US Federal Debt
Click to enlarge.
The following chart compares the total nominal return of 3 month treasury bills during World War II (September 1939 to September 1945) to the returns beginning in November 2008.
Click to enlarge.
Note that short-term interest rates were extremely similar. The estimate in blue assumes more of the same.
The following chart compares the cumulative effect of inflation.
Click to enlarge.
The blue line estimate represents 5-year inflation expectations as determined by the bond market (the difference between 5-year TIPS and 5-year nominal treasuries). There is plenty of room for error here. Let's hope any error isn't to the upside (to more closely match World War II's line in black).
The following chart shows the cumulative loss of purchasing power of 3-month treasury bills.
Click to enlarge.
The blue line is an estimate based on the estimates of the previous two charts. There's nothing quite like the accuracy of using two estimates to make a third estimate. That said, it is probably better than a blind guess.
The bond market expects short-term savers to continue to lose real purchasing power. The 5-year inflation protected treasuries trade today at -0.62%. That's a nearly guaranteed 3.1% loss if held 5 years (the exception would be serious deflation since TIPS have some deflation protection). In theory, shorter-term investors would be expected to do even worse.
I don't have faith in the predictive power of the blue lines in these charts, but I do respect what they are trying to say. That's one reason I am/was willing to lock in the real returns of long-term TIPS. Nothing is safe though. There are plenty of ways savers can lose this war. The slow grind of inflation, default, panicking into riskier assets at the wrong time, and taxation all come to mind. Just opinions of course.
See Also:
Mundell-Tobin Effect Epiphany!
Source Data:
St. Louis Fed: 3-Month Treasury Bill
St. Louis Fed: CPI
US Treasury: Daily Yield Curve
Feature, not bug. (see: financial repression).
ReplyDeleteThe government has no possibility of taxing enough to meet its obligations in real dollar terms and also repair the banks. It has to use subtle means of transferring wealth both itself and the broken banking system. Real negative rates are the best way to do that without a violent revolution.
The trick is to find a way to hack the scheme so it transfers other savers' wealth to you. The right real estate deal might work as long as the mortgage interest deduction remains intact.
When I decided to name myself Stagflationary Mark I was thinking in terms of 8% inflation and 5% short-term interest rates.
ReplyDelete3% inflation and 0% short-term interest rates are pretty much the same thing though (other than there being less inflationary gains to tax).
I don't have any regrets. "Negative Three Percent Mark" would have been way too depressing, lol.
One more method comes to mind:
ReplyDeleteCharging depositors!
"Bank of New York said that it will charge 0.13%, plus an additional fee if the one-month Treasury yield dips below zero on depositors that have accounts with an average monthly balance of $50 million "per client relationship," according to a letter reviewed by The Wall Street Journal. A representative of the bank wasn't immediately available for comment.
The charges will take effect on accounts held on Aug. 8, and will be charged in the subsequent billing cycle.
"We are taking steps to pass on costs incurred from sudden and significant increases in U.S. Dollar Deposits with BNY Mellon," said the bank in its letter. It said it finds its deposits "suddenly and substantially increasing" as investors are in a mass "de-risk" mode."
http://www.marketwatch.com/story/bank-of-ny-said-charging-for-big-cash-positions-2011-08-04?reflink=MW_news_stmp
Gold looks good at 0% interest if BNY Mellon is going to charge you for hold cash. As Alanis Morissette would say, isn't it ironic? Don't you think?
ReplyDeleteStag,
ReplyDeleteI've got just one word for you:
RubiCON!
dd,
ReplyDeleteYour link implies a Mundell-Tobin Effect on steroids.
Mr Slippery,
ReplyDeleteTo heckle Siegel or not to heckle. That is the question.
To heckle!
I really should send Jeremy Siegel a thank you letter for his public hatred of TIPS. At the time he was warning others and hyping the stock market earlier this year I was converting my entire IRA to one 30-year TIPS bond AND buying another one on the side.
I have NEVER seen upward moves like this in such a short period of time. I expected to see a loss on them today based on falling oil prices and yet that bond is up over 4%. Amazing. The yield is down to 1.1% from the 2.2% I bought it at.
1.1% implies 30+ years of really, really bad economic growth. Huge implications if the bond market is right.
mab,
ReplyDeleteI will not count the Rubicon eggs until they hatch.
The S&P 500 must close below 1200 for the ongoing Rubicon gallows humor joke to come into play.
1200.07?
It taunts me that one. It taunts me.
Watchtower,
ReplyDeleteRelax.
The Rubicon event cannot happen this week. It's a complex process that takes at least two trading days to complete. That means there is still plenty of time to buy confetti.
First, the S&P 500 must close below 1200. That resets the Rubicon condition.
Second, the S&P 500 must close above 1200. That's the true Rubicon. That's when the confetti would appear! ;)
(Gallows humor, you've got to love it. Seriously. I think it may be part of the Patriot Act. )
Mark,
ReplyDeleteI remember when you bought that 30 year TIPS. I bought a 10 year about the same time, but when it started to seriously appreciate, I sold it so I could go head to head with the Hi-Freq Mafia. (I ended up buying a higher yielding corporate).
I got out too soon, but you might consider taking your monster profits and buying something else or just sitting in cash for a bit. I would be tempted, or maybe I am just greedy.
Mr Slippery,
ReplyDeleteI'm fine holding long-term TIPS until maturity. There is no telling how low real yields can go. Just look at World War II and the 1970s.
Not only did I put a large chunk into the 30-year TIPS auction in February (more than a few years worth of living expenses), but I also converted my entire IRA into one 29 year TIPS bond in the secondary markets. I saw a yield I liked and opted not to wait for that auction. I definitely embraced risk this year, but not like many others have.
This isn't about profits to me though. It is about capital preservation. That's all I was trying to do when buying gold and silver in 2004 (and sold in 2006). That's all I'm trying to do now in long-term TIPS.
The profits I have really don't do anything for me. It isn't like the recent run will change anything about my finances over the next 30 years. All it really means is that if I had bought the arguments of Jeremy Siegel I would be pretty much shafted right now as a long-term saver. There are no good choices now. The opportunity is gone. Who knows if there will be another one.
It is my hope that real rates rise from here. That would not hurt me. It would actually help me. I have a TIPS bond ladder. As bonds mature I'd like to reinvest. I am not rooting for lower rates. Let's just put it that way.
I also have a fairly high cash balance to meet my short-term spending needs over the next 5 years. I'd like to see rates rise so that I could deploy that money safely. I have no desire to chase TIPS with it though, especially at these prices.
I will not count the Rubicon eggs until they hatch.
ReplyDeleteStag,
I know! The line held! I was watching the tape right until the end. Oh well, tomorrow is another day.
I call it the Dreyfus effect named for the money market accounts set up under the uniform gift to minors act for my children way back when where the fees exceeded the interest paid. To quote you: sigh.
ReplyDeleteActually to clarify the accounts were set up under Kemper and did okay but then Dreyfus bought out the Kemper funds and that is when the Dreyfus effect kicked in.
ReplyDeletemab,
ReplyDeletePerhaps Ben Bernanke secretly loved the Rubicon joke and intervened.
That scandalous rascal and monetary hooligan!
If true, what a sense of humor!
The Dreyfus Effect?
ReplyDeleteNice!
I think our economy is experiencing the Richard Dreyfuss Effect.
"Death Therapy, Bob. It's a guaranteed cure."
Well when Dr. Bernanke is administering inter-cranial lead therapy to the risk free rate of return death is the only outcome. Can't blame him as Dr. Greenspan used the same therapy to great effect; but the lead toxicity is now killing the patient.
ReplyDeletedd,
ReplyDeleteBut... but...
It's Miracle Day! What could possibly go wrong?