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Jason Zweig says I bonds are great. I suspect the US government will renege on them if hyperinflation.

Posted by John T. Reed on

Jason Zweig says I bonds are super investments. The I stands for inflation.

You can only buy $10,000 a year, although you can get more per year by overpaying your estimated taxes and taking your tax refund in the form of I bonds.

He says they yield more than 3.5% and they are nearly risk free. They are federally guaranteed government bonds.

I will give credit for one thing: Only $46.4 billion are outstanding. That is analogous to, although much larger than, the number of Forever stamps outstanding.

The interest from these bonds is exempt from state and local income taxes.

The issue is would the federal government really keep their promise to adjust the I bonds for inflation twice a year if inflation got really high?

If we had inflation like 1980—13.5%—or 1918—18%—I expect they would pay the inflation adjustment.

But if we get higher inflation, exactly where do they get $46 billion of, say, gold, to give to the holders of the I bonds? They do not promise gold per se, but the promise to make you whole after high inflation is the equivalent of saying we will give you enough inflation adjustment that you can buy $46.4 billion worth of gold then.

There are two ways historically to end hyperinflation:

• introduce a new currency that is trusted (Germany 1923)

• end capital controls (Zimbabwe recently)

If they introduce a new currency, how can they adjust for the inflation rate when they would no longer be able to measure it?

If they end capital controls, people would use foreign currency in the US to pay employees or buy groceries. The hyperinflated USD would be as useless as Confederate money after the Civil War. There would be no way to adjust I bonds denominated to USD to inflation in the USD.

In the Civil War, the US issued Greenback dollars which they printed too many of and they hyperinflated. 63 years later, the US government wanted Americans to buy bonds to fund WW I.

Because of the recent memory of the Greenback dollar, Americans refused to buy the WW I bonds. To sell them, they had to make them gold certificates. That meant you could demand your repayment in gold coins at any bank. Gold coins were circulating then, like quarters today.

In 1933, right after he took office, FDR issued EO 6102 which ordered all citizens to sell bullion gold at a below market price to the nearest federal reserve by May 1st. That EO also reneged on the promise to pay back WW I bonds in gold.

 https://en.wikipedia.org/wiki/Executive_Order_6102 

Even the legal doctrine of impossibility may apply. It may be impossible for the then bankrupt federal government after hyperinflation to come up with the money to make owners of I bonds whole.

Are Americans who did not buy I bonds going to allow their tax money to make the few who did whole versus hyperinflation?

During the Great Depression, post offices offered savings accounts. 9,000 banks failed in the US then, but not the USPO savings bank before FDIC insurance was invented.

So there is precedent for the US government making good on USPO savings accounts even while they defaulted on WW I gold certificates.

Zweig, who is generally good, in this case, I do not think he ran the numbers on hyperinflation. One of my readers sent me a $15 trillion Zimbabwean note which is on my office wall. Such notes existed in Weimar Germany, Zimbabwe, and other nations that hyperinflated. They will exist here if we get hyperinflation.

Essentially, by promising to make I bond owners whole, the US government has made them roughly gold certificates—same thing they reneged on in 1933.

One virtue for those of you mesmerized by your IRA, SEP or 401(k) is that you can probably have these in your pension account.


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