Vanguard: "Inflation Risk for Global Economy"

[daylatedollarshort]

Quote:

Originally Posted by friar1610 Points taken. To split a hair here, all other things being equal (interest rate, time period, face value etc.) there would be a slight advantage to the I-Bond during deflation. The interest rate would be applied to the I-Bond on the face amount until maturity. With a TIPS, during the period of deflation, the interest rate would be applied to a decreased face amount, resulting in slightly less interest for that period. Therefore, it seems to me, the total amount of interest at the end would be a wee bit more for the I-Bond. I realize this is a "how many angels can dance on the head of a pin" argument, but - hey- what's this forum for?

I have I-bonds, too, it is just for my particular situation I have more available cash in retirement accounts where I can buy TIPS and no annual purchase limits.

Check out this article from 2008. There were deflation fears then, too, and check out the TIPS yields. I wish I'd bought more back then.

How Deflation Would Affect TIPS and I-Bonds - The Wallet - WSJ

Based on how accurate economic predictions and financial prognosticators tend to be, their advice is generally irrelevant. So if you like TIPS and I bonds, you might as well buy them when the forecast is for prolonged deflation and yields are high, because the predictions tend to be inaccurate anyway.

[GrayHare]

Banks are only as strong as their loans. During deflation banks/lenders/investors do well since their loans are repaid with more valuable dollars. If borrowers default, well, obviously that's not good, but that's true regardless of the economic situation.

Cash is not immune to shock either. If the Fed wants to reduce the cash supply (not wise during deflation) by 10% they can declare all notes with serial numbers ending in digit (pick one) to be worthless.

[clifp]

This is a pretty good WSJ article on the impact of deflation on iBonds and Tips Bonds.
iBonds seem like they are the best bet.

[Mulligan]

Quote:

Originally Posted by clifp This is a pretty good WSJ article on the impact of deflation on iBonds and Tips Bonds. iBonds seem like they are the best bet.

I am going the opposite way. After 5 years of maxing out my IBonds since retirement, I am cashing them all out and investing them in higher quality preferred stocks getting 6%, instead of the pitiful 0 fixed and 1% plus inflation adjustment.
My situation is different as I live on my pension easily and do not need a well balanced investment plan. Plus I can pay in the 15% tax bracket instead of the 25% paid on CDs or IBonds. Rates can go up or down the next 20-30 years and I am not going to worry about it too much as I will just buy more of them with the dividends, along with my continued mutual fund purchases.


Sent from my iPad using Tapatalk

[friar1610]

Quote:

Originally Posted by daylatedollarshort I have I-bonds, too, it is just for my particular situation I have more available cash in retirement accounts where I can buy TIPS and no annual purchase limits. Check out this article from 2008. There were deflation fears then, too, and check out the TIPS yields. I wish I'd bought more back then. How Deflation Would Affect TIPS and I-Bonds - The Wallet - WSJ Based on how accurate economic predictions and financial prognosticators tend to be, their advice is generally irrelevant. So if you like TIPS and I bonds, you might as well buy them when the forecast is for prolonged deflation and yields are high, because the predictions tend to be inaccurate anyway.

Similarly, I used to own a few TIPS but they matured and I haven't bought any more. I am fully retired; I bought my I-Bonds quite a while ago and most of them pay 3.4% fixed, so I am holding onto them. I have a few with lower fixed rates and I look at those more as emergency money than long-term investments.

I read the article you cited and something it said in there made me take a look at the Treasury Direct site. I have been wrong all along in my understanding about what would happen during periods of deflation. I thought that the fixed rate always stayed the same and wouldn't be diminished in deflationary periods. But if the variable rate were to go into negative territory, that negative number would indeed be subtracted from the fixed rate thereby reducing it. The combined rate can never go below zero but it can go below the fixed rate.

Generally speaking, I haven't been buying anything new of any flavor the past few years as I am fully retired. So I'm generally just moving money around to keep my AA where I want it. But this year I will start taking RMDs from my Rollover IRAs. Since I don't expect to need that money for living expenses, I'll have to do something with it, so maybe I-Bonds and TIPS will be on my radar again.

[friar1610]

Quote:

Originally Posted by Mulligan I am going the opposite way. After 5 years of maxing out my IBonds since retirement, I am cashing them all out and investing them in higher quality preferred stocks getting 6%, instead of the pitiful 0 fixed and 1% plus inflation adjustment. My situation is different as I live on my pension easilyand do not need a well balanced investment plan. Plus I can pay in the 15% tax bracket instead of the 25% paid on CDs or IBonds. Rates can go up or down the next 20-30 years and I am not going to worry about it too much as I will just buy more of them with the dividends, along with my continued mutual fund purchases. Sent from my iPad using Tapatalk

Hmmm... I'm in a similar situation with respect to pension. But I've always felt I should still have an (increasingly conservative as I get older) balanced AA. I'll have to mull over your approach regarding preferred, dividend paying stocks.

Do you mind if I ask what you envision your overall equity allocation to be (including the preferrerds you plan on buying)?

[Alan]

OP, since the article is about Vanguard execs who issued a warning about global deflation, would you like me to change the thread title from inflation to deflation?

Vanguard Group execs say deflation a real risk for global economy