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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35392  
Subject: Re: I-Bonds and deflation Date: 6/28/2003 6:30 PM
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"I guess I don't understand deflation or your post. It seems to me deflation is when both "things" and "services" (as in wages for example) are decreasing in their value. i.e. Prices per item decline.
Well if an I bond prevents the loss of capital, how can that be bad compared to owning "things" or stocks? Twenty years ago land and everthing else in Japan was higher priced then now. As I understand it, there are many pieces of property with mortgages greatly in excess of the property value. If on the other hand people had a way to keep the same number of Yen, they would be better off then have a Yen demoniated physical asset.
What in my understand is in error?"

Preserving capital in deflation certainly beats losing it. The question was whether an I-bond, in particular, would be a good invesment in a deflationary environment. I take this to be asking: compared to other capital preserving options, such as treasuries or CDs, not compared to owning stocks or property. Zero interest beats losing money; it doesn't beat some interest. So, if one is seriously worried about deflation, it is better to lock in the best interest rate you can get today. If you're worried about inflation, then something with an inflation adjustment makes sense. With the current low fixed rate on I-bonds, I would expect if inflation does hit, EE bonds are a better choice because they will catch the upswing in interest rates, and if deflation hits, they are guaranteed to double in 20 years ( new, up from 17). Assuming, of course, that the US Treasury doesn't default.

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