May 2012 I Bond Rates

[MediumTex]

Getting back to the OP, I was pondering as usual about things.

I was wondering since the PP is based around economic conditions (recession, inflation, etc.) and I Bonds provide to a certain degree inflation protection, should they be counted 100% as the cash portion? They are U.S. government backed and nonvolatile like cash should be and can be liquidated if needed for various expenses. If they have this inflation portion to them though, would you considered them as 50% cash and 50% gold portion or the portfolio?

You don't count I Bonds for the gold portion because you don't want to trust that I Bond rates are going to track inflation.  Gold also provides diversification benefits that I Bonds (or any other bond) can't match.  Gold is mostly politician-proof, while any government issued bond is obviously very vulnerable to damage from delusional politicans.

You do want I Bonds for the cash portion because I Bonds are virtually always going to provide a better return than 12 month t-bills, plus the interest is fully tax deferred until redemption (which can be 30 years or longer).  The bonds stop accruing interest after 30 years, but that doesn't mean you have to cash them in at that time--you can wait if you want to.

[Greg]

Getting back to the OP, I was pondering as usual about things.

I was wondering since the PP is based around economic conditions (recession, inflation, etc.) and I Bonds provide to a certain degree inflation protection, should they be counted 100% as the cash portion? They are U.S. government backed and nonvolatile like cash should be and can be liquidated if needed for various expenses. If they have this inflation portion to them though, would you considered them as 50% cash and 50% gold portion or the portfolio?

You don't count I Bonds for the gold portion because you don't want to trust that I Bond rates are going to track inflation.  Gold also provides diversification benefits that I Bonds (or any other bond) can't match.  Gold is mostly politician-proof, while any government issued bond is obviously very vulnerable to damage from delusional politicans.

You do want I Bonds for the cash portion because I Bonds are virtually always going to provide a better return than 12 month t-bills, plus the interest is fully tax deferred until redemption (which can be 30 years or longer).  The bonds stop accruing interest after 30 years, but that doesn't mean you have to cash them in at that time--you can wait if you want to.

Gracias for the input. I wasn't really even thinking about the politicians. Ideally any changes they make wouldn't be retroactive.

And I do really love the I bonds for cash, they make it easier in my mind to have I-bonds for my cash component since my brain doesn't like the whole 25% of the portfolio earning very little (this has been covered many times in other threads).

I also wasn't thinking about the fact I could just leave them in after 30 years without cashing them if I decided to. Granted I'm 24 now so in 30 years I'll still be in peak-earning years. The taxes might be high for pulling the money out then but I probably wouldn't retire till late 60s so that might be 10+ years of holding the I-Bonds without interest. Not sure if for the I Bonds I purchase now I'd want to go through that. But it is a nice through for bonds maturing near the end of the career and just holding them a bit longer till you retire.

[WildAboutHarry]

The bonds stop accruing interest after 30 years, but that doesn't mean you have to cash them in at that time--you can wait if you want to.

You may not have to cash paper bonds, but the federal taxes on the interest payments are due in the year the bond matures.  Also, I believe that electronic Savings Bonds at Treasury Direct are automatically cashed (and generate a 1099) at maturity.

[MediumTex]

The bonds stop accruing interest after 30 years, but that doesn't mean you have to cash them in at that time--you can wait if you want to.

You may not have to cash paper bonds, but the federal taxes on the interest payments are due in the year the bond matures.  Also, I believe that electronic Savings Bonds at Treasury Direct are automatically cashed (and generate a 1099) at maturity.

I wonder how that works in practice.

My mother has a couple of bonds that are over 30 years old.

What happens if you forget about a bond and cash it after 50 years?  Will the penalty and interest on the 20 years of late taxes soak up all of the gains?

[WildAboutHarry]

I wonder how that works in practice.

My mother has a couple of bonds that are over 30 years old.

What happens if you forget about a bond and cash it after 50 years?  Will the penalty and interest on the 20 years of late taxes soak up all of the gains?

I would hope that there is some sort of special dispensation for those Savings Bonds stuffed in a book/mattress/closet and forgotten, but I wouldn't count on it.

I also suspect that the suspension of paper savings bonds probably has something to do with the ability to better track taxes due, etc.

[sophie]

I wonder how that works in practice.

My mother has a couple of bonds that are over 30 years old.

So does my mother.  Yikes!  Isn't there a statute of limitations on federal taxes though?

[MediumTex]

I wonder how that works in practice.

My mother has a couple of bonds that are over 30 years old.

So does my mother.  Yikes!  Isn't there a statute of limitations on federal taxes though?

I would think the statute of limitations wouldn't start ticking until you redeemed the bond.

[moda0306]

Any interest will be shown, likely, on a 1099-INT... so I wouldn't worry about penalties/interest so much as an older person sitting on bonds they don't know they have earning no interest after maturity.

Since the paper I-bonds are pretty useless, I'm quite sure they have a pretty organized system sorted by SSN.

[moda0306]

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

I haven't been tracking CPI-U for some time.  Looks like we've had 3 negative months in a row.

Also, if you look at the Billion Price Project through MIT, it would appear that the CPI, for now, is maybe not as much of a sham as some might think.  That said, I'm not about to go out and buy TIPS... well, maybe just one TIP, just for a second, just to see how it feels.  (Wedding Crashers joke... pardon my gutter humor).

http://krugman.blogs.nytimes.com/2012/0 ... n-lessons/

[craigr]

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

I haven't been tracking CPI-U for some time.  Looks like we've had 3 negative months in a row.

Also, if you look at the Billion Price Project through MIT, it would appear that the CPI, for now, is maybe not as much of a sham as some might think.  That said, I'm not about to go out and buy TIPS... well, maybe just one TIP, just for a second, just to see how it feels.  (Wedding Crashers joke... pardon my gutter humor).

http://krugman.blogs.nytimes.com/2012/0 ... n-lessons/

IMO. The CPI is only going to be true sham when inflation rates are high. It's only then that it's a real political football. A low and stable (or falling) CPI doesn't present the same case for lying about it.

Why would there be political pressure to say the CPI is really 2% when it was actually 1% for instance? None really. COLA payments only become a problem when inflation was high and rising. But falling? That's just gravy. But is there pressure to lie when inflation is 10% actual and pols are saying it's really 8% for instance? Sure there is.

[moda0306]

Craig,

You're probably right to some degree, though there is a HUGE chasm between deflationists and inflationists right now and Mr Bernanke's caught in the middle, as is a congress arguing over stimulus vs austerity.  In some ways, I'd argue that the accuracy of our inflation rates now are as important as they've been for decades.  As an investor, though... yes, I'm not going to buy inflation insurance from the money-issuing entity.  Your insistence on that point still holds absolutely true.

However, a usually-honest CPI makes i-bonds more relevant... simply wait until they start cooking the books to pull out of the deal.

Further, though, how "independent" do we believe the BLS to be?  Is there enough of a silo around them between congress & the fed to keep some level of independence?  Just curious...

[craigr]

Further, though, how "independent" do we believe the BLS to be?  Is there enough of a silo around them between congress & the fed to keep some level of independence?  Just curious...

Having worked as a contractor to the government I will generally say most agencies can't stand each other and will have turf wars (others reading this can probably attest). However, when push comes to shove the guy at the head of the agency is a political appointee and will do what he's told. IMO. That's my experience. So BLS may be fine up to the point where the heat is on and then I'm expecting it to fall in line just as the equivalents have done in other countries that faced high inflation.

As to inflation/deflation. The problem with the Krugman's of the world is they just don't seem to get that you can't force people to spend money they don't have. And eventually you just run out of roads that need building, etc. Sometimes the markets need to be left alone so they can work things out. I wish they'd get out of the mortgage, banking and stimulus business and just let the whole thing flush out the garbage. It will be painful at first, but we'd be out of the problems by now. All they are doing is dragging out the pain and making it very uncertain for businesses to decide what to do.

[moda0306]

Further, though, how "independent" do we believe the BLS to be?  Is there enough of a silo around them between congress & the fed to keep some level of independence?  Just curious...

Having worked as a contractor to the government I will generally say most agencies can't stand each other and will have turf wars (others reading this can probably attest). However, when push comes to shove the guy at the head of the agency is a political appointee and will do what he's told. IMO. That's my experience. So BLS may be fine up to the point where the heat is on and then I'm expecting it to fall in line just as the equivalents have done in other countries that faced high inflation.

As to inflation/deflation. The problem with the Krugman's of the world is they just don't seem to get that you can't force people to spend money they don't have. And eventually you just run out of roads that need building, etc. Sometimes the markets need to be left alone so they can work things out. I wish they'd get out of the mortgage, banking and stimulus business and just let the whole thing flush out the garbage. It will be painful at first, but we'd be out of the problems by now. All they are doing is dragging out the pain and making it very uncertain for businesses to decide what to do.

I agree that we aren't going to spend assets we don't have... the question would be, then are there or are there not "roads to build."  I'd argue, emphatically, that there's plenty we could do in my state to improve congestion and efficiency... it doesn't have to be building bridges to nowhere and having some people dig ditches while others fill them in, and I really don't think we're the exception.  Might as well do a bunch of that when our economy has the capacity to do so without pulling those workers out of improvements in the private sector rather than waiting for the economy to re-reach equilibrium again with even more packed freeways to do the work.

[craigr]

I agree that we aren't going to spend assets we don't have... the question would be, then are there or are there not "roads to build."  I'd argue, emphatically, that there's plenty we could do in my state to improve congestion and efficiency…

Well that's the age old debate. I think government is horrible at allocating capital efficiently. So no, I don't think they should go about building a bunch of stuff for private sector jobs that don't exist. Primarily because money is being spent on govt. projects instead of being left in the hands of people that actually own and run businesses and have consequences for their bad spending habits.

Might as well do a bunch of that when our economy has the capacity to do so without pulling those workers out of improvements in the private sector rather than waiting for the economy to re-reach equilibrium again with even more packed freeways to do the work.

Problem with this idea is it's not tech workers and economists like Krugman building these projects. It's state workers, cronies, etc. in a lot of cases so the stimulus money just goes to grow government and cronies of government and not productive economic expansion.

Again though, age old debate…I've never though seen an individual, family, or business spend its way out financial trouble by piling on massive debt to buy a bunch of stuff that may or may not be needed. And NO, I don't think that being a government exempts you from this immutable law of the universe. If it did work that way, we could all be given a government job paying $1 Million a year building roads and we'd all be happy.

[moda0306]

Craig,

Do you believe that we can have an expansion of aggregate investment by the private sector if aggregate demand for private sector products is well-below capacity?  If not (then you're like me), then can't the government make use of that excess capacity for the things that most people agree that the gov't should do, whether they do it now or 5 years from now?  Even if government is awful at allocating capital, whether we have austerity or stimulus, people 5 years from now are never going to hand the freeways and mass transit over to the private sector in some huge about-face of the role of government.  If we feel like our roads and rail are inadequately upkept or efficient (I'm from MN, where a HUGE (by MN standards) bridge collapsed in 2007), doesn't it make sense to do things now while the private sector, whether they do a lot of things better or not, is simply NOT in a macroeconomic position to work at full capacity?

[craigr]

If we feel like our roads and rail are inadequately upkept or efficient (I'm from MN, where a HUGE (by MN standards) bridge collapsed in 2007), doesn't it make sense to do things now while the private sector, whether they do a lot of things better or not, is simply NOT in a macroeconomic position to work at full capacity?

Here's the problem: They just aren't good at doing the stimulus thing. They always talk roads, etc. But what you end up with is junk like Solyndra, Chevy Volt, etc. making up big parts of the package deal. A lot of this money is simply set on fire for things that aren't needed or are bad ideas (which is why nobody but the government is dumb enough to give those things money).

It's the same argument made about "Teachers, Police and Firefighters" during budget talks. If we used all the money for those three things then each person in this country could have their own teacher, police officer and firefighter following them around all day. But that's not what happens when the sausage grinder is done with the money.

I'm just being realistic here.

[moda0306]

Well we'd probably guesstimate different amounts that end up being "good" vs "bad" stimulus, but I'd definitely chime in that simple, broad tax cuts should definitely be a part of any "stimulus.". I think the payroll tax holiday is wonderful in how simple and free of cronyism it was, giving people back money, more for those who earned more to keep it fair to those who earn more.

However, as a general rule, I find supply-side fixes to a demind-side recession to be fruitless.  The balance sheet repair that the cash not paid in taxes is a far greater benefit, IMO, than any increased motivations that low capital gains taxes and income taxes have to increase aggregate investment.  I just don't think with an economy way under productive capacity will ever expand investment in aggregate.  It's a demand problem and a balance sheet problem.  I think if we could make sure that "stimulus" doesnt expand the role of government so much as it just front-loads what the government already does anyway, we'd be in a spot of quasi-agreement and really move the economy forward.

[TripleB]

If we used all the money for those three things then each person in this country could have their own teacher, police officer and firefighter following them around all day.