To qualify this, there is zero risk that the technical letter of the agreement won't be honoured.
Lending money to the US government is very high risk right now. Simple person metrics like debt to GDP indicate they're currently fighting a bigger war than WWII, and the trend-line says they are losing. If you lend the US government enough money to buy a sandwich there is a real risk that at the end of the agreement they'll return an amount of money that won't get you a sandwich.
It doesn't matter that they say "inflation protected" on the tin. Exactly what happens there is uncertain, it is quite likely that there will be games played with inflation figures. Or a simple haircut of how much money they owe ("we did owe you $100, now we owe you $75. Law says so.").
In 1933 Congress unilaterally devalued the dollar by nearly seventy percent, rewrote the gold clauses in private contracts, largely forbid the private possession of gold, and managed to get away with it. The Supreme Court conveniently decided to ignore the Constitution on that occasion.
On the flipside, at least it ultimately resulted in laying the background that politically enabled private ownership of gold again. I'd rather be able to trade away my pieces of paper for gold than play a rigged game where I buy pieces of paper that 'represent' gold I can't own.
If a state did it, it would be a straightforward violation of the Contracts Clause. With regard to Treasury bonds and gold certificates it was the government rewriting its own contracts. It was a violation of the contract on every Federal Reserve Note and bank deposit as well. Redemption in gold had been suspended before, but the value had not been, and in the late nineteenth century the government started redeeming gold certificates again at full face value after an interruption during and after the Civil War.
So if you start out by issuing an executive order requiring everyone to turn in their gold in exchange for certificates denominated in dollars and then a few months later you decide that those certificates and all other deposits are worth 70% less in gold then they were before it amounts to a systematic taking that looks like the worst violation of the Takings Clause ever. i.e. "Nor shall private property be taken for public use, without just compensation" (from the Fifth Amendment).
In theory states could do something similar under the taxing power, but Congress doesn't have the power under the Constitution to enact property taxes in any way that is practical. We have the 16th Amendment so they could do that in a practical way on incomes.
Congress just decided to jointly repossess 70% of the financial wealth of the country, and ignore every solemn representation they or anyone else had ever made to the contrary. It that is not unconstitutional it should be.
There were alternatives, they could for example have recapitalized the Federal Reserve system, with a debt for equity swap at the cost of wiping out the original shareholders, of course. The banks held title to a worthless enterprise and Congress sanctioned a massive levy of their depositors to keep them afloat.
All on 5-4 votes, which is not exactly a compelling vote of confidence for a contract case.
"Justice McReynolds wrote the dissenting opinion. He protested that gold clauses were binding contracts, and that allowing the administration's policies to stand would permanently damage faith in the government to uphold its own contracts and those of private parties. McReynolds distinguished the cases at hand from the Legal Tender Cases, arguing that in the earlier cases the government sought to continue operating until it could meet its obligations, while the Roosevelt administration apparently sought to nullify them."
Of course. And the SCOTUS under FDR was ruling under the threat of court packing. A lot of rulings from then are risible.
My favorite is telling a farmer his homegrown pig feed is illegal because it effects interstate commerce.
The one that best illustrates bad law with good intentions is the migratory birds act: protect wildlife -> good. Doing so by making international treaties supersede the constitution -> not good (that ruling has been cut back)
The key to mitigating that risk is crossing it with the same risk on the other side - for example, a mortgage. If the US dollar devalues, so does the nominal value of the mortgage.
Lending USD to USG is zero additional risk. If one wants to hedge against the risks you mention, then one has to invest in non-USG, or even non-US, assets. But for everyone living in the US, USD will continue to be quite relevant. And given the low purchase limits on series I bonds, they will only ever form a portion of someone's assets.
I'm saying that he's lending money to the people who write & interpret the rules, and those people do not intend to pay their creditors back in real terms. Indeed, they have probably crossed a practical threshold where they cannot pay back the real amount.
It doesn't matter what the rules say right now, his wealth is at risk. They can and do change the rules sometimes. They can change what the word "inflation" means. Maybe someone legislates that inflation is 1% now for paying back I-bonds, I dunno. This is risk, it could happen. Something is going to happen, the debt situation is unprecedented bad. Will that something affect these bonds? It is possible.
The US gov't so far has enough credibility that they won't manipulate the inflation figures or change the law under you to cheat you of your money.
Of course it _could_ happen - nothing prevents it. And if they did, they'd have destroyed the credibility that took over a hundred years to create, and it would remove any future possibility of people lending money to the US gov't. A rational actor would not undertake this action, unless there's some good reason (such as nuclear war).
One only needs to peer into the sausage factory that is the Bureau of Labor Statistics[1] to see that a measure of inflation is a form of opinion whose credibility is entirely wrapped up with that of the speaker.
> The US gov't so far has enough credibility that they won't manipulate the inflation figures or change the law under you to cheat you of your money.
It isn't a matter of credibility at this point, it is one of political realities. There hasn't been a plausible outcome where the debt principle gets paid back since the 1970s, but that turned out to be OK because they can keep rolling that over with new debt. Alright. Well now we're approaching debt levels where even paying back market interest rates is coming under pressure and probably going to give.
The risks here, much like the debt to GDP ratio, are starting to move off the charts. Lending the US government money can't possible be safe under these conditions. Someone here is obviously going to get screwed, some of these promises have to be broken. It could just as easily be these bonds as anything else.
Even if we assume the measurers of inflation are honest, using honest metrics, inflation is hard to measure and the measurement has a natural skew downwards.
We’ve all heard about shrink inflation by now. Theoretically that’s measurable by taking the Oz. into account.
But how about the drop in quality of goods? Raisin Bran with few raisins, cars with thinner door panels, etc. This is impossible to measure, obviously happens, and is systematic in one direction resulting in a lower reported inflation rate.
The i-bond with a fixed rate of 0% is guaranteed to return less than inflation: Even if you buy their inflation metric as faithful: The 'gains' are taxed. The tax is at income rates, not even LTCG rates.
Moreover, what they're attempting to match isn't inflation, it's a specific government inflation metric which contains many corrections which make it obviously not match inflation for the purpose of preserving purchasing power.
For example, when inflation goes up the metric assumes that purchasing will shift from high value goods (like steak) to lower value goods (like rice), which causes the metric to read lower. This is no good if your goal is preserving purchasing power: you put in enough to buy steak and the inflation metric is okay with what comes out being only enough to buy a meal of rice (not technically, since steak and rice aren't the only goods but you get my point).
Well also because there are other factors that are high. Inflation is a basket of many goods. Just because lumber is up or down doesn’t mean inflation, overall, must be up or down.
It’s not a conspiracy in this case or an official narrative. Inflation is high so reporters try to find examples. Instead of lumber, they now talk about groceries or whatever.
We know inflation is high. The conspiracy theorists are the ones who say it’s higher (20,30% etc) because their commodity of choice is up that much.
Last year that commodity was lumber. A couple of months ago it was oil.
It’s quite possible, likely even, that your personal inflation doesn’t match the official inflation, because you don’t have the same basket of goods. By all means if you want to present an alternate inflation with different weighting that’s fine, preferably show what the same weighting’s were over the last 20 years though and be transparent about the weightings like official ones
Or do a YouTube video showing different amounts of lumber and yell about how the lame stream media is lying to you.
“metrics like debt to GDP indicate they're currently fighting a bigger war than WWII,”
Meaning that the GDP trends as if we’re in a WW3 situation and loosing, not that we are. I.E the GDP/debt metric appears to be as bad as if we were loosing a war when in fact we’re not even fighting one.
Ironically I disagree with both points. Yes the economy is bad, yes it will get worse but:
- I don't think the economy is as bad as losing a world war; the US has too many fundamentals in her favor (namely resources and a strong Navy to prevent outside threats).
- Ironically enough we are in fact loosing a low intensity world war, mostly fought in diplomatic relations with third world countries. Just like the first Cold War, but with weaker fundamentals on our side.
Weaker fundamentals? Do you really think the relationships with third world countries are more strained than were during active colonization? Russia and China did a lot of work with their infrastructure programs but I am still not sure they have the upper hand.
Our industrial base is gutted and we don't have enough resources. Not enough to sustain our extravagant lifestyles.
Europe has to find a way to buy Rubles quickly or choose between freezing or damaging capital goods (there are industries that cant be shut down because they get damaged).
There’s not enough American LNG to rescue Europe, and if there were there arent enough ports to import it. Anyway, nascent American populism will make sure Americans get (cheap) gas first.
To qualify this, there is zero risk that the technical letter of the agreement won't be honoured.
Lending money to the US government is very high risk right now. Simple person metrics like debt to GDP indicate they're currently fighting a bigger war than WWII, and the trend-line says they are losing. If you lend the US government enough money to buy a sandwich there is a real risk that at the end of the agreement they'll return an amount of money that won't get you a sandwich.
It doesn't matter that they say "inflation protected" on the tin. Exactly what happens there is uncertain, it is quite likely that there will be games played with inflation figures. Or a simple haircut of how much money they owe ("we did owe you $100, now we owe you $75. Law says so.").