Jun Gao

Apr 24, 2020

2 min read

Inflation because of Government Air Program?

Basically this article is saying: yes, inflation soon.

https://www.wsj.com/articles/the-debt-is-soaring-debt-risks-are-not-11587646819?mod=searchresults&page=1&pos=4

Q: What is the usual fear about high government debt?

A: The usual fear is that high government debt leads to a crisis or excessive inflation. But there’s little risk of the first, and nothing inevitable about the second.

Q: would printing money cause inflation?

A: Printing money alone doesn’t cause inflation. That requires spending and investment to reach the point that the economy overheats, sending prices and wages up. Or the public has to expect higher inflation, which can be self-fulfilling.

Remark: inflation can be observed inflation-protected securities.

TIPS:

Principal value of TIPS adjusts up and down based on inflation as measured by the Consumer Price Index (CPI)

Risks of TIPS

Investing in TIPS may seem very compelling at first glance, but investors should consider three issues:

  1. The increase in face value of the bond triggers taxes each year, which not only eats into the element of inflation protection but also creates additional tax work. For this reason, individual TIPS bonds make more sense for a nontaxable account.
  2. While TIPS don’t carry credit risk — the risk of default by their issuer: the U.S. government — their prices do fluctuate between their issue date and maturity date.