"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man"
- Ronald Reagan
I Bonds for Inflation
Monetary Policy: The “Fed” or Federal Reserve’s actions and communications to promote maximum employment, stable prices, and attempt to moderate long term interest rates. They do this largely by managing interest rates and the total supply of money in circulation.
Fiscal Policy: The Federal Government’s decisions and laws regarding taxation and government spending.
Without question this is the biggest monetary and fiscal mess I’ve experienced in my twenty-seven years as a financial advisor… The long-term implications to the entire world are much more serious than even what we faced during the 2008-2009 Great Recession. We have an ugly convergence of events: Persistent high inflation, inflated growth stock valuations (resulting from years of interest rates which were artificially low for way too long), a huge annual spending deficit, an enormous national debt and the prospect of much higher interest rates to service that debt in the future. Combine these serious challenges with the economic fallout from Covid lockdowns and the resulting supply chain challenges along with war in Ukraine and we have a really big problem on our hands.
While these financial problems are troubling, I’m probably more concerned about “collateral damage” which are the derivative of these problems. Recent reports seem to indicate that food and fuel inflation has already ravaged the finances of the lowest quartile of incomes in the United States. Abroad, the problems appear to be much worse. Third-world countries whose citizens were mostly living “hand to mouth” during the best of economic times are now forced to decide what things they will have to go without. Is it meat for children or fuel to heat their homes? Reports of economic riots in these third-world countries are already in the news.
These are NOT trivial first world “economic” problems and indications are that food and fuel costs will get worse before they get better. There are literally billions across the globe who are gradually becoming more desperate as first world problems come to the humble doorsteps of those with the least ability to cope. And desperation is fuel for social unrest…
As for the economic fallout to us from this mess - what I’ve heard from clients and colleagues alike is there is “no place to hide”. Historical safe havens like bonds have been obliterated by the prospect of permanently higher interest rates. In addition, cash is a guaranteed loss of 8.6% (the current rate of inflation) in real buying power.
What can be done for the average family in the midst of such challenging economic headwinds? With this backdrop it’s no wonder that in the last year I’ve had dozens of discussions with clients, friends and family about I Bonds.
What are I Bonds? They are simply government issued bonds which adjust the interest payment based on actual inflation. They currently yield, wait for it…. 9.62 percent! No, that is not a misprint. They adjust every six months for actual inflation once you buy them - so no need to worry about inflation changing once purchased - and you will always be able to sell them for at least the amount you invested.
If you are wondering why you’ve never heard of these instruments - it’s because they are not a tool that financial advisors can use for clientsT. hey are only available in $10,000 per family member per year increments (plus an additional $5,000 if purchased with tax refunds annually) and must be purchased directly from Treasury Direct. They also cannot be purchased for a Traditional or Roth IRAs.
While I Bonds can be held for 30 years, they need to be held at least 12 months. If sold before 5 years the owner will lose 3 months interest. After 5 years there is no loss of interest for selling them. They are an awesome tool – but for most affluent families they are not available in large enough quantities to move the family inflation needle, unless…
My suggestion is to take advantage of these terrific inflation protected investments! I suggest that individuals and married couples purchase the maximum amount they can afford every year. That’s 20k in electronic bonds annually for a married couple. If you need to withhold more in taxes in order to get a tax refund which you can use on an I Bond that’s probably not a bad idea. That’s 25k per family per year that is inflation protected! Do that for 10 years and you start to have a nice piece of your family finances which is inflation protected.
I Bonds provide effective short term inflation protection but will NOT keep you significantly AHEAD of inflation. While volatile and subject to market fluctuations, value stocks which are both relatively cheap AND provide current income will ultimately prove to be the best way to stay AHEAD of inflation over the course of future decades.