Even Paranoids Have Enemies

Most folks welcomed the arrival of the Treasury Department’s inflation-linked securities, known as Treasury Inflation Protected Securities, or TIPS.  For the grammatically-anal among you–card-carrying member, myself–you buy TIPS and you buy aTIPS; it’s not plural or singular, just what they are.  You can click on over to TreasuryDirect, via this link, to see learn how TIPS work (using it as a plural sounds so much better, sort of like a futures contract does).

Some Trilateral Commission/conspiracy types, however, were skeptical since it left the fox guarding the hen house.  The principal amount of a TIPS is adjusted each month for the change in [__]flation–”in” or “de,” and the interest payment goes up or down, accordingly.  The Consumer Price Index for all items–doesn’t exclude energy and food prices–is used for the inflation adjustment.  So Uncle Sam calculates the factor that determines the interest payment and the maturity value of the security, and it’s on the hook for the potential increase.  Suffice it to say, for the cynic there’s plenty of reason for the government to prefer deflation as it relates to TIPS.

Never happen, right?  ‘Government’s wouldn’t do that, would they.

You’ll have to decide that for yourself, but the following might help. 

I’m lifting the following directly from John Mauldin’s Thoughts from the Frontline weekly newsletter (available here) dated 18 September 2009 (available here.)  The emphasis mine, other than the title.

Outrageous! – Artificial Deflation!

Speaking of deflation, let me mention something I find totally outrageous. Normally, I actually take up for the bureaucrats who are stuck with the task of trying to monitor inflation. It is a tough job, and like Monday-morning quarterbacks, everybody thinks you should have done it differently. I can understand the rationale for hedonic measurements [GPS: adjustments for quality, like increased computer speeds, etc.], housing rent equivalents, etc., even if I don’t agree with them. You have to set some rules and live with them. But the latest imbroglio is disgraceful.

It seems the US Bureau of Labor Statistics, in the CPI next week, will treat the subsidy received by those 800,000 car buyers who bought a car in the “Cash for Clunkers” program as if the price of a car fell by $4,500. Really? My tax dollars account for nothing?

This does several things. It will decrease the inflation used to adjust the GDP for this quarter. Not the end of the world, but annoying But what really matters is that the CPI is used to calculate Social Security increases and interest paid on TIPS.

If I tried to defraud one of my clients using such accounting legerdemain, I would be shut down, sued, and taken to court (at the minimum) by the host of regulators who look over my shoulder. And I should be! You don’t make such changes in the rules to your own benefit. But that is what the BLS did. This policy should be overruled immediately. There are enough deflationary forces in the world without having to artificially create some more. OK, off the soapbox and onto the banking system.

If you’re interested in inflation-protected securities, there are a few routes.  First, there are these TIPS, issued by the Treasury.  Second, there are inflation-linked securities issued by corporations.  Third, there are inflation-linked securities issued outside the U.S., which add an element of currency fluctuation to the mix.

There are, however, tax implications that argue for using mutual and or exchange-traded funds to get exposure to this asset class if they’re to be used in a taxable account (i.e. not an IRA).  The principal adjustment from inflation is taxable every year, whereas you don’t receive that compensation–other than in the market price–until maturity.  Probably not a huge tax issue, but one that’s easily avoided by investing in a fund of inflation-linked securities.

Oh, and you might recall from prior dispatches, that we’re not terribly concerned about inflation for the next couple of years, although the man/woman on the street probably is.  We don’t mind thinking differently from him/her.  Kinda makes us feel smart.




One Response to “Even Paranoids Have Enemies”

Leave a Reply