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| 5/29 |
| 2005/4/14-15 [Reference/Tax, Finance/Investment] UID:37194 Activity:high |
4/14 So it seems like TIPS (Treasury Inflation-Protected Securities) are the
safest bonds to buy. It doesn't seem like they're at all affected by
market conditions (bad or good), and they have a guaranteed rate of
return after inflation (CPI adjustments). So what's the catch?
Is the only downside of this tiny risk investment a tiny post-inflation
yield of ~ 1.8%? Anyone with experience? I think I can buy these
direct from the government, too. Thanks!
\_ AFAIK the low yield is the drawback.
\_ well, yes, the catch is you can get better rates elsewhere. for
example, top cd rates today are rather higher than the comparable
TIPS rate. if inflation were to go crazy, TIPS could be a
better deal. but otherwise...
\_ Over the last few years interest rates have dropped below
that of inflation. While inflation rates weren't "crazy,"
lots of fixed income households were hurt. TIPS is supposed
to solve this.
\_ If you can count on the government to report inflation accurately.
I don't think you can, personally.
\_ So if Dubya's people say CPI is overstating inflation and manage
to drop the CPI calculations by 1 or 2 points, I get screwed
right?
\_ Hey, maybe one of those Bush guys took Econ 100b! "The CPI
overstates rates of price increase by 1/2 to 1.5 percent per
year (and the GDP deflator has similar biases)."
http://csua.org/u/bpg
\_ Which leads us back to Social Security which uses the CPI
to determine how much to increase payouts. Messing with
the CPI means messing with SS. Neat stuff, huh?
\_ You know, when it shows up in Econ 100b, it's probably
not a controversial issue whether the CPI overstates
or not. So, the question is would you prefer to run
Social Security based on a CPI you know is faulty, or
would you prefer to run it based on something that
economists can agree is more realistic.
\_ It showed up in Jan 1996 lecture notes.
I believe CPI calculations have already been
adjusted downwards since then.
The question is, well, how accurate is it now?
\_ Well, apparently Greenspan is still pushing
for using a chained CPI, which was recommended
by the Boskin Commission back in 1996.
\_ Makes sense. You need a big gun opposite
Greenspan to challenge him. Otherwise,
he's probably right on that point.
\_ There have been a lot of arguments that the
CPI _under_estimates inflation. I think
overall it is probably a decent number if
people argue both ways.
\_ The catch is, as far as I can tell, that you have to pay taxes on
the increased value of the bond when it adjusts, which sucks.
From http://www.kiplinger.com/basics/archives/2002/11/story14.html
"Another caveat: If you buy TIPS directly from the Bureau of Public
Debt you're liable for federal taxes on the inflation adjustment,
even though it's not a cash payout. That's in addition to the tax
you must pay on the interest income. (You don't pay state or local
income tax on Treasuries.) For that reason, it's best to hold TIPS
in a tax-deferred or nontaxable account, such as an IRA." |
| 5/29 |
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| csua.org/u/bpg -> econ161.berkeley.edu/Teaching_Folder/Econ_100b_S96/Lectures/lecturethree.html Real and Nominal GDP We choose a base year for measuring real GDP in order to separate out cha nges in nominal GDP due to overall inflation and deflation from changes due to increases or decreases in the wealth and productivity of the econ omy. A price index with a fixed basket of goods: it is sometimes called a "Las peyres" index. A price index dual to a fixed-prices quantities index: it is sometimes ca lled a "Paasche" index. An index with changing baskets of weights chained together is--no surpris e--a "Chain" index. I don't want you to worry about the names "Paasche" and "Laspeyres". I wa nt you to, instead, worry about the problems of making index numbers. Four key lessons: * A fixed-weight index takes no account of people's ability to substitu te to achieve the same utility when commodities become more expensive... Fixed-Weight Indices, "Deflators", and Chain Indices Let's begin with a basic problem: we want to create a single index--a sin gle number--that will capture, as best we can, the growing overall amoun t of production and wealth in the economy. To see how you might go about building such an index, let's lump all commodities--all goods a nd services--into two categories, "computers" and "stuff". You can see t he major lessons and problems if we just consider trying to add up two k inds of goods. And the major lessons and problems generalize in a straig htforward manner to the real world, in which there are thousands of diff erent commodities. In 1941, the US economy also produced 0 computers--and we do not know how much they would have cost--perhaps infinity, since we did not know how to produce them. In 1987, the US economy also produced some 150 million "standard computers"--and the average "standard computer" sold for $1,000. In 1995, the US economy also produced some 490 thousand "standard computers"--and the average "standard computer" sold for $450. Compare my UC Ber keley 1995 laptop--12 MB of memory, a 50 MHZ 68040 processor, a 320 MB hard disk--with my Harvard 1991 laptop--8 MB of memory, a 33 MHZ 68030 processor, an 80 MB hard disk. My new laptop is clearly more "computer" , but how much more? Dividing its price by the overall computer price i ndex suggests that my current laptop has the horsepower of some ten "st andard computers"--while my old laptop had the horsepower of four. But there are enormous problems in even measuring the quantity of even fine ly-divided groups of commodities. Nominal GDP grew from $4,360 billion to $6,916 billion from 1987 to 1995. One experiment: let's take 1987 as the "base year"--value all production in all other years as if we took it forward or backward in time to 198 7, and sold it at the prices that prevailed in 1987. nothing produced in 1995 that would have cost an infinite amount to make in 1987--we do get different answers depending on whether we use 1987 or 1995 prices to calculate rea l GDP growth over those eight years. They are both right answers to differ ent questions--but neither of those questions is probably the one that y ou want answered. Every computer purchased in 1995 is, using 1987 prices, valued as if it were worth fully twice as much as it in fact was... Every computer purchased in 1987 is, using 1995 prices, valued as if it were worth much less relative to other goods at the time than it in fact was... You could construct a fixed (quantity)-weight price index. You could divide nominal GDP by real GDP, and get something called the implicit price deflator. Yes: + The CPI overstates rates of price increase by 1/2 to 15 percent per year (and the GDP deflator has similar biases). We are getting richer and more productive faster than the official numbers report. |
| www.kiplinger.com/basics/archives/2002/11/story14.html Elizabeth Frengel Folks gearing up for retirement or looking for a little extra income grav itate toward Treasuries because of their safety and dependable payout. P roblem is, inflation eats away at the principal you lend to Uncle Sam -- and the bond's real return when you decide to cash it in. That's where Treasury inflation-protection securities (TIPS) step in. But economists and market wat chers agree that as the economy shakes off its slump, consumer prices wi ll resume their rise. How TIPS work Also known as inflation-indexed securities, TIPS stay on top of inflation because their value is adjusted upward in step with rising consumer pri ces. The value of the bond would automatically rise $ 5, and the real purchasing power of the original $1,000 investment would n't change -- no matter what the inflation rate. Because the interest th at's paid every six months is based on that ever-increasing principal, i nterest payments also rise proportionally. The government guarantees tha t your original investment will stay the same. In exchange for the safet y net, though, inflation-indexed bonds pay a lower interest rate than Tr easury securities of similar maturities that don't have the adjustment f eature. When TIPS pay off Whether TIPS are worth it depends a lot on the economic landscape. The bi g factors are stock-market performance and how much inflation the bond m arket is pricing in, says Tony Crescenzi, chief bond market strategist f or Miller, Tabak & Co. The difference -- also known as the break-even point - - is 16%. As long as inflation exceeds 16% over the next ten years -- and that's a good bet -- TIPS investors will win. Although Wall Street has been whispering worries about deflation in recen t months, Crescenzi says it's an unlikely scenario. Central bankers all over the globe have learned a lot from the deflation that's plaguing Jap an, and the US has a particularly active Federal Reserve. If deflation were to become a concern, he says, the Fed would boost the money supply , which would push up prices (too many dollars chasing too few goods). Crescenzi estimates that inflation will rise at a 2% to 3% clip over the next several years, mainly due to skyrocketing health-care costs -- whic h account for 14% of the economy. Energy costs are also running above th e five-year average, he says, and the dollar is weakening while import p rices creep upward. Cautionary tips Remember, though, that just because TIPS wipe out the number-one downside of bonds -- inflation -- these investments still carry risk. TIPS aren' t as easy to trade on the open market as non-indexed Treasuries, which m eans you can miss out on opportunities to turn price swings into capital gains. It's more of a concern for institutional investors, who do more trading, but it's still worth noting. Bureau of Public De bt you're liable for federal taxes on the inflation adjustment, even tho ugh it's not a cash payout. That's in addition to the tax you must pay o n the interest income. You can buy TIPS through a bond fund, not so much for the diversity -- TI PS are pretty safe - but to take advantage of the fund manager's ability to stagger maturities and trade for capital gains. Unless you own a fun d in a tax-deferred account, you'll have to pay taxes on the inflation-b ased readjustment of principal as well as on interest payouts. But funds pay the adjustment of principal as income, so you won't have to wait un til the bond matures to get it. |