Thursday, November 29, 2007

The Death of Real Yields v.6 (Musical Tribute)

We had an undead scare (dead cat bouncing?) over the previous two days but we seem back on track to plunge to the bottom again today. Whew! We dropped from ~1.7% to ~1.6%. Before you know it there will be almost no way to protect wealth. Hurray!

I don't know about you, but this certainly puts me back in a very musical mood.

Feels like Hoover, combined with the 1970s lack of gold standard perhaps. Two wrongs make a right? Of course they do!

See Also:
The Return of the Living Dead Real Yields
The Death of Real Yields v.5

Source Data:
FRB: Selected Interest Rates
Bloomberg: Rates & Bonds

Special Note: Spot the sarcasm in this post and win a special prize. Prize probably not worth the paper it is printed on though. Sorry about that!


Anonymous said...

Stag, the brand of ice cream or type of food is minor. The fact that health care, property taxes, insuarance and education costs are soaring is not. Also, alleged quality improvements, while neat, supress cpi but cause consumers to increase spending. While i like tips, I maintain you do not receive a true positive yield. One reason i think the euro is appreciating against the greenback is that monetary or fiscal inflation is more difficult with multiple government treasuries and central banks looking out for their own interests. At least one country might publicly cry foul. The whole world knows the U.S. playbook - inflate (NO DEFLATION).

Stagflationary Mark said...


Healthcare, property taxes, insurance, and education costs are still just a fraction of my living expenses (and I live rather frugally, well below my means at less than $25k a year, helps that my house is paid off).

I track every penny I spend and have been doing so for six years.

I'm not seeing anywhere near the inflation you seem to see (once you factor in all the things that have not been going up like healthcare, property taxes, insurance, and education costs).

Let's talk about the last four years, at least as it relates to my budget.

My property taxes haven't even been skyrocketing. They've gone up at a 4% average annual rate. Future inflation is coming though, since they're banking the difference by under appraising my home (in theory, assuming my home doesn't drop in price that is, iffy assumption).

How about cable and Internet. They "feel" expensive through Comcast, that's a 4.8% annual climb but I would also argue that I'm getting more for my money (hedonics). My connection is faster though and the "on demand" section of cable (didn't exist back then) is now filled with free movies. Without hedonics, I could still be using a cheap dialup connection and rabbit ears on the TV though. Speaking of TVs, they keep dropping in price. At some point I'll be upgrading. I keep waiting, but they keep falling.

Food is way down. I'm spending less than I once was but much of that is me living more frugally. However, I'm comfortable that food HAS only been rising with inflation. I'm not confident it will stay that way though. Should it rise, I'm reasonalbly confident the CPI will capture it.

Garbage collection is only up 2.2% annually on average. How is that even possible? Garbage trucks burn gasoline, right?

Power bills are up 6.8% annually for me. Yeah, that one hurts a bit. However, power is still less than 5% of my budget.

My phone line is actually cheaper than it was four years ago. Same exact service.

Gasoline is currently not the most expensive part of owning a car (for most people anyway, and especially true for me). The car is the most expensive part. Cars are not keeping up with inflation. I drive a Toyota Camry XLE. I know what I paid. They are the same price they were 11 years ago (not even adjusting for inflation, and yeah, I drive an old car).

I could go on, but there's not much point. I can simply say that on average, I am comfortable that the CPI comes relatively close to what I'm seeing. I can't say it is the same for everyone. No one inflation rate could possibly be the same for everyone though.

Stagflationary Mark said...


I should add that just because I think the inflation that affects me (through the CPI) has been relatively tame that doesn't mean I think it will continue to be tame. I'm very unsure on that.

I'm merely trying to point out that if the inflation that affects me rises, I believe I will see it reflected in the CPI (within a percent or so). Therefore, I am reasonably comfortable owning TIPS and I-Bonds as a hedge against that possible future inflation.

Anonymous said...

All good points, but i noticed most of the items you mention are basically dicretionary and do not apply to a typical family lifestyle. As a business owner, I can tell you that health care for my family and my employees' families has more than doubled in less than 6 years. ($700 vs $1450/mo) This is not chump change for most. Also, the benefits are slightly reduced and submitted bills are far more scutinized and often denied requiring multiple submissions and challenges. Time is money. Perhaps there should be negative hedonics. Wisely, you do not seem to have any debt. However, 2/3 of homeowners carry a mortgage which, by and large, is there largest expense. The cpi does not capture housing inflation, but it has been enormous and is undeniable. Most families also carry credit card debt at rates that were once frowned upon as usurous. The increase in debt charges in not in the cpi. The collge I attended has increased tuition at 7.7 per annum over a multi decade period, while there endowment has increased billions and reported inflation has decreased. I can tell you that what used to take one income (raising a family) now takes two incomes. As long as debt is money and the unholy alliance between finance and politics exists the average american will remain a debt slave. They don't know what is happening and they have no voice in politics. Real wages for the bottom 80% of Americans are lower today than in 1971, the year Nixon defaulted on America's debts and abandoned the gold standard. This is true, even though the percentage of people with college degrees has soared. The common slogan that education is the solution rings hollow to me. Today, the typical government employee's earnings (including insurance and pensions) far exceeds the median private employees compensation. Inflation in Government compensation resulting in deflation of private enterprise compensation is a travesty. Inflation is not just an increase in a government chosen basket of goods, but an increase in credit/money. As long as the inflation was in stocks this system appeared to be working well, but consider what has happened since stocks deflated and the inflation shifted from stocks to housing. Not a good result for for most. The notion that asset inflation encourages business activity is disingenuos too. Inventiveness and productive investment involve risks that are to often not worthwhile compared to the tax advantaged growth available in existing financial assets. Why swim against the tide of govt/fed inflation when it can propel you forward effortlessly without regulations and yearly state, local and federal income taxes. If you get a chance, spend an hour or two at Also, google Kasmir Petrov. He is an ex Ohio State asst. professor who has internet posted certain college lectures regarding inflation, money supply and business cycles. He argues convincingly that any inflation is bad and that inflation will eventually shift from high order capital goods (stocks, bonds, real estate) to low order capital goods (cpi stuff). Keep up the good work. Wealth is for all (or at least it should be attainable to all through hard work and savings).

Stagflationary Mark said...


Property taxes, food, garbage, power bills, phone lines, and transportation (need a way to get to work) don't seem all that discretionary to me. I honestly tried to avoid the parts of my budget that included luxury items (my pet costs, recreation, and the like). I did include cable, Internet, and TV though (this is America after all, lol).

I'd agree that healthcare is certainly not chump change and that is especially true for large families. In fact, healthcare has been hitting me fairly hard lately. My girlfriend lost her job so we're paying through the nose for COBRA. I can't imagine what it would be like for a large family.

Here's my take on the CPI and housing. If the runup in home prices was sustainable, it will eventually filter into the CPI (and therefore my TIPS) as rents rise. If the runup in home prices was not sustainable, then it won't filter into the CPI (and heaven help those who borrowed too much to buy a home at the top). The problem is rents. If people rented they wouldn't be experiencing huge increases in housing costs. However, we all suddenly felt the need to be overleveraged homeowners.

As for real wages, I have spoken of the inequality that's happening (in previous posts) and it bothers me immensely. It isn't sustainable to pile up so much debt onto people who can't afford it.

As for college degrees saving us, Gary North has an excellent article on the PhD glut.

We'll soon be living in a world with a college degree glut in my opinion.

I've spent many hours looking at the grandfather report. Some of it is a bit too alarming for me, since ALL growth looks ugly on long-term charts. I'd prefer to adjust the charts per capita and adjust for inflation generally. Those charts that still look bad after you do it are the ones that concern me. And obviously I am concerned, or I wouldn't be doing an Illusion of Prosperity blog. I just want to be realistically concerned.

What you have said in the following rings very true to me.

He argues convincingly that any inflation is bad and that inflation will eventually shift from high order capital goods (stocks, bonds, real estate) to low order capital goods (cpi stuff).

As a stagflationist, clearly I agree. I tend to dwell on real returns though, since I'm always trying to figure out how best to protect myself.

I have tried to argue that any positive real return on savings is unsustainable in the long-term (and is therefore "bad"). It pushes a present inflation problem into the future for others to deal with. Volcker didn't crush inflation in the early 1980s. He postponed it by offering EXTRA money to those who already had money (in the form of very high real returns). That's my take on it anyway.

And lastly, the way the CPI is calculated works for me personally. I would once again say that it can't work for everyone. Unfortunately, if TIPS can't work for the average person because the CPI doesn't reasonably represent the costs he/she is facing, then nothing probably can (and that includes gold perhaps).

You simply can't hoard healthcare and other services. If the price of goods stays lower than it normally should (because billions will work for peanuts overseas), hoarded goods might not necessarily be a good hedge against future services costs.

Picture this. Let's say you are a worker making plasma screen TVs for a living. You see your food costs go up immensely. Your boss tells you all is fine though, because the price of plasma screen TVs is holding rather steady. Well, that's all fine and dandy if you could afford the plasma screen TV and presumably eat it. I think the Chinese people are going to realize that at some point, perhaps soon.

We are still a LOT better off than they are, in the grand scheme of things.

Unfortunately, the operative words might be "still" and "grand scheme." At least they know they are not all that well off. We seem to be working under the illusion that we are though.

Anonymous said...

Stag, you seem like a good egg so i'll offer you this for consideration. There are many paths to wealth. Until recently, all of the wealthy people I knew had worked long and hard and always lived below their means. Due to the long time frames invloved, imputed gains (non taxed) were a crucial part of their wealth gains. These imputed gains came mainly from real estate and business assets (public and private). I do not see how these imputed gains can be equaled with tips whether we agree on the extent of inflation or not. Short term, I like tips. Longer term you are running in place at best. Incidentally, since the stock market bubble burst, the business owners I know have generally been running in place. Real estate operators I know have done extremely well. The finance people i know have flourished beyond anything I have ever seen and I lived in a wall street town for many cycles. If you really want to make money, you should manage money, other peoples money. You seem to have a knack for the fundamentals -something i can assure most do not. Also, as inflation transfers money from investors to borrowers leverage enhances the gains. From what I have seen, hedge hogging is good work if you can get it. Really good work.

Stagflationary Mark said...


Short term, I like tips. Longer term you are running in place at best. Incidentally, since the stock market bubble burst, the business owners I know have generally been running in place.

I hear that. Unlike the vast majority, I'll be quite fortunate if I can simply run in place. I'm planning on worse than that. I've played in the casino (stock market) and it was exceptionally kind to me. Now my goals are much different though. Lose a little each year while embracing safety, live below my means, and die broke at age 100.

If you really want to make money, you should manage money, other peoples money.

I'm not so sure I'd be good at managing other peoples money. I can imagine how the first meeting would go though, lol.

Before we get started on your investment plan, how much risk are you willing to accept over the next decade or so? I think that if you take some seriously big risks, you might be able to hold onto all of what you've got and perhaps even eek out a slight gain, assuming you don't lose everything that is. Ah, safety is what you want? Perfect. How much have you been planning to lose safely over the next few decades? On a personal note, I'm planning to lose a percent or two each year to inflation and taxes. Would you find that acceptable? Of course, I don't provide this service for free. You'll want to factor that in as well. Let's put you down for a three percent real loss per year, just to make the numbers easy. That being said, how much are you starting with?

Something tells me that would go over like a lead balloon. It could be worse though. I think my theoretical client would be especially annoyed that I keep buying the same I-Bonds on his behalf that he could buy himself for free. ;)