Do You Expect High Inflation?

[TromboneAl]

Do you expect to see a problem some time in the next few years? If so, what are you doing to avoid problems/benefit from it?

 

[ziggy29]

I loaded up on long-term TIPS in November when they were giving a "real" yield to maturity of close to 3%. Half of them mature in 2016 and the other half in 2025, and I plan to hold to maturity.

 

[landonew]

I loaded up on long-term TIPS in November when they were giving a "real" yield to maturity of close to 3%. Half of them mature in 2016 and the other half in 2025, and I plan to hold to maturity.

When you say loaded up, did you mean a reallocation from the equity portion of your portfollio or merely a conversion from higher yield bonds?

Can you explain the rational of this decision? I thought people typically bought Treasury bonds when interest rates are high.

Thanks

 

[FIREd]

Yes, I suspect we will have higher inflation, though probably not hyperinflation. I also loaded up on TIPS in November (converted cash and GNMA to TIPS) and I am considering buying some i-bonds this year.

 

[ziggy29]

When you say loaded up, did you mean a reallocation from the equity portion of your portfollio or merely a conversion from higher yield bonds?

Can you explain the rational of this decision? I thought people typically bought Treasury bonds when interest rates are high.

I mean I shifted a large percentage of my bond allocation to TIPS.

And while Treasury yields were low then, real yields on TIPS were very high then (nearly 3% *real*) because the market was pricing in extended deflation. Treasuries and TIPS don't move in tandem.

To me, a very secure investment returning nearly 3% real seemed like a no-brainer for a chunk of my fixed income allocation.

 

[landonew]

I mean I shifted a large percentage of my bond allocation to TIPS.

And while Treasury yields were low then, real yields on TIPS were very high then (nearly 3% *real*) because the market was pricing in extended deflation. Treasuries and TIPS don't move in tandem.

To me, a very secure investment returning nearly 3% real seemed like a no-brainer for a chunk of my fixed income allocation.

So, assuming an average rate of 3% (inflation), this would be similar to a regular T-bond yielding around 6%??

Historically, are TIPS and T-Bonds competively priced (when accounting for inflation)?

Of the cuff, it seems like it would be difficult to predict what the rate of inflation will be 10 years from now. Consequently, I would assume that TIPS would traditionally be considered safer than ordinary T-bonds, and thus their net yield (considering inflation) would be historically lower.

Sorry for the newbie questions, just trying to understand the strategy behind TIPS as opposed to T-Bonds.

 

[calmloki]

Don't see anyway there can not be inflation - being of very simple mind it seems to me that the best defense is to have a bunch of the wealth in stuff that would go up in value along with the inflation rate. The stuff has to return a profit as well as grow with inflation. For me, unfortunately, the answer is rental real estate. Unfortunately because rentals call for more effort than just opening the envelopes to pull out the checks.

 

[ziggy29]

So, assuming an average rate of 3% (inflation), this would be similar to a regular T-bond yielding around 6%??

Yes, roughly. If inflation averaged 3% over the duration of a particular TIPS issue, then the bond would effectively yield a nominal 6%.

One of the reasons for TIPS over conventional Treasuries (aside from the current high price of Treasuries) is that TIPS would likely be less susceptible to interest rate hikes due to inflation. In an increasingly inflationary environment, the value of long Treasuries would likely fall sharply (and their yields rise) because inflation is eroding their value. TIPS, on the other hand, are likely to maintain their value in an inflationary environment because their nominal yield automatically increases to match inflation.

It's also true that Treasuries will benefit more from ongoing deflation and interest rate cuts. But it's pretty hard to cut interest rates from here, and it seems to me that TIPS have a lot more upside potential (or at least capital preservation potential) than Treasuries do.

 

[Cruising2022]

I don't know, honestly. I can see inflation due to a falling dollar, but I think other currencies will keep up. Logic would suggest that increasing money supply would cause inflation, but for that kind of inflation to happen, it has to actually reach consumers' pockets. Right now it's just replacing money that has disappeared, while we take on additional debt. IMO I think the more likely result of this is flat economic growth (L-shaped recovery)

 

[Grep]

I don't expect very high inflation. I expect a moderate, creeping inflation that is talked down but permitted with a wink to be somewhat higher (maybe 4-5%) over a future decade or so, as governments around the world digest their debt.

 

[ziggy29]

I don't know, honestly. I can see inflation due to a falling dollar, but I think other currencies will keep up. Logic would suggest that increasing money supply would cause inflation, but for that kind of inflation to happen, it has to actually reach consumers' pockets.

This is a good point. I remember reading somewhere that if I created a printing press that could produce $100 bills that were indistinguishable from "real" C-notes, I could print $3 trillion of these bills and have NO impact on inflation if I buried them in my back yard or kept it all in storage. But if I spent them -- injected them into the economy -- it WOULD have an inflationary impact.

So it would make sense that no matter how much money the Treasury prints out of thin air, as long as individuals, businesses and banks hoard it instead of injecting it into the economy by spending it, there won't be inflation. The inflation would only enter the picture when the cash hoarders start releasing it into the economy.

 

[W2R]

Why do I think that hyperinflation is in our future? Is it because of my great insights into the subject of economics? ...NO... I have never studied economics and pitifully, I don't know a whole lot about it. Taking a class in economics is in my how-to-keep-occupied-in-ER list.

The reason I think there will be hyperinflation in our future, is twofold.

(1) The worst that can possibly and yet reasonably happen, will. I am sure that must be somebody's law. At any rate, that is how life has been so far, and why should it change?

(2) Sucker punches are most effective when they originate from the unexpected. Notice how the media are promoting a deflationary scenario, despite the fact that we are printing or giving away money right and left? That tells me that the unexpected (inflation) is the big sucker punch in our futures.

I could be wrong! Often I am. But, I do expect inflation (actually, stagflation) worse than what we saw in the 80's. Not sure what to do about it, though.

 

[youbet]

I don't expect very high inflation. I expect a moderate, creeping inflation that is talked down but permitted with a wink to be somewhat higher (maybe 4-5%) over a future decade or so, as governments around the world digest their debt.

5% inflation coupled with no/slow growth over a decade would be an absolute killer.........

 

[Notmuchlonger]

Do you expect to see a problem some time in the next few years? If so, what are you doing to avoid problems/benefit from it?

Yeah, I think we will have higher inflation but not absolutely sure. Im not doing anything about it but keeping my costs down.

 

[Grep]

Despite the dramatic recent events, I do not see anything that justifies or would lead to "hyper" or even "very high" (e.g., 80's at its worst) inflation. I'm not convinced that the scars of the 80's have been forgotten so completely for that scenario to be permitted.

By the way, "hyper" inflation is probably not the word you are looking for. "Hyper" inflation would be Germany in the 30's and 40's, or Zimbabwe today. You probably just want to say "high" inflation.

 

[Grep]

5% inflation coupled with no/slow growth over a decade would be an absolute killer.........

Oh, I completely agree! But my highly-fallible crystal ball says that 4-5% over 5 years or more, starting in a few years, is something that would be prudent to prepare for.

 

[W2R]

Despite the dramatic recent events, I do not see anything that justifies or would lead to "hyper" or even "very high" (e.g., 80's at its worst) inflation. I'm not convinced that the scars of the 80's have been forgotten so completely for that scenario to be permitted.

By the way, "hyper" inflation is probably not the word you are looking for. "Hyper" inflation would be Germany in the 30's and 40's, or Zimbabwe today. You probably just want to say "high" inflation.

Thanks! Using the right terminology helps in the discussion. So, after reading your post I went to dictionary.com and found a definition of hyperinflation that I like:

A very high level of inflation that tends to result in the breakdown of the monetary system, the hoarding of goods, and difficulty in achieving real economic growth. The classic case of hyperinflation occurred in Germany during the 1920s. Hyperinflation, which tends to motivate people to own real goods, adversely affects security prices.

While the hyperinflation in Germany might be more extreme than that which I fear, I am concerned about inflation to the point that it leads to the described economic consequences and personal behaviors. Probably it won't happen, but then a couple of years ago I would have said that probably 700+ billion dollars was more than could possibly be needed for any future government bailouts.

I really hope that you are right about the inflation of the 1980's not being repeated this time. I remember that inflation well. If our inflation stays under that level, all will be fine in my little corner of the world.

 

[harley]

There are no yes or no questions. We need some "I don't know, but leaning toward..." options in the poll. I suspect there will be increased inflation moving forward, but I'm not sure about the next 5 years. Probably later in that period and going forward from there.

 

[TromboneAl]

There are no yes or no questions. We need some "I don't know, but leaning toward..." options in the poll.

I considered that, but I wanted a cleaner result. So consider it a "If you had to choose one" question.

 

[FUEGO]

I see more of the potential for 4-5% average inflation over the next 5-10 years, maybe a bit more for the first year or two of the recovery.

My strategy? Same as always. ~100% equities portfolio plus a few hundred thousand in fixed rate debt (student loans at 1-2% and mortgage sub-5%). 5% inflation would mean my student loans return 3% real, and my mortgage costs me nothing in real terms.

I also have a very tiny amount (<2%) socked away in ISM/OSM sallie mae inflation linked bonds. If they don't default, they will continue to pay a handsome coupon every month. Something on the order of 2% per month with 5% inflation. Yes, per month. And that is with "only" 5% CPI inflation.

Hmmm... that's got me thinking of buying some more with my stupid money.

And 4-5% inflation may be somewhat inefficient from a macro standpoint for GDP growth, but not really damaging like 10-20+% inflation.

 

[Bikerdude]

I guess high inflation is a good possibility so I voted yes. I have Tips, I-bonds, and laddered CD's as my main defense against inflation. I have a pension and will be collecting SS soon so deflation may not impact me that severely.

 

[MichaelB]

Define high inflation. Greater than 4% CPI? No, I do not believe that will happen.

I think real growth stays at 1% and inflation rises to 3%, our economic growth is mostly inflation and real per capita GDP is flat. Low grade stagnation. Without real growth public revenues will not increase – as needed to reduce deficit and pay for the current financial rescue (well, hopefully a successful rescue). As gov’t income doesn’t increase we will need higher taxes, which reduces income available for personal consumption. To offset the loss in wealth over the past year the savings rate needs to increase, which also which reduces income available for personal consumption.

The US will be faced with a falling standard of living, which will keep the inflation rate low. The effects of inflation - a loss in purchasing power - will happen anyway.

 

[mathjak107]

if debt and printing of money brought hyper inflation and high interest rates we would be a 3rd world nation by now with the deficit spending getting so high back in 1982....


in fact after world war ii books were written about the fact the us debt was 2x gdp..... it was a given we were going to hyper-inflate....

by 1982 we were at 500% gdp... today we are at 800% gdp and here we are trying to keep from deflating.


it all makes good reading and news but no one knows what will happen next

 

[Walt34]

I think with the govt. borrowing/printing money we will have high inflation. I'm trying to talk DW into spending all of our money while it's still worth something.

She is not buying into that theory.

 

[James5v]

I can not see how the current government spending will not at some point create inflation. For those who do not see this please explain to me how the tremendous increase in national debt, the likely decrease in the value of the dollar, and the printing of large sums of cash will not create an inflationary climate.