TIPS: Treasury. Inflation-protected. Securities. Tips. As in "show us your tips."
Why do we have such a thing? Well, the problem with super-duper safe bonds like those of the U.S. Government is that investors holding them a long time often do worse, after taxes, than inflation. Meaning that, if inflation is growing at 3% a year, and their bonds are only returning 1% a year after tax…then the investor is losing 2% a year in buying power.
In the 1990s, when investors started to realize this issue, they began to, um…well, stop buying U.S. Government bonds. And that’s a huge problem for a country that desperately needs to raise cash all the time.
So, rather than risk an illiquid marketplace where buyers weren’t buying government paper, Uncle Sam created TIPS, which basically adjusts the end-value the principal investors get based on the CPI, or consumer price index, which is a key measure of the average selling prices of a carton of milk…a gallon of fuel...a dozen eggs…and a grand slam breakfast at Denny's.
So yeah...TIPS. No hair gel and bleach necessary.
Related or Semi-related Video
Finance: What is Disinflation?4 Views
finance a la shmoop what is disinflation disinflation often confused with dat
inflation refers to the decline in inflation rates over time in 1973
America was fully juiced with Warbucks from Vietnam inflation hovered around [soldiers firing weapons]
the mid going on high single digits and then higher from there like 7% or more
depending on where you look him and Jimmy Carter stepped in on this guy and [Carter walks into office]
raised the federal rates the Fed rates their massively stamping out the wild
bull economy and putting the brakes on inflation but it didn't happen until
after Carter was actually out of office and Reagan took over inflation [Reagan replaces Carter in office]
eventually had rocketed all the way up to about 14 ish percent on an annualized
basis looking at the monthlies in the 1980-81 period right here
well the crux of dis inflation is that inflation is still positive it's just
becoming well less positive and or like you know how you feel not long after you
say I do and the honeymoon is over and you have to take out the garbage so
under Carter the US inflation rates were attacked in a variety of ways the [Carter in a boxing ring]
biggest of which was to make the cost of renting capital very expensive which
cooled the economy but it took a long time like note how slowly inflation
rates came down and well really it was decades before things fully stabilized
you can see how things slowly disinflation the raging levels that
peaked at post-vietnam era 1314 percent then slid all the way down to a 1 to 3
percent way down there where it's hovered for a
while so that's disinflation still inflation but just less of it deflation [Disinflation deflating]
is when inflation turns negative like prices are actually declining and yes
we've had periods of deflation before albeit very short ones like in the post
mortgage crisis Mallove's in 2009 right here yes yes it's rare but it happens
got it okay class dismissed
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