Overcapacity and I-Bonds

The chart clearly shows the slack and the long-term trend of increasing slack. Much to my relief as a saver, it does not exactly scream that hyperinflation will soon be upon us. Further, this overcapacity problem isn't just limited to the United States nor do I see how the governments' solutions can fix it. In other words...

It is improbable that the governments of the world can prop up the "unpropable".

S&P: Govt Incentives For Autos Might Impede Indus Recovery

"Government funds do not address the structural problems the industry is facing, including global overcapacity, the need for industry-wide consolidation, high capital intensity, and automakers' fixed-cost structure," Standard & Poor's said in a report.

Japan reels under massive slide in exports

From consumer products, raw materials, to airports and other infrastructures to name but a few, saving the banks does not address the problem of overcapacity and the simple truth is a lot of the growth that took place in the past years will have to be scaled back. Given Japan's experience, it is possible to see that no government can always spend its way out of economic problems. The best thing a government can do is create a stable economy that encourages people to spend without worrying too much about the future.

Chinese industry still in deep trouble -vice min

"We can not easily conclude that the economy has bottomed out. The industrial situation remains serious," he cautioned.

Lou said overcapacity, including in the steel and auto sectors, was intensifying because of weak domestic and global demand.

He said companies, especially smaller ones, still faced acute funding shortfalls because of rising inventories. Beijing has tried to address their financing difficulties by leaning on banks to give more credit to small- and medium-sized enterprises.

Challenges And Opportunities In The European Manufacturing Sector

Almost all of Europe’s manufacturing industry has felt the impact of the recent financial crisis. Overcapacity is increasingly apparent as demand slows, and executives across the continent are now under pressure to adjust workforces and realign their businesses to recent market developments.

I continue to ride this crisis out in TIPS and I-Bonds. In hindsight, I'd have done better without the inflation protection. However, in an environment that destroyed wealth in the trillions, not losing purchasing power was still a relatively good strategy. I'd do it again. In fact, I am doing it again and will continue to do it again.

The I-Bond rate resets on May 1st. The bonds currently pay a locked in rate of 0.7% above the CPI, tax deferred for up to 30 years. That's good enough for me in this environment. I have this sinking suspicion we'll be seeing 0.0% above the CPI at some point. What's my reasoning?

1. We've already seen it once (May 2008).
2. The "smart" economists want negative real interest rates.

I also want to point out that I-Bonds do not need to be held the full 30 years. In one year they can be sold (with a three month interest penalty). Check this out though. I-Bonds bought today earn 5.64% for the first six months. The following six months will most likely be 0.0% (thanks to deflation). What's a three month penalty on 0.0%? Not much, lol.

Savings I-Bonds Update: New Inflation (err… Deflation) Rate Announced

This would leave you with a 5.64% return on your money for 6 months, and then nothing for 5 months. Overall, that’s a 3.08% annualized return, and you will be exempt from state income taxes on the interest as well. This is very competitive with current bank CD rates.

This is not investment advice. I'm simply stating what I am doing. Further, I won't be selling my I-Bonds in a year. I'm holding them the full 30 years. They can't lose money during deflation (as good as cash). During periods of high inflation, they are somewhat protected from both it and the taxes on that inflation. Only serious hyperinflation can absolutely ruin them as an investment, but in that environment we're all... well, you know.

I told friends in 2000 that I'd have put all my money in I-Bonds if the government would have let me. They paid 3.4% over inflation. The government limits how much we can buy in any given year though. They recently lowered it from $30k to $5k (although we can actually buy $10k if we purchase $5k through Treasury Direct and $5k in paper form from a local bank).

See Also:
Trend Line Disclaimer

Source Data:
St. Louis Fed: Capacity Utilization: Total Industry