When talking about TIPS, it's important to clarify that folks who want a hedge should buy TIPS directly, not shares of TIPS funds. TIPS funds are not at all guaranteed to maintain their value with inflation. I've been burned by this!
I am far from a permabear, but to my layman's ears Arnolds arguments have some force and I would guess the probability of high inflation in the next 10 years might be somewhere between 5 and 15 percent. That's enough to make it worth hedging I think.
The probability of high inflation, greater than 5% annually, is not somewhere between 5 and 15 percent, it's 100%. All paper money depreciates sharply. The British pound was once worth one pound of silver. You'd probably need 1000 pounds today to buy a single pound of silver.
Hi Arnold. Nice piece. I too am an inflation bear. Only I like TIPS. Hold them to maturity and they do what they're supposed to. And right now on many maturities you an lock in a real yield of 2%-plus for decades. (Only a few years ago the *nominal* yield was 2%.) Here's my recent post. https://jayhancock.substack.com/p/under-trump-inflation-bonds-are-a
Conventional wisdom usually says to max out your yearly I-bond purchase limit before buying TIPS, would you agree with that?
Another important thing to broadcast about TIPS is that one should buy them in a tax-protected account like an IRA, not in a taxable brokerage account. Otherwise you will get taxed on the inflation-adjustment.
Hi Cinna. At the moment TIPS seem like a better deal because the real (after-inflation) yield to maturity is ~2% for many issues. By contrast the latest fixed rate for I-bonds, set Nov. 1, is 1.2%. My understanding is that the I-bond fixed rate is pretty much the same as the real, after-inflation yield to maturity. As Arnold mentioned there is a 2ndary market for TIPS and the price/ real yield for them bounces around. RIght now the real yield is around the highest in has been in decades. But you have to buy individual issues and hold to maturity.
For IRAs: yes, if you keep TIPS there you won't be liable for the nuisance tax on the CPI increase in principal (or the coupon payments).
With stocks you only have to pay the capital gain when you sell. Same with ordinary bonds.
With TIPS, you owe money for the “phantom income” of the inflation accrual each year, even if you don’t sell it and it doesn’t reach maturity.
[Yes Elizabeth Warren and other lefties have proposed taxing unrealized capital gains. But that is not the law now and is very unlikely to become law.]
In a taxable account you do pay capital gains on the part of stock returns that's de facto just keeping up with inflation, so in a sense this is right. But it's a bigger deal for TIPS.
I think you are too hard on TIPS as inflation hedge, where the real rates going up effect is usually temporary, but yes harder this time because real and nominal rates had been so low so long.
I pretty much agree with the rest of the piece re: hedging.
One further corollary: IMO medium and especially long term bonds are bad investments because they correlate with stocks in inflationary environments, have lower returns in most, but protect you only against deflation on the downside.
In the “wiser” post Great Depression Fed environment of “Helicopter Ben”, IMO the chance of deflation is extremely low. And so the risk-reward on bonds is poor. Better to split your bond allocation (that isn’t TIPS or I-bonds) into part stocks, part cash/short-term bonds.
P.S. the one other place I don’t agree with the piece is that if you look at the historical record, gold has proven repeatedly to be an excellent hedge against stocks and against inflation.
This is even more true in the post-WWII era where deflation - which destroys the value of gold - is incredibly unlikely. An allocation of 5%-20% gold can be entirely appropriate, although I agree that the more you hold in TIPS and I-bonds likely the lower the percentage of gold needs to be as a hedge.
Even this guy who was/is a skeptic on gold will attest to its hedge value (TIP OF THE DAY: his website is a must-read IMO for folks doing retirement planning or in retirement):
The market seems unconcerned about inflation despite all the narratives. 30y inflation expectations are 2.28%. You can buy this via inflation swaps, an ETF like RINF, or via TIPS (if you hedge out nominal bonds).
Looks to me like the market is actually pricing in deflationary forces. Meaning "we will need to print a lot of money just to get inflation to be 2.2% long term." That's the sort of environment that favors gold and other "inflation" trades.
Or do you just think the bond market is seeing something different from stocks/crypto/gold which are all pricing in "inflation?"
Besides Stu’s point, you are confusing disinflation with deflation.
And by looking at “the market” and current price/yields only, you merely see the weighted average opinion of what is most likely to happen. This tells you very little about the worst ~5%-15% of cases, which is what AK is referring to when he talked about the desirability of hedging.
Housing seems like the best inflation hedge due to its dual use and massive tax advantages. In retrospect I wonder if I underinvested in housing. I bought all the home I "needed" when I probably should have bought all the home I "could" back in Jan 2020. But hindsight in 20/20 and I didn't know we were going to have a pandemic and a helicopter.
It also has built in creditor protections that other assets do not so long as it is a primary residence. So another non-crazy reason to overinvest in a house that you also live in is that you are more likely to be able to protect it in creditors.
One of the essential features of money is scarcity; in an era of fiat currency, that is missing. While gold and crypto (Bitcoin) have no yield, they are a means of payment that cannot be debauched by over-issuance. Gold is not easily divisible or transferable and has storage issues, but it has central bank sponsorship as a store of value, now growing due to US sanctions manipulations that cast a shadow on the dollar's reserve currency status. So gold and crypto deserve a place in any sensible portfolio. Over the years I have missed out on market appreciation relative to stocks for the gold portion of my holdings, but it has appreciated much more than inflation, and I have had the comfort of feeling insured against catastrophe in the form of inflation possibly getting out of control. The size of our national debt is now so great that it seems inevitable that a high level of inflation will be only way out, and it could easily get out of control
The big difference is in demographic trends. After WWII the deficit could be reduced fairly easily. Now, not so much. Neither major party is willing to tackle entitlement reform.
Reagan did it. And he passed a tax cut by getting Dem votes when Speaker O'Neill said no way. I'd argue if Clinton felt the urgency he could have done it. His budget balancing was mostly cutting DOD and interest savings by reducing debt maturity age but he had the capability. It just takes one leader.
Economically, I think it would be easier today than the 80s or after WWII.
I don’t actually agree with you on much here, but i‘ll point out only that Clinton’s budget balancing was mostly based on spectacular revenue growth from stock market capital gains. Secondarily, the Newt GOP House at least somewhat reined in spending.
Whether you are correct or not “economically” today, politically it is nearly infinitely harder, as Trump has taken up the demagogic Dem position on entitlements as untouchable.
Yes, Clinton and Reagan saw similar revenue growth, larger than others after Clinton.
It's been a long time since I looked but as I said, most of Clinton's budget success came from interest costs and DOD cuts. I think much more from DOD but not certain on that. Little or nothing in the rest of the budget.
Well, I looked it up. We are both right, but you got it more right.
What we both left out was his tax increases. That plus strong economic growth was 55%-60% of the explanation, cuts in interest costs 10%-15%, and cuts in defense 15%-25%. Non-defense spending did indeed increase somewhat in real terms. The so-called “peace dividend” after the breakup of the Soviet Union. The rest was increased payroll taxes relative to SS payouts from Baby Boomers before they started retiring.
1). Marriage approximately doubles your income, but in Silicon Valley marrying well can mean more than doubling your income due to the "strike it rich nature" of the Valley. So marry well and move to Silicon Valley.
2.5). In order to deal with the effects of politics on your life, teach yourself basic economics and read classical liberal and libertarian thinkers. This will likely improve your marriage and help your children..
3). Buy a house in Silicon Valley and hold. It will appreciate.
4). Leave Silicon Valley on the first day of the lock-down and buy another house in another state. Your new house will appreciate as the rest of California moves into your new town.
5). Transition your skillset to become remote work capable.
6). Move to a red county in red state. Keep working for your Silicon Valley firm earning the same income. Raise your children there safe from the blues.
My comment is on investing in general. Everyone has wealth in their body and mind. Invest in your body and mind to obtain more wealth. Invest in relationships. Invest in a home. See? Same topic.
Just for starters I doubt anyone meeting big or even modest success specific to silicon valley as an IQ below 120, probably higher.
I don't know why you don't see that you are talking about a much broader topic. He is more focused on preserving capital than investing. He is talking about what to do with his MONEY.
One issue with this analysis is that it looks at inflation hedges as assets that hold or gain value contemporaneous with inflation. But what matters for investment is long term returns. Stocks have returned 8+% over decades through many cycles. As long as you can hold on, you will outpace inflation with stocks, even if you see temporary downside during the inflationary period. Real estate has been good long term too.
To avoid forced selling at the wrong time, you would not put 100 percent of your investment in stocks or real estate.
Permanentne??? What facts would change your mind? If none it becomes a faith, like heaven. 10 years ago I thought that, but now believe inflation is only politically bad when it comes to food & fuel. Asset inflation of houses is tough for the new young buyers, but very nice for voting sellers and ok with the owners not selling.
Few own as much in stocks as equity in their house.
Unlike the 70s, there is plenty of production capacity for the buyers. If 250% debt/gnp Japan is not suffering from high inflation then the US doesn’t need to.
That’s why tax cut deficits are preferable to govt spending deficits, the cuts go to producers & workers, while the spending goes to paper pushers in bullshit jobs that either have no value or add regulations making production harder.
“The Fed’s ultimate job is to make sure that the government can fund itself . . . .” In theory, that might push the Fed into inflation. But in practice, the ability of the government to fund itself by borrowing has turned out to be enormous—no inflation needed. If we knew that the government was close to the limit of its ability to borrow, inflation fears would be fully justified. But I, for one, do not know that.
"With Bitcoin there is no return." I'm not sure that's correct. I don't understand it well but it appears that my exchange, Coinbase, does offer a return on BTC holdings. Please correct me if I'm wrong.
Okay, looking at my account. It looks like Bitcoin does not generate a return but: "Earn rewards by holding USDC or by buying and staking eligible assets." Eligible assets do not include BTC, but do include Ethereum and Cardano.
For inflation, the question to ask to know which assets will move more isn't "how much" but "who prints". The "how much" is predictably 2% cpi annually- of course the actual amount printed is more than 2% of the money supply because of gdp growth and substitution effects.
For the "who prints" in the US its either monetary policy set by the federal reserve or fiscal policy controlled by the Treasury. Generally if it's the federal reserve, the money is added via liquidity for financial assets. Since that lowers interest rates and increases cash for asset holders, it benefits liquidity sensitive assets like bitcoin the most. Money for investors means higher financial asset prices.
If instead it's the Treasury doing the printing, the effect on assets will depend on the specific details of policy. Generally labour tends to benefit either through welfare payments or through higher employment. Labour doesn't invest; it spends. So things like rental properties and stocks do well as labour spends more on rent and consumables. Money for labour means higher consumer spending.
"The Fed’s ultimate job is to make sure that the government can fund itself, and when push comes to shove it will not be able to abandon that job in order to fight inflation."
Maybe I could argue about inflation but I won't. Instead, I have a question that I initially thought was off-topic from your desire to discuss how to protect one's portfolio from inflation but after I wrote it I realized how to bring it back to your issue. If a government doesn't have enough money to pay their bills, what does their central bank do and what is the outcome?
Managing one's portfolio for inflation like we recently suffered is one thing but you are talking about a whole other kettle of beans. It seems to me there are two choices: print money or raise interest rates. (1) Printing money is a losing battle. Maybe I'm wrong but I'm not aware of a government that ever got out of a debt crisis printing money. They eventually cancel debt and issue a new currency or use another currency such as, ironically, the dollar. Maybe they just cancel debt. Are i-bonds going to survive this? I don't think so. (2) Raising interest rates is exactly the same as what is done to fight inflation. What if the interest rates get totally out of control, going to 20, 60, or over 100%. Might they then switch to print money? I expect so. Now we are back to failure of the currency.
One other thing to consider is that these extreme cases have never happened in a country nearly as big economically as the US. Is Germany after WWI the closest? Doesn't seem close. It seems that if you are worried about US not being able to pay its bills, you should buy a remote compound and stock up on supplies for failure of the world economy.
I would rather focus on the issue that poses the issue for the Fed, to raise interest rates or to inflate: deficits. Its is failing to make deficits = Σ(expenditures with NPV>0) that's the real problem. THAT is what reduces real growth. Whatever scope there is for reducing Σ(expenditures with NPV>0) we need to levy taxes _on consumption_ to pay for it.
Closer to your concern, I'd like to see the Treasury issues a future NGDP security.
When talking about TIPS, it's important to clarify that folks who want a hedge should buy TIPS directly, not shares of TIPS funds. TIPS funds are not at all guaranteed to maintain their value with inflation. I've been burned by this!
I am far from a permabear, but to my layman's ears Arnolds arguments have some force and I would guess the probability of high inflation in the next 10 years might be somewhere between 5 and 15 percent. That's enough to make it worth hedging I think.
The probability of high inflation, greater than 5% annually, is not somewhere between 5 and 15 percent, it's 100%. All paper money depreciates sharply. The British pound was once worth one pound of silver. You'd probably need 1000 pounds today to buy a single pound of silver.
On the other hand TIPS funds aren't subject to the 10k/person/year limit, unless I misunderstand.
It's I bonds that have the limit, not tips
Hi Arnold. Nice piece. I too am an inflation bear. Only I like TIPS. Hold them to maturity and they do what they're supposed to. And right now on many maturities you an lock in a real yield of 2%-plus for decades. (Only a few years ago the *nominal* yield was 2%.) Here's my recent post. https://jayhancock.substack.com/p/under-trump-inflation-bonds-are-a
Conventional wisdom usually says to max out your yearly I-bond purchase limit before buying TIPS, would you agree with that?
Another important thing to broadcast about TIPS is that one should buy them in a tax-protected account like an IRA, not in a taxable brokerage account. Otherwise you will get taxed on the inflation-adjustment.
Hi Cinna. At the moment TIPS seem like a better deal because the real (after-inflation) yield to maturity is ~2% for many issues. By contrast the latest fixed rate for I-bonds, set Nov. 1, is 1.2%. My understanding is that the I-bond fixed rate is pretty much the same as the real, after-inflation yield to maturity. As Arnold mentioned there is a 2ndary market for TIPS and the price/ real yield for them bounces around. RIght now the real yield is around the highest in has been in decades. But you have to buy individual issues and hold to maturity.
For IRAs: yes, if you keep TIPS there you won't be liable for the nuisance tax on the CPI increase in principal (or the coupon payments).
Thanks, this is very helpful! Didn't realize the rates had changed so much.
That's true of stocks too, right?
No, it is not.
With stocks you only have to pay the capital gain when you sell. Same with ordinary bonds.
With TIPS, you owe money for the “phantom income” of the inflation accrual each year, even if you don’t sell it and it doesn’t reach maturity.
[Yes Elizabeth Warren and other lefties have proposed taxing unrealized capital gains. But that is not the law now and is very unlikely to become law.]
In a taxable account you do pay capital gains on the part of stock returns that's de facto just keeping up with inflation, so in a sense this is right. But it's a bigger deal for TIPS.
I think you are too hard on TIPS as inflation hedge, where the real rates going up effect is usually temporary, but yes harder this time because real and nominal rates had been so low so long.
I pretty much agree with the rest of the piece re: hedging.
One further corollary: IMO medium and especially long term bonds are bad investments because they correlate with stocks in inflationary environments, have lower returns in most, but protect you only against deflation on the downside.
In the “wiser” post Great Depression Fed environment of “Helicopter Ben”, IMO the chance of deflation is extremely low. And so the risk-reward on bonds is poor. Better to split your bond allocation (that isn’t TIPS or I-bonds) into part stocks, part cash/short-term bonds.
P.S. the one other place I don’t agree with the piece is that if you look at the historical record, gold has proven repeatedly to be an excellent hedge against stocks and against inflation.
This is even more true in the post-WWII era where deflation - which destroys the value of gold - is incredibly unlikely. An allocation of 5%-20% gold can be entirely appropriate, although I agree that the more you hold in TIPS and I-bonds likely the lower the percentage of gold needs to be as a hedge.
Even this guy who was/is a skeptic on gold will attest to its hedge value (TIP OF THE DAY: his website is a must-read IMO for folks doing retirement planning or in retirement):
https://earlyretirementnow.com/2020/01/08/gold-hedge-against-sequence-risk-swr-series-part-34/
The market seems unconcerned about inflation despite all the narratives. 30y inflation expectations are 2.28%. You can buy this via inflation swaps, an ETF like RINF, or via TIPS (if you hedge out nominal bonds).
Looks to me like the market is actually pricing in deflationary forces. Meaning "we will need to print a lot of money just to get inflation to be 2.2% long term." That's the sort of environment that favors gold and other "inflation" trades.
Or do you just think the bond market is seeing something different from stocks/crypto/gold which are all pricing in "inflation?"
Doesn't mean the market is right.
Besides Stu’s point, you are confusing disinflation with deflation.
And by looking at “the market” and current price/yields only, you merely see the weighted average opinion of what is most likely to happen. This tells you very little about the worst ~5%-15% of cases, which is what AK is referring to when he talked about the desirability of hedging.
Housing seems like the best inflation hedge due to its dual use and massive tax advantages. In retrospect I wonder if I underinvested in housing. I bought all the home I "needed" when I probably should have bought all the home I "could" back in Jan 2020. But hindsight in 20/20 and I didn't know we were going to have a pandemic and a helicopter.
As a matter of policy we should NOT encourage to increase there consumption (real housing services) to hedge inflation.
I agree with you on policy encouragement / what it *should* be.
But I agree with forumposter on what to do given the reality of policy that we have.
Sorry, i don't want extra house when our government can't find itself.
Why do you expect housing to still have tax advantages when the government can't pay its bills?
It also has built in creditor protections that other assets do not so long as it is a primary residence. So another non-crazy reason to overinvest in a house that you also live in is that you are more likely to be able to protect it in creditors.
And property tax advantages to long term residents. And five million other things.
One of the essential features of money is scarcity; in an era of fiat currency, that is missing. While gold and crypto (Bitcoin) have no yield, they are a means of payment that cannot be debauched by over-issuance. Gold is not easily divisible or transferable and has storage issues, but it has central bank sponsorship as a store of value, now growing due to US sanctions manipulations that cast a shadow on the dollar's reserve currency status. So gold and crypto deserve a place in any sensible portfolio. Over the years I have missed out on market appreciation relative to stocks for the gold portion of my holdings, but it has appreciated much more than inflation, and I have had the comfort of feeling insured against catastrophe in the form of inflation possibly getting out of control. The size of our national debt is now so great that it seems inevitable that a high level of inflation will be only way out, and it could easily get out of control
As a percent of GDP our federal debt held by the public is about the same as after WWII.
The big difference is in demographic trends. After WWII the deficit could be reduced fairly easily. Now, not so much. Neither major party is willing to tackle entitlement reform.
Reagan did it. And he passed a tax cut by getting Dem votes when Speaker O'Neill said no way. I'd argue if Clinton felt the urgency he could have done it. His budget balancing was mostly cutting DOD and interest savings by reducing debt maturity age but he had the capability. It just takes one leader.
Economically, I think it would be easier today than the 80s or after WWII.
I don’t actually agree with you on much here, but i‘ll point out only that Clinton’s budget balancing was mostly based on spectacular revenue growth from stock market capital gains. Secondarily, the Newt GOP House at least somewhat reined in spending.
Whether you are correct or not “economically” today, politically it is nearly infinitely harder, as Trump has taken up the demagogic Dem position on entitlements as untouchable.
Yes, Clinton and Reagan saw similar revenue growth, larger than others after Clinton.
It's been a long time since I looked but as I said, most of Clinton's budget success came from interest costs and DOD cuts. I think much more from DOD but not certain on that. Little or nothing in the rest of the budget.
Well, I looked it up. We are both right, but you got it more right.
What we both left out was his tax increases. That plus strong economic growth was 55%-60% of the explanation, cuts in interest costs 10%-15%, and cuts in defense 15%-25%. Non-defense spending did indeed increase somewhat in real terms. The so-called “peace dividend” after the breakup of the Soviet Union. The rest was increased payroll taxes relative to SS payouts from Baby Boomers before they started retiring.
Here's my unsolicited investment advice.
1). Marriage approximately doubles your income, but in Silicon Valley marrying well can mean more than doubling your income due to the "strike it rich nature" of the Valley. So marry well and move to Silicon Valley.
2). In order to marry well, work hard, and choose the right college. This means looking at SAT scores AND the viewpoint ratio. https://scottgibb.substack.com/p/how-to-choose-a-college.
2.5). In order to deal with the effects of politics on your life, teach yourself basic economics and read classical liberal and libertarian thinkers. This will likely improve your marriage and help your children..
3). Buy a house in Silicon Valley and hold. It will appreciate.
4). Leave Silicon Valley on the first day of the lock-down and buy another house in another state. Your new house will appreciate as the rest of California moves into your new town.
5). Transition your skillset to become remote work capable.
6). Move to a red county in red state. Keep working for your Silicon Valley firm earning the same income. Raise your children there safe from the blues.
Clearly you aren't speaking to the situation where our government can't pay its bills but let's ignore that.
1 What percent of the population has the skills to make it in silicon valley?
2 See (1)
2.5 See (1)
(Note AK is primarily speaking of where to put his existing assets)
3 See all the other responses.
4 What does one do with the silicon valley house? What do you think it can be sold for given this lock-down you mention?
5 Great! How many people have this option?
6 Given the above, why wouldn't anyone who could do this do it from the start?
If someone has the skills to be successful in silicon valley, I'm not sure they need to do ANYTHING you suggest.
This advice is universal in the sense that anyone can move to Silicon Valley and work their way up. Correct?
Anyone? No, I don't think that's true.
It's also a completely different topic than AK is discussing. He has been successful and is looking to preserve his wealth, not build new wealth.
Why don't you think it's true?
My comment is on investing in general. Everyone has wealth in their body and mind. Invest in your body and mind to obtain more wealth. Invest in relationships. Invest in a home. See? Same topic.
Just for starters I doubt anyone meeting big or even modest success specific to silicon valley as an IQ below 120, probably higher.
I don't know why you don't see that you are talking about a much broader topic. He is more focused on preserving capital than investing. He is talking about what to do with his MONEY.
My advice is just general investing advice from my perspective. It doesn’t say anything about IQ.
There are many options in what one does with accumulated wealth. One could invest in learning, a family, a house, or a move to Silicon Valley.
Arnold is just talking about specific types of investments. I’m talking about other types of investments.
One issue with this analysis is that it looks at inflation hedges as assets that hold or gain value contemporaneous with inflation. But what matters for investment is long term returns. Stocks have returned 8+% over decades through many cycles. As long as you can hold on, you will outpace inflation with stocks, even if you see temporary downside during the inflationary period. Real estate has been good long term too.
To avoid forced selling at the wrong time, you would not put 100 percent of your investment in stocks or real estate.
Permanentne??? What facts would change your mind? If none it becomes a faith, like heaven. 10 years ago I thought that, but now believe inflation is only politically bad when it comes to food & fuel. Asset inflation of houses is tough for the new young buyers, but very nice for voting sellers and ok with the owners not selling.
Few own as much in stocks as equity in their house.
Unlike the 70s, there is plenty of production capacity for the buyers. If 250% debt/gnp Japan is not suffering from high inflation then the US doesn’t need to.
That’s why tax cut deficits are preferable to govt spending deficits, the cuts go to producers & workers, while the spending goes to paper pushers in bullshit jobs that either have no value or add regulations making production harder.
“The Fed’s ultimate job is to make sure that the government can fund itself . . . .” In theory, that might push the Fed into inflation. But in practice, the ability of the government to fund itself by borrowing has turned out to be enormous—no inflation needed. If we knew that the government was close to the limit of its ability to borrow, inflation fears would be fully justified. But I, for one, do not know that.
"With Bitcoin there is no return." I'm not sure that's correct. I don't understand it well but it appears that my exchange, Coinbase, does offer a return on BTC holdings. Please correct me if I'm wrong.
Okay, looking at my account. It looks like Bitcoin does not generate a return but: "Earn rewards by holding USDC or by buying and staking eligible assets." Eligible assets do not include BTC, but do include Ethereum and Cardano.
For inflation, the question to ask to know which assets will move more isn't "how much" but "who prints". The "how much" is predictably 2% cpi annually- of course the actual amount printed is more than 2% of the money supply because of gdp growth and substitution effects.
For the "who prints" in the US its either monetary policy set by the federal reserve or fiscal policy controlled by the Treasury. Generally if it's the federal reserve, the money is added via liquidity for financial assets. Since that lowers interest rates and increases cash for asset holders, it benefits liquidity sensitive assets like bitcoin the most. Money for investors means higher financial asset prices.
If instead it's the Treasury doing the printing, the effect on assets will depend on the specific details of policy. Generally labour tends to benefit either through welfare payments or through higher employment. Labour doesn't invest; it spends. So things like rental properties and stocks do well as labour spends more on rent and consumables. Money for labour means higher consumer spending.
"The Fed’s ultimate job is to make sure that the government can fund itself, and when push comes to shove it will not be able to abandon that job in order to fight inflation."
Maybe I could argue about inflation but I won't. Instead, I have a question that I initially thought was off-topic from your desire to discuss how to protect one's portfolio from inflation but after I wrote it I realized how to bring it back to your issue. If a government doesn't have enough money to pay their bills, what does their central bank do and what is the outcome?
Managing one's portfolio for inflation like we recently suffered is one thing but you are talking about a whole other kettle of beans. It seems to me there are two choices: print money or raise interest rates. (1) Printing money is a losing battle. Maybe I'm wrong but I'm not aware of a government that ever got out of a debt crisis printing money. They eventually cancel debt and issue a new currency or use another currency such as, ironically, the dollar. Maybe they just cancel debt. Are i-bonds going to survive this? I don't think so. (2) Raising interest rates is exactly the same as what is done to fight inflation. What if the interest rates get totally out of control, going to 20, 60, or over 100%. Might they then switch to print money? I expect so. Now we are back to failure of the currency.
One other thing to consider is that these extreme cases have never happened in a country nearly as big economically as the US. Is Germany after WWI the closest? Doesn't seem close. It seems that if you are worried about US not being able to pay its bills, you should buy a remote compound and stock up on supplies for failure of the world economy.
What did I miss?
What about raising taxes as a third option?
Sure but that's not something the Fed can do. To me his premise assumed we were beyond that.
Ah gotcha, forgot this was just about the Fed
Related: I proposed something called "Consumption-linked perpetuities", here: https://medium.com/@gideonmagnus/consumption-linked-perpetuities-a-path-to-fiscal-sustainability-in-the-united-states-4e1a31ea1626
I would rather focus on the issue that poses the issue for the Fed, to raise interest rates or to inflate: deficits. Its is failing to make deficits = Σ(expenditures with NPV>0) that's the real problem. THAT is what reduces real growth. Whatever scope there is for reducing Σ(expenditures with NPV>0) we need to levy taxes _on consumption_ to pay for it.
Closer to your concern, I'd like to see the Treasury issues a future NGDP security.