Gerald Ford, among other disabilities during his campaign to win the Presidency he had been appointed to, suffered from rampant inflation. His administration came up with a modest response indeed, a program basically to admonish the citizenry not to engage in inflationary behavior, to save more, spend less and otherwise short-circuit rising prices. This was pitched with a tangy little acronym; Whip Inflation Now!

And the inflation of that day was quite extreme. How would you like a 15% 30 yr fixed? When auctioned treasuries are paying 8% that’s not too bad, actually. Other indicators moved proportionately. These were truly grim numbers and the Presidential response, WIN, was almost universally received as a bad joke. The widely distributed buttons were worn upside-down or displayed in undignified surrounds. Ford’s basic competence, if not sanity, was brought into question.

One thing you could say of WIN however, which is not often true of gub response to anything, is that it did not make the situation any worse. But those were the Days of Disco.

Welcome to 1997 when gub introduces a new instrument known as Treasury Inflation-Protected Securities…. TIPS. This was of course a genius response to the terrors of rising interest rates on gub debt. The problem as always was that people with money did not want to lend that money to the feds without asking a pretty stiff interest rate. This was mostly because the bondholders knew that they would be repaid in the future with dollars worth less than the dollars they paid in the first place; truly this is very simple economics however unfair it seems to the Central Bankers.

But plenty of folks watch that T-bill obsessively, maybe not you but some do and these are the people making the big decisions on spending, hiring and firing in the corporate and investment world. So, lessons of Ford and Carter learned, gub grubs came up with a way to abolish inflation from the earth, or at least from their chums and clients, largely Chinese who buy T-bills by the truckload. This is TIPS; a security sold in YOUR name, citizen, that promises the following:

Unlike a normal bond the TIPS is indexed to inflation as reported by the Consumer Price Index. Basically this is whatever fraction of a Big Mac a dollar can buy. Graph this, figure it’s rate of change (nearly always a decline) and there you have it. If you spent $10 on an ordinary bond and it matures in five years, you are paid out interest but your principle has shrunk a bit and the balance is what your investment earned. TIPS turns this on its head. With a TIPS bond your PRINCIPLE actually grows with inflation. So that $10 dollars may be $12 dollars after five years and a bit of inflation and then your interest accrues on top of that and ON THE NEW PRINCIPLE! Bottom line? You and plenty of others may think that we are borrowing money on the open market at something less than 4%. Oh, no no no no no! We are paying 4% PLUS inflation which is… um about 4%! So we have an effective borrowing rate of 8%. Man, good thing those Ford days are behind us, huh?

But even this does not tell the full tale, for if you go to the Treasury website and allow them to try to sell you a bit of America you will learn another great advantage of these instruments. As stated above, the TIPS principle is indexed to inflation so when inflation goes UP, it does as well. Okay, fair enough. But when inflation goes DOWN (and we have had a bit of this deflation lately) does the principle go down? Why yes actually, it does… BUT when the bond matures you are repaid the principle, either the original or the adjusted… WHICHEVER IS GREATER! So what does this mean? It means that like so many other gub programs this policy acts as a ratchet on inflation; it goes UP but is prevented from going DOWN.

So for those armchair economists, some of which are advising the giants of the business and governing world, who think that all this nasty old debt can be magically melted away with a dash of inflation, you had best have another think coming, for all our sakes. For with this new, benevolent invention, the TIPS we are committed to a world where inflation does not merely add to the rate we have to pay on our debts, oh no! INFLATION ACTUALLY INCREASES THE PRINCIPLE OF WHAT WE OWE! And deflation, as unlikely as that may seem, does not bring it down.

But how is this possible? How could anyone think this sort of thing should or could exist? Well, the answer there is the same as it ever was. The investors are betting on the Full Faith and Credit of the United States of America which, in financial terms, means the gub’s right and ability to draw ever larger sums out of your pockets. This is the perpetual foundation of all the chicanery.

One thing you can say for TIPS though is it is much more popular than WIN ever was. There was never a  tangible result from WIN’s blandishments. Indeed, just about ALL indicators pegged the red when Gerry went down to defeat before Jimmy. But TIPS has been a barn-burning success. Nearly half a trillion are outstanding now which, true, may not sound like much, but with a good bout of inflation for a few years, this can double.

 

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