One of the issues that came up in the subsequent comments section was a concern about the tax consequences of this strategy. The idea was that higher inflation would be very damaging from a tax perspective. My intuition was that this is not the case, and I've prepared a little example to show why I think there are no adverse tax consequences from higher inflation. But as I'm not a tax person, I'd like to encourage further discussion to make sure which side of the argument is right.
Here are the relevant comments:
Advisor Caution #9:
Even if the TIPS are held in an IRA, both the real AND inflationary gains will be taxable upon withdrawal for spending, almost certainly reducing the 0.8% pre-tax real return to a negative after-tax real annual return which, in the event of significant inflation rates, could be VERY negative. Furthermore, although the investment in the IRA was in TIPS, upon withdrawal the growth, both real and inflationary will be taxed at ordinary income rates for both federal and state purposes. The response to caution 6 did not address the eventual taxation upon withdrawal.
Even if the TIPS are held in an IRA, both the real AND inflationary gains will be taxable upon withdrawal for spending, almost certainly reducing the 0.8% pre-tax real return to a negative after-tax real annual return which, in the event of significant inflation rates, could be VERY negative. Furthermore, although the investment in the IRA was in TIPS, upon withdrawal the growth, both real and inflationary will be taxed at ordinary income rates for both federal and state purposes. The response to caution 6 did not address the eventual taxation upon withdrawal.
I'm
having trouble visualizing how this concern would play out. Yes, you
also have to pay taxes on gains due to inflation. But over time, tax
brackets grow by inflation as well. Wouldn't tax bracket growth mostly
counteract this concern?
Indexing
the COST BASIS would eliminate the problem, but indexing the TAX
BRACKET will not. The writer is likely in the 25% Federal bracket and
most people pay state taxes (which apply to IRA distributions even if
the source income is TIPS), so 30% is typical (higher in states like
California).
To keep it simple, let's round the expected real return to 1% and make the inflation rate 10%. The total nominal return will be 11.1%. Indexing will prevent this inflation from moving the taxpayer into a higher bracket, but they will still be paying at the 30% rate on all nominal returns. So taxes will grab 3.33% and reduce the after-tax return to 7.77%, far below the inflation rate. The net real loss is slightly in excess of 2%.
Even modest inflation of 3%, which most people will agree is highly plausible, combined with the 0.8% real return the writer correctly estimated for pre-tax real returns at the moment, will completely wipe out the entire return for the taxpayer and leave them at a net real loss.
There is a modest reduction in the effective tax bracket for longer term TIPS because the taxation is all at once in the year of distribution rather than annually. The impact is comparable to an immediate Roth conversion of the entire IRA at a 30% rate, followed by zero taxation afterwards on the annual return (currently 0.8%).
Now, it is very possible that some retirees could sustain a one-time 30% permanent loss and then live comfortably on a 0.8% tax-free real return on the 70% balance of assets that are left. Of course, under such a circumstance it is hard to see why they couldn't comfortably handle the fluctuations of a global equity portfolio.
I don't want to argue with the guest writer: he can do what he wants with his own money. But I could never in good conscience expose a client of mine to the risk of major inflation which, after taxes, even devastates inflation-protected securities. 75% Global Equities, 25% TIPS? Sure. But the reverse is not as safe as he wants to believe.
To keep it simple, let's round the expected real return to 1% and make the inflation rate 10%. The total nominal return will be 11.1%. Indexing will prevent this inflation from moving the taxpayer into a higher bracket, but they will still be paying at the 30% rate on all nominal returns. So taxes will grab 3.33% and reduce the after-tax return to 7.77%, far below the inflation rate. The net real loss is slightly in excess of 2%.
Even modest inflation of 3%, which most people will agree is highly plausible, combined with the 0.8% real return the writer correctly estimated for pre-tax real returns at the moment, will completely wipe out the entire return for the taxpayer and leave them at a net real loss.
There is a modest reduction in the effective tax bracket for longer term TIPS because the taxation is all at once in the year of distribution rather than annually. The impact is comparable to an immediate Roth conversion of the entire IRA at a 30% rate, followed by zero taxation afterwards on the annual return (currently 0.8%).
Now, it is very possible that some retirees could sustain a one-time 30% permanent loss and then live comfortably on a 0.8% tax-free real return on the 70% balance of assets that are left. Of course, under such a circumstance it is hard to see why they couldn't comfortably handle the fluctuations of a global equity portfolio.
I don't want to argue with the guest writer: he can do what he wants with his own money. But I could never in good conscience expose a client of mine to the risk of major inflation which, after taxes, even devastates inflation-protected securities. 75% Global Equities, 25% TIPS? Sure. But the reverse is not as safe as he wants to believe.
New material:
This sounds quite persuasive, and so I've tried to develop an example to understand better about the situation. My conclusion is still that higher inflation does not lead to higher real taxes for the TIPS ladder.
Just to make a simple example, the TIPS yield is 0.8%. But this is not actually relevant for anything. What matters is that the individual has used IRA assets to construct a TIPS ladder providing $50,000 of real income each year. The tax system is simplified, but it is complex enough to capture the idea of whether inflation leads to higher taxes. The current tax brackets are 10% tax for the first $30,000 of income and 25% tax for any income beyond this amount. Tax brackets adjust for inflation.
In the following example, the future inflation rate is 0%. Taxes on distributions from the IRA lead to an annual effective tax rate (the amount of taxes paid divided by the amount of income distributed from the IRA) of 16%.
Next, suppose the inflation rate is 40% per year. Then, naturally, the nominal amount of taxes paid increases. But the nominal income provided from maturity TIPS also increases. And the tax bracket values increase. Taxes paid divided by Income received is still always the same 16%. Higher inflation does not lead to a larger tax burden.
Am I missing something? Can we reconcile what Less Antman is saying along with what I'm saying?
The bigger question is what is the alternative? Any increase in nominal return whether through a directly inflation linked increase for TIPS or an indirect and less predictable increase in nominal returns for equities is going to be taxed the same when held inside of an IRA. The only way to avoid purely nominal returns being taxed is to avoid taxes all together.
ReplyDeleteSome aspects of the tax code are not indexed for inflation and could substantially affect what is owed, especially with high inflation rates and/or long retirement planning windows. For example, the threshold amounts for the net investment income tax are not indexed. In addition, the income thresholds for determining the taxable portion of Social Security benefits are not indexed for inflation. Furthermore, Obama's FY 2014 Medicare proposals for income-related Part B & D premiums would modify current income thresholds and then freeze them until 25 percent of all Medicare beneficiaries must pay income-related premiums; this threshold freeze (i.e., non-indexation) could last for quite a few years.
ReplyDeleteI agree about this. Another issue could be that if inflation is very high, the timing will be off between when TIPS make their inflation adjustments and when TIPS owners spend their income from TIPS.
DeleteWade, the only difference between what you have posted and what Less Antman stated appears to be the method of expressing the drag introduced by taxes. You are using a percentage drag measure, while Less is using an absolute Real drag measure. Your 16% tax loss in a 0% inflation world doesn't "feel" so bad to a retiree (there is still a little Real spending growth). But a 16% tax drag in a 40% inflation world would "feel" terrible, because that's an absolute Real spending gap of 40.8% x 0.16 = 6.5% Real annually.
ReplyDeleteAfter Less Antman's original posting I went back and examined how my TIPS ladder was constructed so far (it's incomplete). About 1/3 was in traditional IRAs and 2/3 in Roth IRAs. This was just an "accident" of where my funds were available when the TIPS were being purchased. But clearly from a tax drag perspective, I would be much better off concentrating the TIPS dedicated to supporting my Essential Expenses Budget into my Roth IRAs. After all, I purchase the TIPS as protection against an high inflation environment, so why lose part of that protection by putting the TIPS into a traditional IRA! I have a LOT of Roth money available, so this won't be a problem. So I consider this to have been a VERY worthwhile discussion as far as guiding my own future TIPS ladder development. (ThePrune)
ThePrune:
DeleteThanks. I've had your post in the back of my mind for the last couple days, and I'm not yet understanding what you mean by this tax drag. This introduces an interesting issue though. For each asset class, it will be nice to have a priority ranking for where it is most appropriate to locate the asset: taxable, tax-deferred, or Roth.
I'm not a tax expert either, but it seems to me that there are two problems with Less Antman's calculation. First, he treats the taxes as though the 30% marginal tax rate is imposed on the entire increase, which would only be true if the first dollar of interest was already in the 30% bracket. Second, he also treats the calculation as though all the interest each year is taxed in that year. But that is not true because the TIPS are in an IRA. Only the withdrawals are taxed each year. Amounts not withdrawn (that is, the amounts set aside for future years) continue to grow at the full rate of 11.1% (in his example) until they are later taxed. This difference is the reason that IRAs are useful even if one is in the same tax bracket in retirement as during the savings years -- they allow the investor to accumulate income on money that would otherwise be lost to taxation. As Wade's example shows, the investor nets the same real income each year after tax (84% of $50,000 real dollars). But I would like to note something that I pointed out in a comment on another post earlier -- Don't try this outside of a tax-sheltered account! In a taxable account, all the accumulation is taxable each year but the investor is receiving only a small part of it. It is likely that taxes will be greater than income in the early years.
ReplyDeleteI took the marginal nature of taxes into account in estimating a 25% Federal and 5% effective State tax rate. The writer referred to a pension, annuity, and Social Security, so the IRA distributions don't start at the lowest bracket. Once income, including half of Social Security, exceeds $32,000, the effective Federal rate for a couple is 22.5%, because the taxpayer is in the 15% bracket but each dollar of income will increase SS taxable income by 50 cents. And approximately where the SS the phase-in ends, the 25% bracket begins. So either the pension, annuity, and SS already bring the couple to the 25% bracket or they will be very close from the first dollar of IRA distributions.
DeleteSince I pointed out specifically that the effect of taxing only upon distribution reduces the effective tax rate modestly, I don't think I'm guilty of ignoring that fact. As I said, the ultimate impact is comparable to a one-time reduction of the traditional IRA (whether at the beginning or end doesn't matter) at the applicable marginal tax rate, which I estimated at around 30% combined federal and state.
I've noted elsewhere in this comment thread my error on the impact of inflation on real returns. On the main point I was trying to make in the other thread, I was wrong.
Wade, you're missing nothing. I stand corrected. As it turns out, my own explanation post was self-refuting. I correctly stated:
ReplyDelete"There is a modest reduction in the effective tax bracket for longer term TIPS because the taxation is all at once in the year of distribution rather than annually. The impact is comparable to an immediate Roth conversion of the entire IRA at a 30% rate, followed by zero taxation afterwards on the annual return (currently 0.8%)."
But if that is the case, then the inflation rate is clearly irrelevant. I was wrong on that point. If Grinder12 can live on an immediate 30% reduction in the value of his traditional IRA followed by a 0.8% return on the balance, the TIPS will provide adequate funding. Money in a Roth needs no such reduction, of course.
Favoring TIPS in the Roth is a bad idea. The Roth is tax-free: you want to favor assets with the highest expected growth potential. TIPS don't meet that definition /expectation unless your portfolio does not include stocks, REITs, etc.
ReplyDeletethis is an interesting point. Many recommend using TIPS in Roths. I would be interested in all the pros and cons if anyone has thought it through.
DeleteYes, this is going to be a good topic for further consideration. Thanks. I've also heard about the idea of using the Roth for assets with the highest expected growth return.
DeleteI believe Wade does have it right as this was a concern when I retired, but then the real rates on TIPS were much (much!) higher than currently as well. What seems to be ignored frequently is the couple will have two exemptions plus at least the standard deduction available. This has to be deducted from source of income or another to begin with. Always appreciate the in-depth discussions though. Fred
ReplyDeleteThank you for clarifying this Wade and Les. I was a bit alarmed by the original argument, given that I'm about to execute this strategy. I quickly ran some cash flows just as Wade did and saw the same thing...the ladder holder's standard of living and average tax rate seemed unaffected by inflation. Our state doesn't tax IRA income so the total portion of our IRAs that goes to the government is closer to 20% than to 30%, after deductions.
ReplyDeleteGrinder12
DeleteIf you live in a state that exempts IRA distributions, that's great. I assume you understand the 50% phase-in rate of SS taxation that causes the 15% federal bracket to effectively be 22.5%. It does make your low planned draws more understandable.
Do look at my new comment in the original thread, though. I still think there are unconsidered risks you are ignoring with a far greater plausibility than the single risk of a long global bear market in equities that appears to consume you (even though there is no 7-year period in recorded history during which global stocks failed to make a new all-time high). But I can see you're resolved to do this, so I'll only suggest that you keep the equities in the Roth (which effectively is a higher allocation due to the absence of deferred taxation), and that if you're lucky enough to get your early bear market in equities, you take the opportunity to rebalance. Also, consider upping the global equity allocation while using a minimum volatility ETF to make you comfortable with it. The downside volatility of a 22% ACWV is about the same as that of a 15% ACWI with similar expected returns.
And for all your defense of your allocation, you really haven't offered any reason to believe that a higher global equity allocation would be riskier. The assumptions would have to be historically absurd (unlike debt default risk, longevity risk, major expenditure risk, and substandard long-term equity return risk, all of which have plenty of historical precedent) to make a 75% Global Equity 25% TIPS allocation riskier than what you're planning to do. Especially if you use a minimum volatility fund for the global equity allocation.
The good news is that most of the risks of your strategy manifest slowly, so as long as you are open to keeping your thinking cap on after you adopt it, there will be plenty of time to make modifications if you can be persuaded they are correct.
One response to the risk of the global equity allocation would be Dimson's "Triumph of the Optimists" volume, which Wade has cited elsewhere. Foreign markets have not fared as well as the domestic one in the past, sometimes disasterously. I'd always thought the discussion resolves to: Do equity returns regress to some mean (Bogle and or Siegel) or does risk increase with the holding period (Samuelson and Bodie)? And does the required time frame match that of the investor's horizon?
DeleteLess,
DeleteThanks for all of your thoughtful comments.
Just to clarify, I think the major risks you are talking about with the TIPS related strategy are not related to market risks, but more to personal spending risks. Is this right?
I mean, if you are building a 25-year TIPS ladder, you are placing a lot of confidence in the idea that you know what your spending will be for the next 25 years.
Lots of things could happen which require you to spend more than you planned. For these contingencies, you do need to have a pool of liquid assets available from outside the TIPS ladder itself. Needing to liquidate non-maturing TIPS to cover unexpected expenses, especially if interest rates have risen, could be devastating.
For sure there's going to be a cost for mismatching the ladder income with actual expenses. I try to evaluate this by running "what if" scenarios, letting each year's ending cash balance be whatever it is and assigning a 3% real interest cost as a proxy for the cost of negative balances, which then accumulates against our ending net worth. The layers of defense against big imbalance costs would be: prior understanding of our expenses, a built in cash cushion in the early period, an $XXk home equity line of credit, heavy insurance coverage, withdrawals from the Roth, a home equity loan, and the ability to adjust expenses. If we got as far as having to liquidate significant portions of the ladder, hopefully it would be from maturities within a couple years of the need and/or be on the right side of interest rates. It seems to me all of those protections would have to fail to end with a substantial ladder liquidation hit. I hope.
DeleteThis comment has been removed by the author.
DeleteLess, you ask why I think a higher equity allocation wouldn't be at least as safe as the TIPS ladder. As several have pointed out on the Bogleheads TIPS Ladder thread, if you've already won the game, there's no need to sit at the equity game table. Now that we're drawing down on our portfolio, I would leave the table completely if we could...we're doing well but we haven't "won" and have to remain in equity to some extent. So then I look at history. How long a holding period do I need, without any withdrawal pressure, to feel safe that our equity will be there when we need it. I download the Shiller historical returns data and analyze the real returns for various rolling periods 15yrs, 20 yrs, 25 yrs, etc. I see bad things can happen over 20 year holding periods, but are much less likely for 25 year periods. So my goal is to get past 20 years without depending on any equity, by constructing as safe an income stream as I can for that period. (Of course that assumes we have enough funds for an equity allocation after paying for the ladder, which fortunately we do). The TIPS ladder strategy accomplishes my goal to the point that it's hard for me to generate a failure scenario. Now, if I ran a purely quantitative MCS analysis with more traditional optimized portfolio allocations (i.e. more equity), maybe I could achieve as low or even lower a failure rate, presumably with a much higher expected final portfolio value that could help cushion against the non-equity risks you rightfully note. I'm not saying I disagree with that approach. I do use MCS to get a general feel for uncertainty. But I only trust MCS--based logic so far (see below), especially when it starts pushing me further out on the equity limb in retirement....I still prefer my own logic here. As for the non-equity risks, I'm comfortable that we can either absorb or mitigate them without upping our equity exposure.
DeleteExpanding on the 20 year holding period point, 9% of all 20 year holding periods since 1900 have had compounded (geometric) real equity returns of 2%/yr or less. None have had a negative real return, although 1961-1981 was close at 0.6%/yr. But consider that the 9% frequency of those tough 20 year stretches occurred within a period (1900-2013) where the overall real equity return was 6.4%/yr. Now consider the future. ..here are some published long term equity return expectations: 1) Harold Evensky--3.4%; 2) Schwab's Investment Advisory Service—3.8%; 3) JP Morgan—5.2%. A lower average long term equity return has big implications for a 20 year holding period. A value just two percentage points lower in the future than in the past, with no change in historical volatility, means the history-based 9% chance of 2%/yr real returns over any 20 year period, turns into a future 9% chance of 0% (or lower) real returns over any 20 year period. There'd be a 15% chance the equity wouldn't beat out the 0.8% TIPS return over 20 years. Continued in next comment........
CONTINUATION
DeleteSomeone might compare a 9% chance of 0% equity return with the 100% chance of the 0.8% TIPS ladder return and wonder what's the point, especially when the expected return of the equity is so much higher. My answer is that the difference in volatility has a huge impact on our quality of life. With a heavier bet on equity, I believe we would be having to adjust our standard of living frequently over the next 20-25 years in response to the annual whipsawing of the market. I don't like that idea at all. The value of the certain and stable standard of living far exceeds the absolute long term return difference. Plus, 0.8% vs 0% over 20 years amounts to a difference of several thousands of dollars per year in standard of living. Not to mention the reduction in mental and physical stress.
That's the reasoning for minimizing the equity allocation. With a decumulating portfolio today, I'm going to be extremely defensive, and equity-averse to the extent that I can afford it. I just wish TIPS yields were higher so more retirees could consider a TIPS ladder.
Wade, unexpected spending is only one of my remaining concerns.
ReplyDelete(1) Default risk - Credit default swaps on TIPS have a non-zero price, representing a non-zero risk of default. Moreover, tax collectors depend on taxpayers to provide any real return. If we are willing to entertain the possibility of equities providing a total real return of 0% for a quarter of a century, what justifies ignorance of the probability that, in such an environment, politicians might break a promise? Didn't Roosevelt default on all gold certificates in 1933? Didn't Nixon default on gold redemption promises to all foreign countries in 1971? Weren't both reelected overwhelmingly after doing so? When a promise is a REAL return, governments default with regularity. They have throughout history, including the US government. Zero equity returns for a quarter century will lead to consequences for government securities.
I'm not saying default on TIPS is likely, but that's because I consider the possibility of real equity returns below 0.8% absurdly low. But if I grant that possibility, then this horrible pessimism should be accompanied by a recognition of the intolerable environment for debt repayment by the US government it would create.
(2) Longevity risk - When adopting a strategy that involves spending far in excess of real returns and accepting a gliding path toward zero assets, the person is playing a game of chicken with death and simply betting on dying before their portfolio does. Could a medical advance add 10 years to the expected lifespan of today's elderly? Couldn't mere good luck cause a woman to make it to 100? There are plenty of centenarians in the world and there should be a lot more four decades from now.
(3) Low equity returns - One of the perverse needs of someone allocating only 15% to growth is that they need a lot of growth from that 15%. Sure, if equities return less than TIPS, a higher allocation is no help, but why only talk about 0% real returns and not the much higher probability of 3%, 2 1/2%, or 2%, all lower than the assumption in the argument and all cases where a higher equity allocation would improve the outcome?
For my situation (and I suspect a lot of folks end up here) My SS is partially taxable due to annuity income. That puts me in a 22.5% bracket (no state tax). Now my annuity grows, SS benefit grows, The value of the TIPS grows, and the tax bracket grows. It is most likely that my marginal rate will remain at 22.5%. (I will never generate sufficient income to hit the 85% taxable limit for SS).
ReplyDeleteI generally use Savings bonds rather than TIPS; maybe not the best but they are simple and can be cashed at anytime - that makes planning much easier. Plus, the interest reinvests and taxes are only due when cashed.
The way I figure it is if I invest 50 bucks at 1% with 5% inflation my I-Bond will redeem in a year at $53. Three dollars is taxable (tax = 0.675) leaving me with 52.325 nominal dollars and a purchasing power of 52.235/1.05 = 49.833. A slight loss of purchasing power. Interestingly this purchasing power actually dips to 49.4 after seven years and then begins to climb. After 20 years It reaches $51.07.
I-bonds today yield 0.2% but inflation is 2-3%. I-bonds purchased today will yield about 48 dollars in purchasing power in 20 years. I-bonds that I purchased 10 years ago (1% real yield) will produce 53 - 54 dollars in purchasing power in 20 years.
A worst case scenario is inflation runs at 10% while the bonds have a fixed rate of 0%. In twenty years they will have only 40 bucks of purchasing power.
Of course with an I-savings bond the 0% bonds can be cashed in (incurring the taxes) and reinvested at higher rates that would likely come along with higher inflation - with no loss of principle.
The bottom line is they won't make me any money - but they look pretty safe to me.
Grinder12:
ReplyDeleteThis will be my last post on this thread. I wish you the best of luck with your strategy. I think it is naive to place the probability of your TIPS ladder yielding 0.8% at 100%, because history provides plenty of examples of government default, including the US government, as I noted in my response to Wade. The printing press cannot provide real returns, only nominal ones, and in the absence of real wealth creation in the voluntary sector, the tax collectors cannot magically give real returns to the chosen ones who own TIPS, except for a short period of time. But since I expect real wealth creation in the voluntary sector that far exceeds 0.8% per year, I expect you'll get your expected return. And given the way you've responded to every spending challenge by mentioning one reserve or another or some way of cutting spending, it is clear that your actual spending needs are so modest they should be met in any circumstance other than TIPS default. IMHO, they would also be met with much, much, much higher allocations to equities.
I did a study going back to 1802 of the Permanent Portfolio, that well-known strategy that allocates only 25% to equities and 75% to various preservationist assets. If the initial withdrawal rate was placed at 3%, it always worked, but so did an allocation to equities of anywhere up to 95% (with the rest split equally among the three safety hedges used by the PP strategy). When the withdrawal rate was raised, failure became a possibility to those portfolios with either too little or too much in equities, and I eventually found the maximum sustainable rate, around the 4% withdrawal figure most people cite, which was only sustainable with equity holdings around 80%. Obviously, that is history, and the future is yet to be written, or at least that book isn't available on my Kindle at the moment.
I am personally only interested in identifying the safest allocation for you and your wife, not the one that will leave you with lots of unspent wealth upon death. I would place that at 80% equities, globally diversified, with the remainder in the hedges of your choice (within reason). Bank accounts, Treasuries, TIPS, Gold, Commodity Futures, Managed Futures, all pretty much fit the bill. So if you were a potential client, that's what I'd recommend, and you'd be running out the door as fast as you could to get away from such a madman. I appreciate your perspective.
From my perspective, you're saying you will worry all the time if you have significant holdings in the businesses that produce the world's goods and services and sleep like a baby as long as you are totally dependent on the financial health of the US government and the integrity of the politicians in charge. And I'd be running out the door as fast as I could to get away from such a madman.
With your low level of spending, I can't tell you that you're making a bad choice, because I'm not sure there is one. Well, okay, 100% in pork belly futures would probably be a bad choice. I wish you and your wife good health, long life, and timely TIPS redemptions.
I do appreciate the suggestions and recommendations.
DeleteLess,
DeleteIndeed, thank you. I do agree with you about the general point that when considering the possibility of default on TIPS, it is important to consider the history of countries defaulting on debts issued in a foreign currency rather than debts issued in the domestic currency. Because the government can't use the printing press to pay its TIPS obligations, since that would only trigger additional inflation.
Grinder12, related to what Less is saying here, if you haven't read it yet I would recommend William Bernstein's e-book, Deep Risk: How History Informs Portfolio Design (Investing for Adults)
As of the end of FY 2012, TIPS comprised only 7.53% of the marketable US Treasury securities outstanding (the peak was 10.31% in 2007); that's not enough to cause a big secondary inflation problem with covering all but the most extreme inflation scenarios. And large inflation adjustments to the principal of TIPS do not have to cause big cash flow (and money printing) problems for the government because the adjustments only pertain to the value at maturity, which could be many years in the future -- after inflation has perhaps reverted to more moderate levels for a number of years. Expecting sustained high levels of inflation over many years is a bet that the Fed is essentially incapable of doing its job of ensuring price stability. I wouldn’t want to bet most of my retirement portfolio against the Fed.
ReplyDeleteAnd if the Treasury wanted to reduce the supply of TIPS because they became too costly due to prolonged high inflation, it could slow down or even stop issuing new ones. And the Fed could also take some TIPS out of circulation through QE-like programs...
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