Hot TIPS tips !
Many people are afraid that US inflation is about to accelerate. I think they are totally irrational, but the point is that they can be useful too. Most people in the USA don’t know about Treasury Inflation Protected Securities with payments indexed to the CPI. The inflation chicken littles would be delighted to invest in TIPS if they knew about them.
Some people know about TIPS. Many are economists. One is a wayward philosopher journalist. I expect that some people look at the TIPS rate and manage firms. They certainly should — it should be a key determinant of investment.
The point is that if the people with irrational fear of inflation buy TIPS then they will drive up their price and drive down the return. This should stimulate investment.
I wonder if a campaign to promote TIPS would do more to stimulate investment than the recent Fed Quantitative Easing II policy. I’m sure it can’t hurt and am trying to do my part.
Robert pulls back Rob from comments on more hot hot exiting inflation protected securities
Rob
Hey Robert its not just TIPS. There is now the I-series savings bond:
http://savingsbonds.gov/indiv/products/prod_ibonds_glance.htm
I can assure you that most inflation chicken littles are well aware of TIPS. They just don’t trust that something indexed to CPI will keep up with actual inflation, given the various incentives of the BLS to understate inflation.
Hey Robert its not just TIPS. There is now the I-series savings bond:
http://savingsbonds.gov/indiv/products/prod_ibonds_glance.htm
And what, pray tell, are those incentives?
a lot of people afraid of inflation are on fixed income & are already trying to decide whether to heat or eat…who’s gonna buy TIPS for them?
Thanks Rob (also for the hot savings bond tip below) but I have to admit that actual Ron Paul supporters don’t trust the CPI and probably believe that we currently have high inflation (and that they are paying more than half of their income in income taxes and all sorts of stuff). The stimulate by promoting TIPS plan has to be directed at the slightly less paranoid — say Paul Ryan not Ron Paul.
Monthly inflation for December was an annualised 6.1%. In November it was 1.5%. Time will tell if this continues or not.
The only thing that a bubble in TIPS is likely to stimulate is hedge fund arbitrage of TIPS versus conventional Treasury Bonds.
Inflation is lied about, partly to reduce payouts on TIPS, they are a joke
rjs,
You should define a lot and what you mean by fixed income. Remember SS is indexed and covers core inflation. Krugman has been arguing this on his blog.
I suspect you include in fixed income folks the same demographic which went bonkers when Reagan came along and Volcker finally began reducing interest rates form 16%.
That demographic did not go broke then, and is not broke now.
The folks wearing coats inside to eat are not buying CD’s, and don’t have annuities which ‘only’ pay out 5%.
The tea party is apparently the crowd with annuities that just ain’t getting better.
So, they hate Bernanke, just like they loved Volcker.
Robert,
“The point is that if the people with irrational fear of inflation buy TIPS then they will drive up their price and drive down the return. This should stimulate investment.”
The 5-yr TIPS yield is now 0.08%, and that’s up from -0.35% at the beginning of the month (February, that is). Real yields are low, really low – and in fact, I’d bet that they’re more likely to rise than to fall. The reason is, that the 5yr-5yr break even forward (5-yr inflation expectations 5yrs from now) has all but recovered to 2.76% (last quote) and exceeded its average since 2005 (2.37%). As economists continue to upgrade their GDP forecasts, Deutsche Bank is now forecasting 4.3% for 2011, your not getting paid to hold TIPS. Real yields will rise, not fall.
The interest-rate channel is actually the weakest monetary policy channel right now. It’s the wealth-effect that is likely to drive business investment, as consumers somehow drop their saving rate and spend. Further, the depreciation allowance (fiscal policy) will pull forward a lot of business investment – not TIPS (bc they will rise).
It’s all fake, though, and I expect that there will be a big pull-back in 2012. This will be a very short business cycle.
Rebecca
my use of “fixed income” was rather generic and included friends who are on unemployment and others who email me complaining of rising costs as they are living paycheck to paycheck and having trouble making ends meet…
my comment had nothing to do with the tea party, bernanke, or any political argument…i was offended on behalf of my friends and the large number of others in those situations by the suggestion that their problems were irrational and could be solved by buying TIPS…
Rebecca
I started coming to angry bear just for such astute investment advice.
The chicken littles will have to sell their gold first.
Thanks Rebecca: Robert should have known better.