MaoXian.com -- Archive > August 25, 2003

"The Fed and the U.S. government are attempting to reflate the U.S. economy.... Politicians do this via deficit spending. Fed governors do it by enforcing low/negative real short-term rates that strip savers and bondholders of their wealth and then erode long-term bond prices through the effects of higher inflation. You/we can fight back. By some egregious folly, the Treasury began to offer a safety valve back in 1997. They began to issue TIPS. These securities won't make you rich, but they'll protect your principal in the ensuing years and even stand a chance of going up in price over the near term. Buy all you can."

Let's look at inflation-indexed bonds in the UK, which have been around about 20 years. The actual inflation rate for the UK in the following years:

1985: 6.1% | 1986: 3.4% | 1987: 4.2% | 1988: 4.9% | 1989: 7.8% |
1990: 9.5% | 1991: 5.9% | 1992: 3.7% | 1993: 1.6% | 1994: 2.4% |
1995: 3.5% | 1996: 2.4% | 1997: 3.1% | 1998: 3.4% | 1999: 1.5% |
2000: 3.0% | 2001: 1.8% | 2002: 1.7% | National Statistics Online

Looking at the actual inflation numbers and comparing them with the expected inflation rates implied by the yield spread in the chart above, it looks to me like the people committing an egregious folly, over the last 20 years at least, have been the *buyers* of inflation-indexed bonds, not the issuers.