Chile Forum

The Treasury Department this week set at zero the fixed portion of the yield on Inflation bonds, guaranteeing that new buyers will never earn more than the rate of inflation for the 30-year life of their investment.(doesn't this just give you such a warm, happy feeling?)

This is what it has come to. The economy is so rotten; secure income is so hard to find that savers are lending money to the government for an inflation-adjusted return of…nothing. They just want to know they’ll get their money back without losing ground to a higher cost of living. Is that anyway to get ahead?

Strangely, it might be. I-bonds are a close cousin to Treasury Inflation-Protected Securities (TIPS), both of which have been around since 1998. Both pay a yield that rises and falls in line with inflation. With I-bonds, which are popular with individual investors, the rate you earn is a combination of a fixed rate that is somewhat mysteriously set by the Treasury (now at zero) and a fluctuating rate determined by change in the Consumer price Index. The new I-bond rate set this week is 3.06%, totally attributable the most recent CPI readings (aka lies...).

“The financial system is so screwed up at this moment that I-bond rates, even paying just the inflation rate, are actually competitive with most things out there,” ... For example, bank CDs pay just 1% to 2%. With them you lose ground to inflation.(duuhhh...?)

The beauty of I-bonds is the government guarantees that you will never lose ground to (their lies about... er, "version of"...) inflation and never be saddled with a loss (unless you consider the REAL rate of inflation), as can happen with TIPS (and most bonds) in periods of deflation. The total rate of return will never be less than zero. (well, shadowstats might argue that point - negative return is a certainty)

The fixed-rate portion of I-bonds has hit zero before—once in 2008 and again one year ago. There was even a six-month period in 2009 when a period of deflation wiped out the yield altogether and I-bonds produced zero return. That experience along with today’s extremely low yields may help explain why I-bonds are losing their luster. New sales have plunged by about half since 2008...(...isn't that surprising!)

But savers may be missing the forest for the trees. Today’s rate of 3.06% is a full percentage point higher than the yield on a 5-year bank CD. (Five years is the shortest holding period for I-bonds without incurring penalties.) The federal income tax on I-bonds can be deferred up to 30 years; I-bonds are exempt from state and local income tax.(tax on what...? non-existent capital gains...?) Maybe locking in an inflation-rate return, for now anyway, isn’t so crazy after all. (well, maybe not crazy - perhaps just stupid?)

greg~judy wrote:perhaps this ugly tidbit is worth a bump to this older thread?

You know in your gut that something isn't right in this country. But you don't have the "Economics education" to figure it out. It all seems too complicated for you to put your finger on, so you just keep slaving away to pay interest and taxes as your dollar buys less and less. All you can do is keep working like a dog and leave the matter to the Wall Street "experts" and politicians to handle for you.

But it's all quite simple really. So simple in fact, even a dummy can understand it when it is broken down to basic elements.

So then, how exactly did you all become such debt/tax/inflation slaves? Well, I'll let you in on my little secret. You will be amazed at how easy it is to understand.

My name is Mortimer M. Moneybags III and this is the true story of how I bankrupted and enslaved my hometown of Tomatoville, USA:

THE SETUP

One night, Bill, Frank, John, and Mike came over to my place for a friendly game of poker. My four neighbors are all prosperous tomato farmers. Tomatoes actually serve as the currency of Tomatoville, USA.

Before starting, the five of us agree to each put up 10 tomatoes as our "risk capital." That's a total of 50 tomatoes. (Gross Domestic Product - GDP)

Play begins and we realize that trading tomatoes during our bets is awkward. I suggest that we utilize paper notes to represent our tomatoes instead. Because I hold a degree from Harvard, all agree that I should act as "Central Banker".

We place our tomatoes in the center of the table and I print 50 paper notes with the face of Tomatoville's founder on them (corresponding to the 50 total tomatoes, 10 notes for each player). Each paper note therefore represents 1 tomato....simple. (sound money/hard money/gold standard)
As play resumes, I have an unseen advantage over my guests. At 30 minute intervals, I repeatedly excuse myself for a "bathroom break." (Fed Meetings) During this time, I'm actually sneaking into my bedroom and printing up more 1 tomato notes (fiat money).

Upon returning, I gradually gamble and inject ever increasing amounts of notes (liquidity) into the game (the economy). By midnight, the original 50 notes has increased to 500 total notes.

After ebbs and flows, the game was remarkably even at midnight. The five of us, who had each started out with just 10 notes apiece, now held 100 notes apiece. As you might expect, due our newly found "wealth", the size of each player's bets increased in direct proportion to the growth in the supply of Tomato Notes. (price inflation).

But the same 50 tomatoes -the true intrinsic value of the game - (GDP) remain in the jackpot.

Because we are getting so "rich" from the game, I propose that instead of ending the game, we leave everything as is and resume play the following month.

"Why don't you fellows spend some of your Tomato Notes, and save some to invest in next month's play. Tell the shopkeepers that each Tomato Note represents one tomato that is still sitting on this table. They'll accept the Notes as if they were actual tomatoes."

"Great idea Mortimer! The paper is so much more convenient to trade than the tomatoes." replied Mike.

All agree to suspend play and resume next month. Before they leave, I announce that I'm cashing in 20 of my 100 notes in order to make tomato sauce the following day.
At the original ratio of 1 note to 1 tomato, my 20 notes trade for 20 tomatoes. I have doubled my original "investment" of 10 tomatoes (profit taking), and still have 80 paper notes with which to resume the game next month. There are now only 30 total tomatoes remaining on the table.

As I expected, my friends have no intention of cashing in any of their "winnings" because the returns from the game are so high. They each hold 100 notes and really believe that their original 10 tomatoes have yielded a 10 to 1 return from playing the game (Bull Market, irrational exuberance).

When the players explain to the town merchants that the Tomato Notes represent actual tomatoes that are stored at my house, the merchants gladly accept the notes as if they were actual tomatoes. During the ensuing month, the players spend many of their notes and take out various loans as well.

Bill buys his wife a new sports car by putting down 25 Tomato Notes and taking a loan for the balance. (Detroit prospers.)

Frank takes out a small business loan to open up that restaurant he's always dreamed about (job creation).

John puts down a 50 Note down payment and signs a contract for a new home mortgage (housing boom).

Mike spends 40 of his Tomato Notes and also goes on a credit card shopping spree (consumer confidence).

The local bank manager also trusts that the Tomato Note income of the borrowers represents true wealth, so he honestly believes that he is not engaged in risky lending when he lends out his depositors tomatoes to the successful poker winners. (Sub Prime mortgages, No Money Down Mortgages)

The bank then sells some of the loan notes to The Tomato Street investment houses. Blinded by greed, and ignorant of "the big picture", Tomato Street portfolio managers believe that the debts are solid investments for their clients. (secondary market ,mortgage backed securities)

So not only do the four players believe that they are prospering, but the businessmen that are now selling more goods to the wealthy poker players believe that they are earning more Tomatoes also! They too increase their personal spending and borrowing accordingly. (multiplier effect)

As the new "prosperity" makes its way through the town, the prices of goods and services also begin to rise - exactly like the size of the bets in the poker game had risen, and exactly for the same reason! Everyone thinks they are getting "richer", but their new wealth is artificial and temporary.

Me? I just rub my hands in glee and laugh at how foolish these people are.
The economy of Tomatoville is BOOMING......or so it seems.

john wrote:All four Republican presidential candidates still in the race warn about the dangers of government debt, yet their proposals would add to the budget deficits:
Four Fiscal Phonies - By Paul Krugman
http://www.nytimes.com/2012/03/02/opini ... onies.html
Government spending and employment comparisons:
States of Depression - By Paul Krugman
http://www.nytimes.com/2012/03/05/opini ... ef=opinion

zaebis wrote:

john wrote:All four Republican presidential candidates still in the race warn about the dangers of government debt, yet their proposals would add to the budget deficits:
Four Fiscal Phonies - By Paul Krugman
http://www.nytimes.com/2012/03/02/opini ... onies.html
Government spending and employment comparisons:
States of Depression - By Paul Krugman
http://www.nytimes.com/2012/03/05/opini ... ef=opinion

is that the same paul krugman that said that more gov spending is a way into prosperity, deficits dont matter and that US has to spend trillions to prepare for imaginary alien invasion to pull out of the current depression? yap we should take his work seriously!

john wrote:

zaebis wrote:

john wrote:All four Republican presidential candidates still in the race warn about the dangers of government debt, yet their proposals would add to the budget deficits:
Four Fiscal Phonies - By Paul Krugman
http://www.nytimes.com/2012/03/02/opini ... onies.html
Government spending and employment comparisons:
States of Depression - By Paul Krugman
http://www.nytimes.com/2012/03/05/opini ... ef=opinion

is that the same paul krugman that said that more gov spending is a way into prosperity, deficits dont matter and that US has to spend trillions to prepare for imaginary alien invasion to pull out of the current depression? yap we should take his work seriously!

Krugman said nothing of the kind. Please provide your sources for these claims.

zaebis wrote:

john wrote:

zaebis wrote:

john wrote:All four Republican presidential candidates still in the race warn about the dangers of government debt, yet their proposals would add to the budget deficits:
Four Fiscal Phonies - By Paul Krugman
http://www.nytimes.com/2012/03/02/opini ... onies.html
Government spending and employment comparisons:
States of Depression - By Paul Krugman
http://www.nytimes.com/2012/03/05/opini ... ef=opinion

is that the same paul krugman that said that more gov spending is a way into prosperity, deficits dont matter and that US has to spend trillions to prepare for imaginary alien invasion to pull out of the current depression? yap we should take his work seriously!

Krugman said nothing of the kind. Please provide your sources for these claims.

this one among many others.

http://www.youtube.com/watch?v=KyxURk_c5dU

krugman has been liberal media clown-turn-economist for decades.

California South wrote:http://krugman-in-wonderland.blogspot.com/

john wrote:
I concede that Krugman's metaphorical reference to an imaginary alien invasion was a little over the top. However, his main contention, that government fiscal stimulus is essential when the economy is faced with a combination of low demand and high unemployment, is both logical and historically accurate. Now let's see your other sources.

BTW, Krugman was a well known economist long before he became a columnist. And, yes, I think it's prudent to take seriously the work of a nobel prize winning economist.

Red wrote:

john wrote:
I concede that Krugman's metaphorical reference to an imaginary alien invasion was a little over the top. However, his main contention, that government fiscal stimulus is essential when the economy is faced with a combination of low demand and high unemployment, is both logical and historically accurate. Now let's see your other sources.

BTW, Krugman was a well known economist long before he became a columnist. And, yes, I think it's prudent to take seriously the work of a nobel prize winning economist.

Still going with krugman, huh? Hasn't the last few years demonstrated the utter worthlessness of mainstream economics?

If neo-liberal economics is what you mean by mainstream economics, then I concur.

You go on at length how jacked-up things are here in the states, that things are going down the wrong path (you'll get no argument there). Yet you trot out an economist who advocates ever bigger helpings of the status quo- this wrong path. How can this end better for a progressive? Or are progressives not really that "progressive"

greg~judy wrote:
...please continue with the FULL story of tomatoville...
i.e...
THE STING
&
THE WRAPUP

at - http://www.tomatobubble.com/id39.html
if you have a taste for tomatoes, that is...?