suep

What’s Behind the Slide in Gold and Silver?

I'm convinced that bonds are certificates of guaranteed confiscation in these inflationary times. And what times aren't inflationary, here in the United States?

Here is my reasoning, and anyone of course is free to attempt to find fault with it:

Assume that I buy a ten-year, $1,000 bond that pays 3% interest (assuming simple interest for this exercise). Now, I think in terms of lamb chops: how many pounds of lamb chops can I now buy with my $1,000? Say they cost $10/pound. So with that $1,000, I can buy 100 pounds of lamb chops. So for ten years, I receive $30 each year while I wait for my bond to mature. When that happens, I get my $1,000 back. Now, how many pounds of lamb chops can I buy with that returned $1,000? Well, over those ensuing ten years, the purchasing power of that $1,000 has dropped by 3% annually, for a total depreciation of 30%. That means that after those ten years, I can buy only 70 pounds of lamb chops with my returned $1,000. So by buying that ten-year bond that paid $30 annually, I've lost 30% of my original investment in real terms.

You may say that while I was waiting for my bond to mature, I was earning 3% on my money. But was I? No. Why not? Because the government wants its slice in taxes. So that 3% return is really perhaps 2.2%. And if I spent that purported 3% nominal return, I'm really in a fix, no? If I don't spent the interest, at least I came close to maintaining the original purchasing power of my money. But it's still a losing proposition.

The bond I thought was an OK deal turned out to be a loss.

If anyone disagrees with me, you are also disagreeing with a banker and a bond expert who, in quiet voices, completely agreed with my logic.

Today, the only way a person could buy a bond and come out ahead is if he successfully played the interest game.
I believe that's why the Ben Bernankes of the world say they hate deflation. Why? Because in a deflation, the above argument is reversed, and bond distributors would then find themselves on the receiving end, not the dishing end. They would need to turn profits with the money they collect, rather than making a guaranteed profit the way it is now.