# Anyone familiar with TIPS?



## labouton (Jan 24, 2011)

I'm not talking about what you give a pretty waitress but Treasury Inflation Protected Securities and whether anyone would recommend them.


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## partdeux (Aug 3, 2011)

Never heard of them...

Wouldn't go near it with a 10 foot pole

Think derivatives - and RUN


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## Immolatus (Feb 20, 2011)

I would not invest in these out of pinciple alone, because I would not loan the gubt money under any circumstances, but lets go a little deeper.

From the TIPS website:

_What happens to TIPS if deflation occurs?_
_The principal is adjusted downward, and your interest payments are less than they would be if inflation occurred or if the Consumer Price Index remained the same. You have this safeguard: at maturity, if the adjusted principal is less than the security's original principal, you are paid the original principal._

So, in theory, you could hold this for X years (30 years is the longest maturity, but the length of time is irrelevant) and could just get your principal back. In this case, you would be a big fat loser, even if the 'adjusted principal' was only $1 less than the 'original principal'. In 30 years, no matter what the gubt may say 'officially' about in(de)flation, your dollar would be worth waaaaay less in purchasing power, not to mention the obvious opportunity cost of said money.
Even in the best possible scenario, lets say inflation ran rampant for 30 years (Ack!) and you were paid back your principal plus whatever they measured the inflationary adjusted principal would be worth the same exact amount you put in originally, measured in purchasing power. Yes, theoretically your $1000 could turn into a million in that time period, but you would be no better off.
If that was the case, you may as well have bought gold, because it is the true measure of inflation, so at least in theory the price of gold would keep up with it anyway. I am not actually trying to tout gold (although I certainly would over these things) I'm just pointing that out. There would also be many other things you couldve invested in, like I unno, food for LTS, and the tons of other preps everyone here speaks of. Or maybe a house, or an extra mortgage payment towards the loan principal, etc, etc.
The final irony of all this is that its the gubt itself that creates inflation for the most part anyway.

You also would have been taxed on that money, which wouldve killed any potential 'profit' (protection) you wouldve earned, so even in theory this is a lose-lose proposition.

"_Can I be taxed for TIPS earnings before I receive payment for those earnings?_
_Yes. If the principal of your TIPS grows in a given year, that growth will be taxed as income in that year, even if your security hasn't matured and, therefore, you haven't received payment of the principal."_

Ouch, and double ouch.

Now after that, back to my first point. If you are gung ho for the gubt, and support all the ways it is spending its (OUR) money, then thats your perogative. I would assume you are not if you are on this forum. 
For the sake of argument, lets say you are.
You would be loaning the federal gubt money. It has recently been downgraded, our debt/gdp is hovering at 1. (Widely reported as 100%). Personally I dont see why the ratio used by all measures is gdp, because thats akin to saying that the gubts earning potential is equal to gdp, whcih I guess in theory would be true if they were to confiscate ALL of the wealth in the country to support itself, but obviously thats not happening, ever, and wouldnt make sense and too obvious to even have to point out.
To me, the obvious ratio that should be used of a gubts fiscal well being (Ha!) would be its debt/income ratio, maybe, say, just like yours is when you apply for a loan. While a gubt could certainly increase its revenue (raise taxes/fees) that would come at the expense of a number of other parts of the measure of gdp. If a stranger asked you for a loan, and they made $100,000 per year, and was $100,000 in debt, would you loan them money? Of course not. But its actually way way worse than that in terms of the gubt, because its debt/income ratio is so high as to be meaningless.

**Wow. I was going to do this calculation, and I found this article in the USA today.
_"The __United States__ generates approximately $14.5 trillion in __GDP__ each year and carries, currently, $14.3 trillion in debt. That represents a __debt-to-income ratio of roughly 1-to-1__."_
The writer is a "_community organizer and political commentator" _and obviously a complete moron. To suggest that gdp=income shows an incredible lack of understanding of the concept.**

Where was I? Oh right, debt/income. The real number is closer to 6.8 (680%) by my rough calculation (debt $15T/income $2.2T). So back to my example of a guy asking for a loan who makes 100k, his debt is actually 680k. Obviously a pretty risky play.

Ok, Im done.

I would like to see what others have to say on the subject (PD, where are you?) also.

As always, consult your financial adviser before making any investments.

_Immolatus has a degree in Economics from the University of Maryland, College Park._



EDIT: PD's answer was much more concise!


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## partdeux (Aug 3, 2011)

Immolatus said:


> **Wow. I was going to do this calculation, and I found this article in the USA today.
> _"The __United States__ generates approximately $14.5 trillion in __GDP__ each year and carries, currently, $14.3 trillion in debt. That represents a __debt-to-income ratio of roughly 1-to-1__."_
> The writer is a "_community organizer and political commentator" _and obviously a complete moron. To suggest that gdp=income shows an incredible lack of understanding of the concept.**
> 
> I would like to see what others have to say on the subject (PD, where are you?) also.


The debt of 14.5T cracks me up... it's really somewhere between 75 & 125 TRILLION, and we are currently spending 25% more than revenue each and every year, PLUS revenue is falling. Doesn't sound like a solid financial plan to me.


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## Immolatus (Feb 20, 2011)

Eh, 14T, 100T, whats the difference? Its unsustaniable, and its not real money anyway, its all 'created'.


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## Salekdarling (Aug 15, 2010)

Immolatus said:


> Eh, 14T, 100T, whats the difference? Its unsustaniable, and its not real money anyway, its all 'created'.


What's that called again? Quantitative Easing? Man, I wish I would have paid more attention in economics. :scratch:


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## labouton (Jan 24, 2011)

Immolatus said:


> I would not invest in these out of pinciple alone, because I would not loan the gubt money under any circumstances, but lets go a little deeper.
> 
> From the TIPS website:
> 
> ...


Thanks very much for your in-depth response. It's greatly appreciated.


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## The_Blob (Dec 24, 2008)

when thinking about 'the economy' two Albert Einstein quotes spring to mind:



“The most powerful force in the universe is compound interest”



“We can't solve problems by using the same kind of thinking we used when we created them.”


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## BillS (May 30, 2011)

labouton said:


> I'm not talking about what you give a pretty waitress but Treasury Inflation Protected Securities and whether anyone would recommend them.


One of the bad things about those is the fact that government itself is the one that measures inflation. According to John Williams at shadowstats.com inflation is 11%. According to the government it's 3.77%. Therefore, when adjusting for inflation, TIPS pay NEGATIVE interest.


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## Immolatus (Feb 20, 2011)

*Had to dig deep to find this one...*

Article on ZH about TIPS

Now offering a negative interest rate! Whoo hoo!


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## Woody (Nov 11, 2008)

BillS said:


> One of the bad things about those is the fact that government itself is the one that measures inflation. According to John Williams at shadowstats.com inflation is 11%. According to the government it's 3.77%. Therefore, when adjusting for inflation, TIPS pay NEGATIVE interest.


So, you can lose money fast or faster, those are the choices, eh?

:beercheer:


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