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Burton Malkiel says I bonds are a great hedge against inflation. Not if the inflation is high.

Posted by John Reed on

In today’s Wall Sreet Journal, Burton Malkiel, says I bonds are a great hedge against inflation.
I pause to let many readers genuflect at the mention of Malkiel. He is the author of the great book A Random Walk Down Wall Street.
However, I think he is full of crap on I bonds. Like TIPS, they adjust for inflation twice a year. You do not get the adjusted interest until maturity at 30 years or when you cash them in. You have to pay a penalty for cashing them in before five years.
If they had existed in the 1970s and 1980s, they probably would have worked as promised. But in hyperinflation, if we get it, they are like chasing a supersonic plane on a bicycle. In theory, the adjustments would eventually make you whole after the hyperinflation ended. But in reality, where is the U.S. government going to get, say, $15 T to make good on their I bond promise to you. I have a $15T Zimbabwean bill on my wall, a souvenir of hyperinflation there sent to me by a reader of my hyperinflation book.
If you cash your I bond in the day after they adjust it fr the CPI increase, you will be months, maybe half a year behind current prices. Before you buy I bonds, make sure you find out exactly when you get the adjustment and on what price data the adjustment is based.
My recollection is that you get the money in January based on calculations made in December which, in turn, were based on price data collected in August. So maybe in August your I bond could have bought you five Mac laptop computers. But by the time you get the cash, it may buy only one Mac laptop or one Kindle. That is not inflation protection for double digit or hyperinflation inflation. It is a token payment against such levels of inflation.
My advice is to purchase well-managed foreign currencies to be held abroad. Ditto commodities like silver or copper and nickel in the form of “junk silver” or current U.S. pennies or nickels. I also recommend real estate, inventory, equipment, long-shelf-life food.
These things protect you from USD inflation by definition, not by relying on the U.S. government, who deliberately caused the inflation, keeping an unkeepable promise made to you. In 1933, the U.S. government reneged on gold certificate war bonds sold during WW I. (Executive order 6102)

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