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You wrote, In your counter example, you assume a 5% inflation-rate, create a bond with a 5% coupon due in due years, and then assume you will break even with respect to retaining purchasing-power. I say that owing such a bond creates an average loss of purchasing-power of -2.04% per year. So clearly, we think about the math of inflation very differently.

I'm sitting here trying to think of what variable I might be missing. The only other variable I can think of that would account for this loss is taxes. Since income on interest payments is taxable, it reduces purchasing power on returns. But to account for a -2.04% loss in purchasing power, you'd need about a 41% combined marginal tax rate.

I've only recently begun accounting for taxes when estimating my taxable account yields. Until recently most of my assets were in tax-advantaged accounts, so the tax impact didn't seem that important. Now I'm starting to pay a more attention to it since my taxable assets will soon out-strip my tax-advantaged.

- Joel
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