Tuesday, December 11, 2007

1970s Real Treasury Bill Yields (After Taxes)

Each line in the chart represents a given tax bracket. For example, the blue 35% line shows the inflation adjusted real treasury bill yield for those in a 35% tax bracket.

This is a continuation of a previous post showing the added damage high taxes can cause. Although yields were negative in the 1970s when adjusted for inflation, the government still taxed the "profits." Since interest rates were high in the 1970s, taxes were also high.

When inflation is 1% and you earn 1%, it isn't a big deal. When inflation is 10% and you earn 10%, it starts becoming a big deal. When inflation is 10%, you only earn 7%, and you are taxed on that 7%, it becomes a very, very big deal.

This is the sort of thing that just gradually sneaks up on you too. When three month treasury bills are underwater there is always hope that things will change for the better in just three more months. It isn't like you are locked in. Only what if things don't change for the better? What if we keep stagnating? There was a serious recession in 1974-1975. Real yields were not exactly positive. The deflationists expecting Great Depression level real yields at that time must have been sorely disappointed.

How much risk is there? All I can say is that the three month treasury bill is currently yielding 2.91% as seen here. I cannot predict what the CPI will do over the next three months so I can't actually say that the real yield is negative. I can say that it is unlikely that the yield is seriously positive. The CPI is up ~3.5% over the past year and oil is still hanging in there. Further, the consensus estimate for the rise in the CPI from October to November is 0.6%, as seen here. That isn't exactly tame.

See Also:
1970s Real Treasury Bill Yields

Source Data:
FRB: Treasury bills (auction high) (discontinued)
St. Louis Fed: Consumer Price Index for All Urban Consumers: All Items


Anonymous said...

Thanks for doing all the work to make this info available.

Since the markets are a zero-sum game in some respects, when you are "losing" during such times, someone else is winning. Who was winning?

Stagflationary Mark said...


Nearly all financial assets rose in price relative to reported inflation. Nearly everyone was a winner.

Now picture what might happen if most financial assets fall in price relative to inflation. Nearly everyone could be a loser.

In the beginning of an inflation, everyone benefits and nobody pays. In the end, nobody benefits and everyone pays. I read that somewhere a few years ago and very much believe it. Our something for nothing monetary policies will eventually come back to bite us.

As Warren Buffett put it in the 1970s, inflation was a "tapeworm."


Stagflationary Mark said...

I should add that I fear higher inflation. I don't necessarily know for sure if it is coming or not.

All I think I do know is that it will be harder to make money in the future. The easiest fruit has been picked, and some of it might have simply been imaginary fruit at that (as recent home buyers are finding out the hard way).

Anonymous said...


Just as residential real estate profits were imaginary, so too are the recent record profits from financial companies. Many of the assets banks hold are deflating just like home values. Commercial real estate values are turning negative also. A negative feed back loop is set up which will be countered with lower fed rates and fast and loose fiscal policies.

In my view, to much credit has been created. I just don't see how the vig can be met by so many people. In aggregate, things are not pretty, but in the lower four quintiles, debt and savings levels are truly scary. Take California: median income is 1/9 (+/-) of median home price. Get real. I wish a congressman would ask Bernanke to explain why it takes $4 of debt to create $1 of GDP. Up until we abandoned the gold standard, the debt to GDP ratio was 1:1. Is this sustainable? Is this desirable and if so why?

Bad loans are made during good times. We've basically had good times since 1982, so perhaps we have a LOT of bad loans about to come due.

Stagflationary Mark said...


The debt bubble is what turned me bearish in 2004. Capital One Financial and General Motors were my barometers.

I sold my stocks in 2004 and within a day realized some of my folly. I was now stuck entirely in fiat paper. That seemed worse than where I was!

I put a third of my portfolio in gold and silver for a few years (2004 to 2006). Whew!

It isn't easy being a bear. You've still got to choose between inflation and deflation. I ended up in stagflation mode and am growing more and more comfortable with that outcome long-term. Well, maybe comfortable with the label but not exactly comfortable with the outcome.

I've had three years to think about it and continue to believe real yields won't be going back up in the mid-term, and could conceivably continue to drop far further than most can imagine.