Do NOT buy TIPS for inflation protection

The WSJ'S Jason Zweig has another column recommending TIPS today.

I wrote a book on hyperinflation. Do I recommend TIPS (Taxpayer Inflation Protected Securities—federal government bonds).

.

Hell, no!

.

I bought a bunch when I wrote the 1st edition of my hyperinflation book.

.

.

Then, when writing the second edition of that book, I read the fine print on them.

.

When I got done cursing, I sold them all forcing me to pay $50k of tax penalties.

.

1. They adjust the maturity value of your bond for inflation annually. The interest rate never changes, just the principal value. But you get nothing until maturity. They come in 5, 10, and 30-year maturities.

.

Ever hear of tax on unrealized gains? Dems want it. The public hates it. TIPS have it. That is, if you own a million dollars worth and inflation is 4%, the value of your TIPS will rise by $40,000 and although you cannot actually get that $40,000 until maturity, you have to pay income tax THIS YEAR on that unrealized $40,000 NOW!

.

2. Indexation like this was invented in the 1970s. Why? In the 1800s, the way to protect yourself from inflation was a gold certificate. That is a bond or currency with a gold clause. Gold clauses said you could walk into a bank and demand gold coins with a face value the same as your gold certificate.

.

Furthermore, the gold clause said the gold coins you got had to have the same weight and purity as gold coins did when the gold certificate was printed.

.

If you had a million dollars of gold certificates (A type of US paper currency before May 1933) and they were still valid, you would be entitled to 50,000 $20 gold coins. Today, a $20 gold eagle US coin from before May 1933 is worth about $3,300. So today you would get 50,000 × $3,300 = $165,000,000 for your million dollars worth of gold certificates.

.

Do such certificates still exist? Yes, but the US government reneged on them in Executive Order 6102.

.

.

They got sued, but SCOTUS upheld the reneging in spite of it being explicitly prohibited in the US Constitution.

.

“No State shall ...coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts;...or Law impairing the Obligation of Contracts,..”. https://constitution.congress.gov/.../artI.../ALDE_00013037/

.

How does this relate to TIPS? Very simply, in hyperinflation, the amount owed to you by the US government, i.e. the taxpayers, would be so monstrously high that it would be impossible for them to pay you. Furthermore, during hyperinflation before maturity, you would be crushed trying to pay the taxes on your unrealized gains.

.

3. There are other problems like the delay in when they adjust your principal for that years inflation—about six months too late. Or the government lying about the actual inflation rate. (Which Zweig mentioned, then shrugged off.)

.

But the first two reasons I have given you are quite enough.

.

Your home is a good hedge on inflation. Will the government somehow renege on that? No. About 65% of Americans own their home. Too many voters. Even in 1933, relatively few Americans owned a lot of gold certificates. Not many voters to piss off.