On the other hand, perpetual TIP’s would not appeal to the real bunker-mentality people, based on the risk of default, or even the dissolution of the U.S. And I don’t necessarily disagree with them in the very long term.

The Fed could make these bonds pretty useless if they engineered a stealth inflation (check the volume of a Bruyer’s ice cream box over the last 10 years, or how much cereal you actually get in the oversized box).

I would guess that the issuance of a large amount of TIP’s would be engineered by the CBO and NBER to understate inflation (just like the stats were rigged to understate unemployment right now). If the government used the same baselines and tools as they did in 1935, our actual unemployment numbers would hover around 20% rather than the current 9.5%.

There is virtually no limit as to how the government decides what to include, make up, or dis-include in various indexes. This could adversely affect the inflation portion of TIP’s. And I don’t see any adequate legal remedy to prevent the manipulation of government statistical “official” numbers.

A Supreme Court challenge on governmental statistical measures would likely fail for “lack of standing”.

So there is nothing out there to prevent a perpetual TIP’s buyer to object to the official figures indicating what they should be paid.

Still, there may be a place for these investments–so long as the holders realize that “perpetual” is illusory. I have heard that at 1 A.D., and investment in a small amount of gold, if untouched would grow to equal the entire output of our planet at a 5% assumed appreciated, compounded interest rate. Obviously, human institutions would eventually conspire to destroy that wealth over the long, or very-long term.

I love it when people opine about what makes the bond market change. Anyone who has actually traded and invested in these things knows that bonds are really a conspiracy by math geeks to control the world. They messed up big-time with CDOs. Even amateurs shied away. But Gov’t guaranteed inflation bonds? Now *there’s* a plot worthy of SPECTR.

Is it not true that the value of TIPS is positively correlated with changes in expected inflation? If long-term inflation expectations were to plummet, wouldn’t TIPS–particularly perpetual TIPS–do the same?

Perhaps a better solution is one promoted by Zvi Bodie, which is target date matched TIPs portfolios which have the same duration as your retirement holding period. Because such portfolios would be immunized against any real rate changes, they would be as close to risk free as you can get.

Great blog by the way.

Err, no. For in retirement, or with an annuity, you eat your capital.

With a perpetual of course you’re not doing that. You need $3 million to give you $5,000 a month, and one of your children $5,000 a month after your death, and one of your grandchildren $5,000 a month after your child’s death….well, you get the picture.