Comments on: What about perpetual TIPS? http://blogs.reuters.com/felix-salmon/2010/08/27/what-about-perpetual-tips/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: MRLAMF http://blogs.reuters.com/felix-salmon/2010/08/27/what-about-perpetual-tips/comment-page-1/#comment-17836 Mon, 30 Aug 2010 22:21:05 +0000 http://blogs.reuters.com/felix-salmon/?p=5115#comment-17836 Of course there is principal, or else, what are you loaning the government (or whoever for that matter)? The principal is the original loan and it is used to compute the coupon payments.

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By: Publius http://blogs.reuters.com/felix-salmon/2010/08/27/what-about-perpetual-tips/comment-page-1/#comment-17783 Sun, 29 Aug 2010 17:47:09 +0000 http://blogs.reuters.com/felix-salmon/?p=5115#comment-17783 Hmmmm. An ounce of gold at 1 AD is now worth more than the entire planet. Even if given as a gift? Perhaps 30 pieces of silver, at around 30 AD, would have an even greater value…

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By: TaxLawyer http://blogs.reuters.com/felix-salmon/2010/08/27/what-about-perpetual-tips/comment-page-1/#comment-17774 Sat, 28 Aug 2010 23:37:26 +0000 http://blogs.reuters.com/felix-salmon/?p=5115#comment-17774 What a great idea. This whole premise would work to reduce the number of survivalists-wannabees who are perpetually worried about hyperinflation. Many would feel confident in buying perpetual TIPS–it eliminates the worry of really high future inflation.

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.

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By: dWj http://blogs.reuters.com/felix-salmon/2010/08/27/what-about-perpetual-tips/comment-page-1/#comment-17753 Fri, 27 Aug 2010 21:37:51 +0000 http://blogs.reuters.com/felix-salmon/?p=5115#comment-17753 If we think there’s a bubble in bonds, we could try to sell zero-coupon perpetual bonds. Every bubble needs its example of undiluted lunacy.

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By: Publius http://blogs.reuters.com/felix-salmon/2010/08/27/what-about-perpetual-tips/comment-page-1/#comment-17752 Fri, 27 Aug 2010 21:26:51 +0000 http://blogs.reuters.com/felix-salmon/?p=5115#comment-17752 The value of TIPs is *not* positively correlated with inflation. It is positively correlated with the spot market, because of break-even trades. Note that today, when expected inflation rose (and the bond market tanked), TIPs also sold off pretty sharply.

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.

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By: FelixSalmon http://blogs.reuters.com/felix-salmon/2010/08/27/what-about-perpetual-tips/comment-page-1/#comment-17746 Fri, 27 Aug 2010 19:55:33 +0000 http://blogs.reuters.com/felix-salmon/?p=5115#comment-17746 David Merkel — I don’t think perpetual TIPS are nearly as volatile, on a price basis, as Trills. Not even close. And MRLAMF, there IS no principal on a perpetual TIPS. It’s just interest.

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By: MRLAMF http://blogs.reuters.com/felix-salmon/2010/08/27/what-about-perpetual-tips/comment-page-1/#comment-17743 Fri, 27 Aug 2010 19:38:13 +0000 http://blogs.reuters.com/felix-salmon/?p=5115#comment-17743 You are correct @drzaius7734. If CPI turned negative (see Japan), the principal of your TIPS perpetuity is reduced by half the annualized change of CPI every 6 months. If there was ever a deflation scare, the value of your bond would be reduced. In theory, your purchasing power would remain constant or increase based on the assumption that CPI overstates inflation.

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By: drzaius7734 http://blogs.reuters.com/felix-salmon/2010/08/27/what-about-perpetual-tips/comment-page-1/#comment-17737 Fri, 27 Aug 2010 17:57:57 +0000 http://blogs.reuters.com/felix-salmon/?p=5115#comment-17737 “Long-duration bonds rise and fall a lot in value according to prevailing interest rates, but the main reason why long-term interest rates change is changes in long-term inflation expectations. Once those are stripped out, as they would be in perpetual TIPS, what’s left is relatively stable, in terms of its market value. To a first approximation, the value of the bond would rise in line with inflation.”

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?

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By: DavidMerkel http://blogs.reuters.com/felix-salmon/2010/08/27/what-about-perpetual-tips/comment-page-1/#comment-17735 Fri, 27 Aug 2010 15:56:05 +0000 http://blogs.reuters.com/felix-salmon/?p=5115#comment-17735 Perpetual TIPS are almost the same as Trills. Much as I have argued for more long Treasury debt issuance, no institution has liabilities longer than 100 years. Nothing lives forever on Earth, so to think that debts can is a mistake.

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By: BahM http://blogs.reuters.com/felix-salmon/2010/08/27/what-about-perpetual-tips/comment-page-1/#comment-17734 Fri, 27 Aug 2010 15:54:59 +0000 http://blogs.reuters.com/felix-salmon/?p=5115#comment-17734 It is not entirely accurate to say ” And of course there’s no reinvestment risk”. How about the coupon payment?

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