Bonds and Returns

Now the title of this post might initially bore some folks before they even read the first sentence. Now that I have gotten you to read the first sentence, I hope your a little more interested because this topic is quite interesting. I am going to cover bonds and there REAL returns. I will do this by basically throwing out self explanatory numbers for you to consider.

I first need to state that my definition of inflation might be different from yours. I believe that inflation is not the rise in prices measured by the CPI, but instead is the increase in the amount of currency in circulation. That is a statistic measured by an index regarded as M2. The Feds used to also have an index called the M3 which is believed to be more accurate, but they decided it was "too expensive" to keep measuring the M3. Yeah right, in actuality they wanted to print more money without you, citizens of the U.S., knowing about it. Anyways the M2 is still a fairly accurate measurement. I don't like the CPI because it doesn't take into account energy and food prices. Now that that's cleared up...

Right now, a U.S. two year bond yields around 4.85% return. In the U.S. the CPI, in 2006, was measured at about 3.3%. This results to what appears to be a real return of 1.55%. Now, the M2 experienced a gain of about 10%. That means there was 10% more U.S. dollars in circulation than the beginning of the year (printed by the Federal Reserve). Now the real return is -5.15%. So investing in a 2-year bond doesn't lose money in regards to the amount of dollars that you owe. But it loses in the sense that the value of the money put into the bond is worth less than when it was initially invested.

Now I have a bad tendency to rag on the United States, so let's look at another example, Britain. A British two year bond yields about 5.38%. There CPI was said to be about 3% giving the investor about a 2.38% real return. Now, the British M2 was measured at around, or above, 12% in 2006. The the actual real return is -6.62%. So the British bond in 2006 was actually a bigger loser than the American bond. See, I can be a fair guy.

We might see a different story regarding the M2 here in the United States this year and the coming year. Once the recession comes public and the ball drops on the economy the Feds will begin to lower interest rates. This won't work like it has in the past. The reason the Feds lower interest rates is in regards to an incentive to consumers to invest in cars and houses to ignite the economy. Good luck trying get people to invest in a housing market that is crashing and burning and will continue its downward trend for 3-4 years. Next solution: run the printing press, and they will. They will print as much money as they can in hopes to inflate their way through this crisis. In other words, screw the U.S. citizen over instead of facing this recession responsibly. I apologize, this was supposed to be a short post regarding bond returns and it turned into a session of ranting and raving, but I have to finish now that I'm all riled up. By now I'm sure your screaming. "WHAT SHOULD I DO?" I reply with utter calmness, "buy gold." Gold is the only way to protect yourself from the manipulations implemented by government policy regarding its fiat currency. I promise you, it will soar. I can't predict exactly when, though I feel it will be sooner than later. But I do promise you. It...Will...Come...