INFLATION THREATS & SAVINGS

This is a historic moment. Economists have been advocating indexed bonds for many long and frustrating years. In recent years economists from FRIEDMAN to TOBIN have supported them. Yet, because there was little public clamour for such an investment the govt. never issued inflation-indexed bonds. The success of such bonds depends on public interest and understanding these bonds. Untill now inflation has made fgovt. Bonds a risky investment. If the inflation rate is 3% and if someone had bought a 30 yr govt. bond yielding 5 % he would have expected that by now it would be worth 180 % of its original value. However, after years of higher than expected inflation, the investment would be worth 85 %.

If a person retires today with an investment of $ 10,000 govt. bonds and there is no inflation its purchasing power would be $ 10,000 after 20 yrs But if the inflation is 3 % a year its purchasing power would be $ 5,540 after 20 yrs. If 5% inflation then---$3,770 If 10% inflation rate --$1,390 For this reason alone, the creation of inflation-indexedbonds, with their gurantee of a safe return over long periods of time is a welcome development.

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