Wednesday, February 23, 2011

A Saver's Nightmare v.2

Click to enlarge.

We're keeping the dream alive. Woohoo.

According to Bloomberg, 5-Year TIPS are now yielding
-0.41%. Pathetic.

If the 1970s are any indicator, then real rates could actually fall further. Here's what Bill Gross had to say recently.

February 23, 2011
Investors Chronicle: Default by stealth

"And, on the short end of the yield curve, we are looking at creditors receiving negative real interest rates for a long, long time. That is, in effect, a default."

As a saver, that is truly a nightmare scenario. It is the primary reason I was willing to lock in a positive real yield on 30-year TIPS.

See Also:
A Saver's Nightmare
Real Yield Infection (Musical Tributes)

Source Data:
I-Bond Rates
TreasuryDirect: Auction Results
U.S. Treasury: Daily Real Yield


Mr Slippery said...


You may not like me bringing this up, but negative real interest rates have a strong correlation to the gold price. Larry Summers even wrote a paper about the link.

If negative real rates are expected for a long time, what do you think happens to the gold price?

For personal reasons, I hope the interest rates remain low so my [poorly chosen] adjustable rate mortgage will reset much lower next year. But it sucks for savers.

The only way to "win" at the inflation game is to use it to destroy your debt, transferring wealth from everyone else to you. It is a hard game to win because the timing and your debt structure must be right. You also have to have some kind of indexed or rising income.

God help us all.

Stagflationary Mark said...

Mr Slippery,

"You may not like me bringing this up, but negative real interest rates have a strong correlation to the gold price."

That's the main reason I bought gold and silver in 2004. I've posted about this many times.

Fed Funds Rate vs. Commodities

I bought gold and silver for the first time in my life back in 2004. I know exactly why I did it. It is still fresh in my mind. My gut said that earning 1% in three month treasury bills when inflation was clearly higher than that was not a good thing. I didn't know how long it would go on. The Fed pretty much forced me to own something of substance. Since I'm a saver by nature, I chose rocks. I already had a house. I can understand why renters might choose to buy. It surprised me that the rocks did so well. It surprised homeowners that real estate did so well. I just wanted a hedge against inflation but I got so much more than that. If you can believe in that chart above, you'll see that I actually bought a piece of heavily leveraged inflation. It seems a very small change in the Fed Funds rate can (not always) have a dramatic effect on commodity prices. Why? We live in an overleveraged society. Everything is overleveraged. Just look at how many hedge funds we have. That's my opinion and I'm sticking to it.

Unfortunately, I'm also in the camp that believes that the inflation adjusted gold and silver prices matter too, at least in the long run. When I bought gold and silver in 2004 I told myself that when I sold I'd be done. It would be too easy to be tempted back in. The early 1980s could have easily ruined me.

You can probably guess what I think about the future based on the name I've chosen. I'm sitting in TIPS (treasury inflation protected securities), I-Bonds, and short-term treasuries. I joke to some friends that if we're right to be stagflationists they'll do better than me, but if I'm wrong I'll do better than them. I'm in the wimpy version of stagflation insurance. TIPS, to me, are unleveraged inflation insurance. I just don't want to be leveraged anymore (unless forced again).

I'm not being forced right now. Right or wrong, I am comfortable owning long-term TIPS in this environment and the one I project forward.

Hyperinflation would ruin me but I've known and said that all along. Nothing is risk free these days. Sigh.

Stagflationary Mark said...

Here's a bonus chart I made back in 2007.

Certainty vs. Uncertainty (animated)

The ride is something to behold!

Stagflationary Mark said...

From the comments of that first link I offered:

What surprised me most was the explosiveness of the climb. Even the dealer who sold me precious metals couldn't understand why anyone would think gold would do better than inflation.

It makes sense though. In order for it to be a good long-term store of value, it must behave like a coiled spring. Each year interest rates hold it down is one more year of coiling.

Lately, it is a bit like a Jack in the box. Every time Bernanke gets the lid closed, the music starts back up and it pops out at him again. ;)

I do not envy Bernanke's job.

Gold is REALLY popping out at Bernanke right now, lol. Sigh.

dearieme said...

Long TIPS will just have to undergo an old-fashioned conventional default. Roosevelt's default in the '30s is a suitable model.

Stagflationary Mark said...


I expect plenty of old-fashioned confiscation through taxes on the inflationary gains going forward. Sigh.

Hopefully I'll slide somewhat under the radar though. I'm generally not in a high tax bracket unless inflation really picks up.

Mr Slippery said...

"Lately, it is a bit like a Jack in the box."

Mark, you are so funny. I laughed like a madman when I read that. My wife is starting to wonder about my sanity.

nanute said...

Mark, I expect plenty of old-fashioned confiscation through taxes on the inflationary gains going forward...
That sounds a bit confusing to me. How can you gain from inflation? I guess if inflation exceeds your rate of return, you'll pay taxes on the gains and suffer the loss to inflation. Is that what you mean?

dearieme said...

Two new offers have appeared in the British savings market. One company is offering inflation plus 0.3% per annum if you tie your money up for 5 years. Its competitor is offering inflation plus 1.5% per annum. Why the difference? One company is Bank of Ireland. I suspect that you can guess which.

Stagflationary Mark said...


Probably best to just offer an example.

1. Let's say I earn 2% over inflation.
2. Let's say inflation averages 20% per year.
3. I'd be earning 22%.
4. Let's say I pay about 1/3rd of it in taxes.
5. I'd net about 15%.

Since inflation would be 20% and I'd only be netting 15%, the government would basically be confiscating 5% of my savings each year.

Stagflationary Mark said...


I can only imagine the pain that private companies would experience if inflation picked up and they offered inflation protection to their customers.

Then again, that's what bailouts are for. Sigh.

nanute said...

I understand what your example illustrates. I'm just saying that it would be better to pay a tax on gains, as opposed to a tax on inflationary "losses." The tax man doesn't tax into consideration real vs. nominal rates of return.

Charles Kiting said...

The tax man doesn't tax into consideration real vs. nominal rates of return.

Can you think of anything more evil than the taxman and the money lender being the same entity?

Stagflationary Mark said...

nanute (& Charles Kiting),

There's not much I can do to protect myself against the tax man.

He's the ultimate confiscator.

AllanF said...

Nanute, I don't think you truly get it. If you see savings as a "score" to track your status vs. the other guy, sure the tax on TIPS is less bad provided the TIPS are yielding more than the alternatives. If, however, you see savings wealth you've accumulated through hard work and deferred consumption so that you can indulge in other things more interesting that wage-slavery while maintaining a particular standard of living, taxing the inflationary gain on capital is an outrageous confiscation/theft on principle no matter the amount.

And it doesn't take long for the principle to affect the principal. A mere decade of negative 5% after-tax yields, such as in Mark's example, is enough to wipe out 1/2 of one's wealth. If you're a 50 y.o. early retiree, 10 years ain't all that long.

Allow me to trot out Lenin's quote: "The way to crush the bourgeoisie is to grind them
between the millstones of taxation and inflation."

There should be one of those despair posters with that on it.

Stagflationary Mark said...


"The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."

That's where Wall Street comes in. They are the protectors* of the bourgeoisie! ;)

* - heavy sarcasm