Forbes: What Does 7% Inflation Do to Your Bonds?

Article by William Baldwin in Forbes

If you own any Treasuries, take a grim look at what’s left after inflation and taxes.

Inflation has already crossed the 6% mark. Are we going to see 7%? What does that do to savers?

My answers are “Yes, soon” and “They get slaughtered.”

Inflation is likely to get worse before it gets better. There’s a good chance the 7% line will be crossed. I think this will happen in the December CPI, to be revealed early next year.

Rates like these are making a sucker out of anybody who wants to save money. Ten-year IOUs issued by the U.S. Treasury yield 1.5%. That means your real yield—coupon minus inflation—is worse than negative 5%.

The same government that issues low-rate bonds and creates high-rate inflation, does a third thing to savers. It taxes them. So let’s take a look at real, after-tax returns on ten-year Treasuries.

It’s a sorry picture. The negative reward for saving is now testing the lows hit four decades ago.

What do you do if you’re trying to save for a rainy day—or for a house, college or retirement? There’s not a good answer to that question.

Might bond yields turn the corner, creeping into positive territory? They might someday. I wouldn’t count on it. It is public policy to punish saving. Money is taken from frugal people and given to spendthrifts.

Look at Congress, which sets an example for the country with its trillion-dollar deficits. Or look at ......

To read this article in Forbes in its entirety, click here.