Agreed risk free rate is like 5%, pension funds want a safe 7% or 8%, ask joe sixpack with three kids how much a trip to Disneyworld goes up each year. Don't ask about school/medical costs as he may get violent!!
GDP is directly dependant on a proper inflation rate.....since the i. rate doesn't include housing prices, only equivalent rent rates...GDP is vastly overstated..... as for M3, it can be calculated via other Fed. data
My money is in Gold and Miners. At least I know it will still be worth SOMETHING in a few years. Money supply growth will eventually cause inflation when someone tries to spend that money, IMO. Do I need to be an "economist" to understand that? Your TIPS are a "trick". You lose on the real inflation rate vs their reported rate. You lose on the tax you have to pay on that "income". You are assuming theose TIPS have no risk. What are you going to do if/when they get downgraded to junk? How about 2012+? You can keep your GDP numbers. The stupidity of Americans and their government burying themselves in debt is nothing to crow about, IMO. What happens when it has to be paid back? What will it be paid back with? Famous last words: "Deficits don't matter"
You mixed two comments and attributed them to one person. I'm the TIPS guy. TIPS can never be "downgraded to junk". It's impossible for the US to default on their bonds. (Not that this helps you when you want to buy a Japanese TV, but it'll still buy pretty much the exact same groceries, healthcare, automobiles, and housing in the US) Maybe you should consider UK TIPS-equivalents. If they rebase the CPI and you don't like it, you can redeem the bond immediately. Sticking your money into gold and gold mining stocks, "Because you know they will always be worth something" seems specious. A whopping 2 years ago, Gold was worth 420 an ounce. It's today worth 700 an ounce. Hitting 420 again is far more likely than a massive collapse in the US economy. So, you will lose 40% of your net worth. Frankly, quibbling over the exact rebasing formula for CPI sounds a lot safer to me. But, of course, your mileage may vary. If the US economy collapsed to the point that inflation exceeds 40% in 2 years, you're going to have MAAAANY more problems than where your money is. No gasoline, no banks, no jobs, no more trade with countries whose economies are based on exporting goods to the US. The government-insured brokerage account will be worthless when the broker goes out of business. Money will get sucked out of the mining stocks because Americans will need cash. The world economy will collapse in the end, causing massive inflation everywhere. You seem to be envisioning a scenario where there's a massive collapse in the US but no one else is affected. That's a little too provincial for me.
Well, you can either depend on Keynesian economics, or use your own brain. M3 is just fine, its key components are repos & eurodollars, which do the real trick. Actually M3 was/is very closely watched by bond traders and is considered a major indicator. So no matter what most economists think, in the real world, M3 is very important. M3 can be recompiled and has been. It is going at 10% growth rate. As for subtracting GDP from inflation, it's actually the other way around. Inflation affects GDP numbers, hence, you're supposed to subtract inflation from GDP, if it was not given in constant dollars.. But I'm sure you are relying on some economist's expertise to make that fuzzy logic and twist common sense. Here is an exercise, go out in the real world and compile your own data based on goods that really matter. Might be an eye-opening experience.
I hate to be the one to break the news to you, but TIPS have risk, just like any other bond, whatever nation might be printing them. The risk is a function of the cumulative debts and promises made by that nation as compared to their ability to tax to pay off those promises in addition to paying for the other things they need to do to run the nation. If you think they are risk free, go back to 1933 and see what happened to those who made the mistake of putting their savings in US Dollars. Mining stocks are speculation, not much different than other speculative stocks. As for the price of gold, it isn't the price of gold you are looking at, but rather the expectation as to the real, lasting value of those dollars, euros or pounds as expressed in something solid, that can't easily be printed or faked, like gold. As I see it, owning real gold is REAL savings and REAL wealth that even people like GWB and the million leaches in Washington can't destroy the value of.
Dude, when you see GDP numbers you are seeing them in Real dollars. It is calculated by using prices from a base year, not by using an arbitrary measure of inflation such as CPI (which wouldn't apply as that measures inflation in consumer goods and services, rather than all goods and services produced by our economy). Inflation is not "subtracted" from nominal GDP to arrive at real GDP. It is built into the calculation. Your anecdotal evidence is irrelevant and closed-minded. It leads me to believe you think inflation is being purposely understated (or miscalculated, which is hard to believe when you take a look at the process for calculating CPI) in some sort of conspiracy. Also, I'm quite aware of the fact that bond traders watch M3; just because it's still a useful measure of something does not mean that it is a useful measure of U.S. money supply growth. The fact is, there is no grand conspiracy. The fact that you think M3 is fine because it contains repos and Eurodollars "which do the real trick" makes no sense to me.
Read again. I said it is impossible for the US to default on their bonds. When you control both the money supply used to pay your bonds, and the bonds themselves, defaulting is impossible. You really think the US will stop paying interest in bonds rather than simply printing more money? Yes, TIPS have risk--but not repayment risk. If the inflation indexing is reasonable, their risk is extremely limited. Hence the reason the market is discounting the interest of TIPS so dramatically.
The only power to coin money or issue legal tender is vested in the federal govenment. The Marianas Islands got in trouble with this.