Thursday, November 21, 2013

UPDATED--As TIPS Tumble, Maybe We Won't Have to Go To Electronic Money to Enforce Negative Rates!

Update: "Too Funny: "There's An Electronic Currency That Could Save The Economy — And It's Not Bitcoin""
Original post:
The story thus far:
One of the tools that central bankers can use to make economies dance to their tune is negative interest rates. The problem they run into is physical money which deposits experiencing negative nominal yields can be exchanged for. However, as we have learned from Izzy and others, there is a serious move afoot to do away with physical and go electronic.

This has admirers of gold and crypto-currencies like Bitcoin doing their heroic "Remember the Alamo" last stand bit, pointing out that no, they never meant gold was superior to fiat, what they were saying was: gold is superior to electronic.

And tryanny. Gold is superior to tyranny.

Personally I'm thinking the lesson of currency disruptions from the Hungarian and Weimar hyperinflations all the way back to the demise of the shekel  in 70 a.d. is: keep some small silver coins to make day-to-day purchases and a stash of half-carat diamonds if you have to get through airports.

Maybe that last lesson didn't come out of the Roman destruction of the Temple.
Anyhoo, "Here at Masada Securities we are a fortress of strength in these uncertain times...." 

Back on topic...[edited for sanity]...

From Calafia Beach Pundit:

TIPS are priced to low inflation and weak growth
The TIPS market (Treasury Inflation Protected Securities) has been around since 1997. There are now almost $1 trillion of marketable TIPS outstanding, representing about 8% of marketable Treasury debt outstanding. It's a serious and liquid market, and quite valuable from an investor's perspective, since it gives us a reliable source for ex ante real interest rates across the maturity spectrum, a window into the market's inflation expectations, and a gauge for how strong the market thinks the economy is likely to be. Today, TIPS are telling us that inflation is expected to be low for as far as the eye can see, and the economy is expected to be weak for some time to come. This is the "line" that investors are betting against today, no matter what the surveys of investor opinions tell you.

TIPS are unique among bonds, in that while they pay a fixed rate of interest (which is the real yield), their principal is adjusted monthly for inflation, and everything is guaranteed by the U.S. government. TIPS are thus the only instrument in the world that can guarantee a real return to an investor. Real returns are the Holy Grail for all investors, of course, because if you don't earn a return that is greater than inflation, then your investment will not increase your future purchasing power. Prior to TIPS, we could only know what real rates were ex post, by subtracting inflation from nominal yields. Now we know what risk-free real yields are expected to be out to 30 years, and that sets the floor for all other expected real yields.

The relatively low real yield on TIPS today means that real returns on other assets are expected to be relatively low also....MUCH MORE
Remind me to do a post on the deflation protections embedded in TIPS if we get into deflation for any length of time.

If you recognized the Masada Securities schtick the last couple times I used it was in:
Gold Trove Found at Israel Castle Reveals Crusaders’ Forex Moves
"The 10 Best, and Worst, Times in History to Invest"