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fleg9bo posts,

http://www.spectator.org/AmericanSpectatorArticles/Deflation.htm

Oh, Oh! I should have bought D-bonds instead of I-bonds. <grin>

intercst
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<<http://www.spectator.org/AmericanSpectatorArticles/Deflation.htm>>

Oh, Oh! I should have bought D-bonds instead of I-bonds. <grin>


I-bonds are "D-bonds" as well. They have a 3% minimum yield which is better than any Money Market or government bond would give you under [severe] deflation.
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mark33 writes,

<<http://www.spectator.org/AmericanSpectatorArticles/Deflation.htm>>

Oh, Oh! I should have bought D-bonds instead of I-bonds. <grin>

I-bonds are "D-bonds" as well. They have a 3% minimum yield which is better than any Money Market or government bond would give you under [severe] deflation


If you expect deflation, the best "D-bond" is just the standard 30-year US Treasury security. That was the best performing investment during the Great Depression.

intercst
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Oh, Oh! I should have bought D-bonds instead of I-bonds. <grin>

Hey, have I ever made smarta$$ comments about any of your linked articles? But I'll have the last laugh when your cash ladder is suddenly 99% of your portfolio. But maybe not--golf balls will be so much cheaper you'll still be under 4%. <grin>

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I don't buy Wanniski's argument. He insists that we have deflation because the price of gold has dropped. Yeah, but what about the stuff I buy? Food, gasoline, electric power, most everything I buy is going up, some a lot more than others.

Yes, some things are going down: computers, digital cameras. But that is mainly due to technological advances, which have been happening for a long time.

IMHO inflation has been held down by our free trade policy. But watch out if the "anti-globalization" crazies get their way.

ayduda
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Thanks for the post Fleg,

The subject was interesting, but the writer's first half-dozen paragraphs were so self-congratulatory I couldn't bring myself to read the rest of it. Perhaps if you come across another article that is not so self-serving in the future . . .

-- John
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I-bonds are "D-bonds" as well. They have a 3% minimum yield which is better than any Money Market or government bond would give you under [severe] deflation.

If you are talking real return, yes.

If you are talking nominal return, No! According to http://www.publicdebt.treas.gov/sav/sbifaq.htm "Frequently Asked Questions about I Bonds", the rate can be zero. Specifically,

5. Can I ever lose money in I Bonds?

No. I Bonds are U.S. Treasury securities backed by the U.S. Government. I Bonds even protect you from the effects of deflation. In the rare event that the CPI-U is negative during a period of deflation and the decline in the CPI-U is greater than the fixed rate, the redemption value of your I Bonds will remain the same until the earnings rate becomes greater than zero.


Since this is directly from the Bureau of the Public Debt, the issuers of I-Bonds, I would tend to think that they know what they are talking about when it comes to I-Bonds.

--Mark (who has $7,000 of "Public Debt" in his safe deposit box) Young
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<<I-bonds are "D-bonds" as well. They have a 3% minimum yield which is better than any Money Market or government bond would give you under [severe] deflation.>>

If you are talking real return, yes.

If you are talking nominal return, No! According to http://www.publicdebt.treas.gov/sav/sbifaq.htm "Frequently Asked Questions about I Bonds", the rate can be zero. Specifically,

5. Can I ever lose money in I Bonds?

No. I Bonds are U.S. Treasury securities backed by the U.S. Government. I Bonds even protect you from the effects of deflation. In the rare event that the CPI-U is negative during a period of deflation and the decline in the CPI-U is greater than the fixed rate, the redemption value of your I Bonds will remain the same until the earnings rate becomes greater than zero.

Since this is directly from the Bureau of the Public Debt, the issuers of I-Bonds, I would tend to think that they know what they are talking about when it comes to I-Bonds.


So what do they mean when they refer to the 3% guaranteed base return ?

An very simplified example -

Bought $1000 bond in year 1 - inflation is 2% in year 2, 2% in year 3,
-2% in year 4, and -2% in year 5, and 2% in year 6.

Year 1 - $1000
Year 2 - $1000 * (1 + .03 + .02) or 1050
Year 3 - $1050 * (1 + .03 + .02) or 1102.50
Year 4 - $1102.50 * (1 + .03 + ?? should be 0) or 1135.58
Year 5 - $1135.58 * (1 + .03 + ?? should be 0) or 1169.64
Year 6 - $1169.64 * (1 + .03 + .02) or 1228.12

The question is, do they collect the cumulative deflation and apply it against the future inflation, or do they discount the deflation to 0 ?
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The redemption value of an I-bond is determined by successively multiplying its face value by a composite rate that changes every six months.

This composite rate is essentially the sum of the bond's fixed rate plus the inflation rate for the period. Although the real composite rate could be negative during periods of high deflation, according to http://www.publicdebt.treas.gov/com/comi.htm the Treasury will never set the composite rate below zero, thus preserving any earnings from previous periods.

To illustrate, suppose the real composite rates are 6.00%, 2.00%, -4.00%, and -8.00% during four successive six-month periods.

The oversimplified redemption value of a $1000 I-bond would then be $1000 x 1.03 x 1.01 x 1.00 x 1.00 = $1040.30.

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The redemption value of an I-bond is determined by successively multiplying its face value by a composite rate that changes every six months.

This composite rate is essentially the sum of the bond's fixed rate plus the inflation rate for the period. Although the real composite rate could be negative during periods of high deflation, according to http://www.publicdebt.treas.gov/com/comi.htm the Treasury will never set the composite rate below zero, thus preserving any earnings from previous periods.

To illustrate, suppose the real composite rates are 6.00%, 2.00%, -4.00%, and -8.00% during four successive six-month periods.

The oversimplified redemption value of a $1000 I-bond would then be $1000 x 1.03 x 1.01 x 1.00 x 1.00 = $1040.30.


Aha ... I see. So they weren't as good a deal as I thought. In any case, I don't expect any rampant deflation in the next decade or so. Seems to me that interest rates can only be lowered to about zero before they can only rise again.
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