Why I buy TIPS instead of Treasuries

When demand for goods and services grows faster than supply, inflation results. Consumer price inflation results when fiscal stimulus adds money to consumer pockets without stimulating productivity growth at the same rate.

How Much Washington Really Owes: $100 Trillion

Unfunded entitlements are more than twice as large as the official national debt. The problem is growing.

By Vince Kolber, The Wall Street Journal, Dec. 20, 2022

Treasury reports two separate figures, “net position” and “social insurance net expenditures,” but it doesn’t add them up into “total obligations,” and thereby deprives lawmakers and taxpayers of a full picture.

Net position is the difference between U.S. government “assets” and “total liabilities.” Importantly, total liabilities include only bonded debt—that is, U.S. Treasury bills, notes and bonds. Total liabilities were $34.8 trillion at the end of fiscal 2021. The Treasury reported assets at $4.9 trillion. Simple arithmetic brings us to the net position, negative $29.9 trillion. [Compared with GDP which is $25.7 Trillion. – W]

Social insurance net expenditures calculates the difference between the expected future liabilities of Social Security, Medicare, Medicaid and similar programs over the next 75 years and the income these programs are expected to generate during the same period under current law. The Treasury reported these unfunded liabilities at $71 trillion at the end of fiscal 2021. That brings us to the alarming milestone. Add the net position of $29.9 trillion to the social insurance net expenditures of $71 trillion, and you find that they topped $100 trillion—the first time they have ever done so…[end quote]

Government current transfer payments are, by definition, money that is sent to people without value in received return. Even without the Covid payments the upward trend is clear.

Nonfarm Business Sector: Labor Productivity (Output per Hour) for All Employed Persons has plunged recently to the lowest since the 1982 recession.

I think that the Macro trends point to higher inflation in the future. I don’t think the Fed will be able to get the inflation rate down to 2% using the fed funds rate because the inescapable entitlement fiscal stimulus is not in their control. But the bond market thinks the 10 year breakeven inflation rate is 2.24%.

If inflation turns out to be higher than 2.24%, TIPS will yield higher than Treasuries.



Why 75 years? Why not 50 years? Or 25 years? Or 250 years?

Why doesn’t a young family - maybe early 30s or so - look at their finances and decide they don’t have enough money stocked away to pay for food for the next 50 years? Or utilities? Or property taxes? Aren’t those also unfunded liabilities?

I’m not saying we shouldn’t think about how to pay for these social insurance payments over the next 75 years. We certainly need to look at that because the money set aside for those payments is going to be insufficient in a few years. But totaling them up and coming up with some unimaginably huge number isn’t going to help our thinking about the issue, particularly if that analysis isn’t considering any future changes - changes that are necessary in the very near future to keep those programs in place.

The Post Office got into some trouble from this kind of misguided thinking. The Postal Accountability Act of 2006 forced the USPS to fund retiree benefits in full for the next 75 years. They are putting aside money now for people who haven’t even been born yet, let alone hired. That pre-funding requirement has had an extremely negative impact on the USPS for many years. It was finally removed by a new law earlier this year. (The Postal Service Reform Act of 2022).



Not really, in that the family can change their diets in the future and eat beans and rice instead of steak. They can down-size their home, etc. This is in contrast to the unfunded liabilities of the government which are promises. Unfunded state and local liabilities are also often much larger than the government agencies can pay off. See, for example, the cases of Illinois and the city of Chicago.


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Well, the government can change the law to pay out less in the future. Which is likely what will happen. (Technically, I expect them to raise Social Security and Medicare taxes, but that’s about the same as paying less as far as I’m concerned.)



The kicker is “current law.” Would it be reasonable to make plans for 2022 based on current law in 1947?

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This is a blatantly false claim. If there existed no Social Security, etc, then companies would have to pay a significantly higher wage to workers to get them to carry the risk of retirement investment losses. Because the govt guarantees the payments, workers are willing to accept a lower wage but with a guaranteed minimum retirement payment (and maybe other benefits) when they retire. There likely will be other assets set aside by the employee for retirement, but that is not guaranteed as the employee bears the risk of loss should the investments lose value or even have no value .


No. It’s not false. It is a DEFINITION.

The consequences that might happen in the absence of the transfer payments are irrelevant to the definition. The definition exists as a real number for those who want to know exactly how much is being sent to recipients that are not exchanging value to get the benefit.

Go ahead and speculate all you want about possible effects…on and on. But your speculations will not change the definition of “transfer payment.”



Best guess? It’s close to the life expectancy of an American. Only thing that makes sense.

The big question is, is there any value in projecting shortfalls 75 years out? I’d also say no. Other than to alarm lawmakers into action. Odds of that happening?

This is why I buy TIPS instead of treasuries. Because the probability of getting a better yield is higher. Mainly because of 3 things:

  1. While TIPS can go down with deflation, that occurs very rarely and for extremely short durations. And when it happens, treasury yields drop like a rock anyway.
  2. The breakeven number is close to “reality” over time, so the inflation kicker is essentially a free call option on higher inflation periodically.
  3. Inflation is sticky and cumulative, it rarely reverses to cause a trend average. For example, the ~13% inflation that has been added to TIPS over last 2 years will remain in those TIPS forever. Even if we revert to the desired trend of 2%, there likely won’t be a -9% to remove the excess from the 13%.

Other than treasury bills (short term), I can’t recall the last time I ever bought a non-inflation-adjusted bond. Now, if we see 30-year treasuries at 10+%, I may be tempted. That’s because the best ever risk-adjusted investment in my lifetime were the 13+% 30-year bonds in the early 80s. Imagine 13% return every single year, for 30 years, with almost zero risk, and almost zero volatility (other than almost continuously increasing value as rates slowly decline over the decades). Doesn’t matter for those (me) who only hold bonds till maturity.


Actually, it is false. The level of the economy would be far lower if companies AND govt were required to pay higher wages to employees to compensate them for no benefits of any type. The definition is objectively wrong because it assumes the economy would be at the same current level regardless of differences in how the economy got to where it is today. PLUS, there is (AND WAS) positive economic activity to having a large group of people providing a large amount of cash each month to the investment community to be invested in long-term investments to fund the retirements of the investors. There would have been MORE CASH TO INVEST had there NOT been Social Security. So, the investment bankers are REALLY MAD at the govt for sharply reducing the bankers’ incomes for eternity.