubling every five weeks.

Hyperinflation is a breakdown. Things have snapped. Promises can't be kept. So, probably not.
Very well said! :thumbsup
The examples really explain hyperinflation. Inflation in the 70’s and 80’s hurt, but we didn’t stop functioning. My mortgage rate in 1987 was 10%. Even when mortgages were 16% society and business was still functioning.
User avatar
willthrill81
Posts: 27092
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by willthrill81 »

Dottie57 wrote: Thu Nov 25, 2021 10:22 pm
willthrill81 wrote: Thu Nov 25, 2021 10:07 pm
nisiprius wrote: Tue Nov 23, 2021 7:46 pm There's no way to know.

I think not, but I also think talk of hyperinflation is overheated rhetoric.

Hyperinflation is inflation at the rate of 50% per month.

The worst inflation in the history of the CPI occurred from 1920-1925; prices roughly doubled in five years. That works out to less than 1.2% per month: far, far short of hyperinflation. The "double-digit inflation" around 1980 was less.

In Venezuela, inflation in 2018 is estimated to have been 65,384%. That is, prices multiplied 650X in 2018 = 72%/month. So that's hyperinflation. That means that prices were almost doubling every five weeks.

Hyperinflation is a breakdown. Things have snapped. Promises can't be kept. So, probably not.
Very well said! :thumbsup
The examples really explain. Inflation in the 70’s and 80’s hurt, but we didn’t stop functioning. My mortgage rate in 1987 was 10%. Even when mortgages were 16% society and business was still functioning.
Many people got creative with trying to sell their houses back then since few were happy with double-digit mortgages. I've heard one person describe being nervous to take out a long term CD paying 16% because of inflation. But yes, the economy didn't break down.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
Angst
Posts: 2784
Joined: Sat Jun 09, 2007 11:31 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Angst »

#Cruncher wrote: Wed Nov 24, 2021 6:35 am
nisiprius wrote: Tue Nov 23, 2021 7:46 pmThe worst inflation in the history of the CPI occurred from 1920-1925; prices roughly doubled in five years.
The CPI did double in five years, Nisi; but from 1915 to 1920. From 1920 to 1925 it declined about 12%.
Image
From BLS Consumer Price Index series CUUR0000SA0:

Code: Select all

Year   Jan  Feb  Mar   Apr  May  Jun   Jul  Aug  Sep   Oct  Nov  Dec   Avg

Code: Select all

1913   9.8  9.8  9.8   9.8  9.7  9.8   9.9  9.9 10.0  10.0 10.1 10.0   9.9
1914  10.0  9.9  9.9   9.8  9.9  9.9  10.0 10.2 10.2  10.1 10.2 10.1  10.0
1915  10.1 10.0  9.9  10.0 10.1 10.1  10.1 10.1 10.1  10.2 10.3 10.3  10.1

1916  10.4 10.4 10.5  10.6 10.7 10.8  10.8 10.9 11.1  11.3 11.5 11.6  10.9
1917  11.7 12.0 12.0  12.6 12.8 13.0  12.8 13.0 13.3  13.5 13.5 13.7  12.8
1918  14.0 14.1 14.0  14.2 14.5 14.7  15.1 15.4 15.7  16.0 16.3 16.5  15.1
1919  16.5 16.2 16.4  16.7 16.9 16.9  17.4 17.7 17.8  18.1 18.5 18.9  17.3
1920  19.3 19.5 19.7  20.3 20.6 20.9  20.8 20.3 20.0  19.9 19.8 19.4  20.0

1921  19.0 18.4 18.3  18.1 17.7 17.6  17.7 17.7 17.5  17.5 17.4 17.3  17.9
1922  16.9 16.9 16.7  16.7 16.7 16.7  16.8 16.6 16.6  16.7 16.8 16.9  16.8
1923  16.8 16.8 16.8  16.9 16.9 17.0  17.2 17.1 17.2  17.3 17.3 17.3  17.1
1924  17.3 17.2 17.1  17.0 17.0 17.0  17.1 17.0 17.1  17.2 17.2 17.3  17.1
1925  17.3 17.2 17.3  17.2 17.3 17.5  17.7 17.7 17.7  17.7 18.0 17.9  17.5

1926  17.9 17.9 17.8  17.9 17.8 17.7  17.5 17.4 17.5  17.6 17.7 17.7  17.7
1927  17.5 17.4 17.3  17.3 17.4 17.6  17.3 17.2 17.3  17.4 17.3 17.3  17.4
1928  17.3 17.1 17.1  17.1 17.2 17.1  17.1 17.1 17.3  17.2 17.2 17.1  17.1
1929  17.1 17.1 17.0  16.9 17.0 17.1  17.3 17.3 17.3  17.3 17.3 17.2  17.1
1930  17.1 17.0 16.9  17.0 16.9 16.8  16.6 16.5 16.6  16.5 16.4 16.1  16.7
You can use my spreadsheet, CPI-U since 1913, to find the greatest increase and decrease in the CPI for any specified number of years. (I'll add 2021 in a couple of months.)
Thank you for posting this link to your CPI and inflation webpage, but was best was the link at the bottom of that page to actually download the spreadsheet: http://eyebonds.info/downloads/docs/CPIU1913.xls

I found that moving the 12 monthly columns all the way to the left to abut up to the years index on the left, and then dragging the sheet up and down, viewing the changes in inflation from one year and one decade to another was easy and fascinating to see. I've never conceptualized the entire swathe of the past century in terms of our inflation history so clearly, it was fascinating and something of a revelation. It makes me wonder even more, what's in store for the rest of the 2020's. Thank you again!
Last edited by Angst on Thu Nov 25, 2021 11:09 pm, edited 1 time in total.
Makefile
Posts: 1000
Joined: Fri Apr 22, 2016 11:03 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Makefile »

illumination wrote: Tue Nov 23, 2021 6:35 pm Probably not, I could see some sort of law passed that forced a liquidation. If they can confiscate private gold ownership, they can force you to hand in your government bonds at some pre-determined price.
Another parallel is the NYSE closed in 1914 for four months for the outbreak of World War I: https://www.businessinsider.com/new-yor ... 914-2014-7

As pointed out, 1970s-1980s inflation was not "hyperinflation"--I don't think the US has had hyperinflation since revolutionary times (and likely the Confederacy too?)
User avatar
nisiprius
Advisory Board
Posts: 45169
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by nisiprius »

#Cruncher wrote: Wed Nov 24, 2021 6:35 am
nisiprius wrote: Tue Nov 23, 2021 7:46 pmThe worst inflation in the history of the CPI occurred from 1920-1925; prices roughly doubled in five years.
The CPI did double in five years, Nisi; but from 1915 to 1920. From 1920 to 1925 it declined about 12%.
Image
Ouch! :oops: Thanks. You're right, and fortunately some of my previous postings have been correct... I made a chart of rolling five-year inflation rates, which I've posted several times, and it has a peak at 1920, and I glanced at my own chart and forgot that the plotted date is the end of the period.

1915-1920 was notable because in January of 1914, Henry Ford began paying his workers $5/day. This created a brief period of time during which Ford was celebrated as both a capitalist hero and a labor hero. The $5/day wage was transformational but the inflation of the next five years took back most of the benefit.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
grok87
Posts: 9753
Joined: Tue Feb 27, 2007 9:00 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by grok87 »

nisiprius wrote: Fri Nov 26, 2021 8:38 am
#Cruncher wrote: Wed Nov 24, 2021 6:35 am
nisiprius wrote: Tue Nov 23, 2021 7:46 pmThe worst inflation in the history of the CPI occurred from 1920-1925; prices roughly doubled in five years.
The CPI did double in five years, Nisi; but from 1915 to 1920. From 1920 to 1925 it declined about 12%.
Image
Ouch! :oops: Thanks. You're right, and fortunately some of my previous postings have been correct... I made a chart of rolling five-year inflation rates, which I've posted several times, and it has a peak at 1920, and I glanced at my own chart and forgot that the plotted date is the end of the period.

1915-1920 was notable because in January of 1914, Henry Ford began paying his workers $5/day. This created a brief period of time during which Ford was celebrated as both a capitalist hero and a labor hero. The $5/day wage was transformational but the inflation of the next five years took back most of the benefit.
the high inflation of 1915-1920 was due to the war. same thing happened around WWII and the vietnam war
RIP Mr. Bogle.
Jack&Warren disciple
Posts: 101
Joined: Sat Sep 11, 2021 9:46 am

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by Jack&Warren disciple »

The demand for TIPS is apparently at record inflows, there's so much capital out there chasing so few safe "risk free" bonds. From todays WSJ: "On Oct. 21, the asset manager added more of an exchange-traded fund that tracks an index of inflation-protected U.S. Treasury bonds to several of its model portfolios.

The fund, iShares TIPS Bond ETF, then took in roughly $500 million on Oct. 22, more than 10 times the average new money that the fund took each day in the 12 months ended in October, a Wall Street Journal analysis of FactSet data show. The fund had already benefited from investors' unease about rising prices and attracted about $11.9 billion in net flows in the 12 months ended in October.

In a recent memo to advisers explaining its model changes, BlackRock said that supply-chain bottlenecks, rising wages and housing shortages were driving price pressures. "This bout of inflation could be more than transitory," it said."
User avatar
dodecahedron
Posts: 6044
Joined: Tue Nov 12, 2013 12:28 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by dodecahedron »

grok87 wrote: Fri Nov 26, 2021 8:40 am
nisiprius wrote: Fri Nov 26, 2021 8:38 am
#Cruncher wrote: Wed Nov 24, 2021 6:35 am
nisiprius wrote: Tue Nov 23, 2021 7:46 pmThe worst inflation in the history of the CPI occurred from 1920-1925; prices roughly doubled in five years.
The CPI did double in five years, Nisi; but from 1915 to 1920. From 1920 to 1925 it declined about 12%.
Image
Ouch! :oops: Thanks. You're right, and fortunately some of my previous postings have been correct... I made a chart of rolling five-year inflation rates, which I've posted several times, and it has a peak at 1920, and I glanced at my own chart and forgot that the plotted date is the end of the period.

1915-1920 was notable because in January of 1914, Henry Ford began paying his workers $5/day. This created a brief period of time during which Ford was celebrated as both a capitalist hero and a labor hero. The $5/day wage was transformational but the inflation of the next five years took back most of the benefit.
the high inflation of 1915-1920 was due to the war. same thing happened around WWII and the vietnam war
Indeed, wartime (and immediate aftermath) is notorious for triggering inflation. Both the North and South experienced inflation during the Civil War (the North "only 80%" and the South 9000%.)

Here is an NBER paper surveying US experience with wartime inflation from the Revolution through the first Iraq war. The consistent message: wars against "major powers" have been consistently inflationary.

I am currently reading a fascinating recent biography of George III, who (despite having studied math, economics and history with noteworthy diligence) naively agreed to a fixed royal annuity at the outset of his reign in 1760, in a country which had already been experiencing wartime inflation even before he ascended the throne as the British were fighting the French both on the European continent and in their respective colonies.
Soon after his ascension [at age 22], George announced his plan to hand over all Crown revenues to parliament in exchange for 800,000 pounds a year for life. It turned out to be a terrible decision and by 1769 had cost him a total of 767,000 pounds. ... outgoings increased while George's income was now fixed. His [seven] siblings were growing up and needed supporting and [still unmarried at the time] he had not considered what a wife and large progeny would one day require, let alone the effects of wartime inflation.
Source: The Last King of America: the Misunderstood Reign of George III*, p. 60

Thanks to forum member Mr. Rumples for recommending the book!
grok87
Posts: 9753
Joined: Tue Feb 27, 2007 9:00 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by grok87 »

dodecahedron wrote: Fri Nov 26, 2021 9:14 am
grok87 wrote: Fri Nov 26, 2021 8:40 am
nisiprius wrote: Fri Nov 26, 2021 8:38 am
#Cruncher wrote: Wed Nov 24, 2021 6:35 am
nisiprius wrote: Tue Nov 23, 2021 7:46 pmThe worst inflation in the history of the CPI occurred from 1920-1925; prices roughly doubled in five years.
The CPI did double in five years, Nisi; but from 1915 to 1920. From 1920 to 1925 it declined about 12%.
Image
Ouch! :oops: Thanks. You're right, and fortunately some of my previous postings have been correct... I made a chart of rolling five-year inflation rates, which I've posted several times, and it has a peak at 1920, and I glanced at my own chart and forgot that the plotted date is the end of the period.

1915-1920 was notable because in January of 1914, Henry Ford began paying his workers $5/day. This created a brief period of time during which Ford was celebrated as both a capitalist hero and a labor hero. The $5/day wage was transformational but the inflation of the next five years took back most of the benefit.
the high inflation of 1915-1920 was due to the war. same thing happened around WWII and the vietnam war
Indeed, wartime (and immediate aftermath) is notorious for triggering inflation. Both the North and South experienced inflation during the Civil War (the North "only 80%" and the South 9000%.)

Here is an NBER paper surveying US experience with wartime inflation from the Revolution through the first Iraq war. The consistent message: wars against "major powers" have been consistently inflationary.

I am currently reading a fascinating recent biography of George III, who (despite having studied math, economics and history with noteworthy diligence) naively agreed to a fixed royal annuity at the outset of his reign in 1760, in a country which had already been experiencing wartime inflation even before he ascended the throne as the British were fighting the French both on the European continent and in their respective colonies.
Soon after his ascension [at age 22], George announced his plan to hand over all Crown revenues to parliament in exchange for 800,000 pounds a year for life. It turned out to be a terrible decision and by 1769 had cost him a total of 767,000 pounds. ... outgoings increased while George's income was now fixed. His [seven] siblings were growing up and needed supporting and [still unmarried at the time] he had not considered what a wife and large progeny would one day require, let alone the effects of wartime inflation.
Source: The Last King of America: the Misunderstood Reign of George III*, p. 60

Thanks to forum member Mr. Rumples for recommending the book!
thanks. the encylopedia.com entry on civil war inflation was very interesting. And King George III's experience reinforces my desire for a inflation adjusted annuity...if only one could purchase such a thing....
RIP Mr. Bogle.
SteadyOne
Posts: 504
Joined: Fri Mar 22, 2019 5:26 pm

Re: Will TIPS protect you if there is disastrous hyperinflation?

Post by SteadyOne »

grok87 wrote: Fri Nov 26, 2021 8:40 am
nisiprius wrote: Fri Nov 26, 2021 8:38 am
#Cruncher wrote: Wed Nov 24, 2021 6:35 am
nisiprius wrote: Tue Nov 23, 2021 7:46 pmThe worst inflation in the history of the CPI occurred from 1920-1925; prices roughly doubled in five years.
The CPI did double in five years, Nisi; but from 1915 to 1920. From 1920 to 1925 it declined about 12%.
Image
Ouch! :oops: Thanks. You're right, and fortunately some of my previous postings have been correct... I made a chart of rolling five-year inflation rates, which I've posted several times, and it has a peak at 1920, and I glanced at my own chart and forgot that the plotted date is the end of the period.

1915-1920 was notable because in January of 1914, Henry Ford began paying his workers $5/day. This created a brief period of time during which Ford was celebrated as both a capitalist hero and a labor hero. The $5/day wage was transformational but the inflation of the next five years took back most of the benefit.
the high inflation of 1915-1920 was due to the war. same thing happened around WWII and the vietnam war
For an example close to home: Confederacy experienced hyperinflation pretty severely: “During the war, prices in the Confederacy rose more than 9,000 percent. The inflation rate in the North was only about 80 percent” https://www.encyclopedia.com/history/d ... onfederacy
From the same source:
“ The principal methods available to finance the war were taxation, borrowing, and printing money. The Confederacy was able to raise little of its wartime revenue from taxes, and usually Confederate bonds found but a meager market. Consequently, the government met most of its expenses by issuing ever-increasing amounts of treasury notes. By the end of 1862, treasury notes outstanding plus issues by the various southern states totaled $500 million and were worth only one-third that amount in gold. A year later this amount had increased to more than $700 million, and gold was quoted in paper notes at 20 for 1.By the end of 1864, the amount of currency had risen to $1 billion, and the gold quotation was 40 for 1 before that year-end.”

At the beginning of the war, the Confederate dollar cost 90¢ worth of gold (Union) dollars. By the war's end, its price had dropped to .017¢.
Post Reply