Insane Quote of the Day (Musical Tribute)

October 22, 2011
Better Ways to Fight Inflation

The second problem is that inflation might meow rather than roar in coming years, leaving TIPS investors with meager returns.

This "problem" is a myth that just keeps circulating over and over.

Even as a TIPS investor, higher inflation only hurts me. The reason is that I will have to pay tax on the inflationary gains. In fact, taken at its extreme it is not hard to see that hyperinflation would financially ruin me.

Here's a chart to show what inflation combined with taxation does to the 1.06% 30-year TIPS yield. Note that higher inflation only hurts.


Click to enlarge.

Here's what 30 years of compounding does to the total return.


Click to enlarge.

If inflation averaged 20% over the next 30 years then two things would happen. First, my large nominal returns would push me into the highest tax bracket. Second, I'd stand to lose the vast majority of my nest egg due to the combination of that high taxation and the high inflation rate. Lose lose. Does that really sound like something that would help me?

Shame on the Wall Street Journal for propagating this common myth that higher inflation somehow magically helps TIPS investors. The inflation protection of TIPS is similar to fire protection for my house. I do not hope for higher inflation any more than I hope that my house burns.

If the Wall Street Journal can't even make sense of simple math (as seen in the charts above), then who can?

Of course, a cynical person might suggest that the Wall Street Journal does have knowledge of simple math but also has ulterior motives and/or biases. The Wall Street Journal does have "Wall Street" in its name. Wall Street has a hard time making profits if investors buy TIPS directly from the government and hold them until maturity. The middleman is completely cut out. A cynical person might suggest that anyway. Thank goodness I'm not cynical!



With my patience gone
Someone take me far from here

Yeah
Burning that gasoline
Yeah
Burning that gasoline