And quit spending money that you will never see repaid
Eg the chuck Schumer teamster pension plan bailout
Jerome Powell says raise the limit on I bonds now
President Biden, by executive order, should immediately direct Treasury Secretary Janet Yellen to raise the annual cap on Series I savings bonds from $10,000 to $100,000. I-bonds, established by President Clinton in 1996, are guaranteed, inflation-linked securities issued directly by the Treasury to people and companies. Today, I-bonds pay a healthy 7.12% annual return. The interest rate is adjusted every six months to reflect changes in consumer price inflation. It’s hard to find a better, safer investment in this environment.
The Inflation Mess and a Financial Refuge
Biden and the Fed need a sharp policy change, and meantime Treasury can raise the cap on I-bonds.
ILLUSTRATION: CHAD CROWE
Inflation is a clear and present danger to the American people. Extraordinary excesses in monetary and fiscal policy caused the inflation dragon to resurface after 40 years of dormancy.
Inflation is broadening across sectors and deepening in the minds of households. The price surge is triggering second- and third-order effects: higher wages are going to workers to offset accelerating prices; companies are passing cost increases to their customers with little friction. And forward-price indicators like commodities suggest prices are poised to increase further.
The finances of American households appear vulnerable to an inflationary shock. Low-income Americans are struggling to make ends meet. Middle-income Americans are experiencing a fall in real wages and erosion of their savings. The more well-to-do are increasingly concerned about the true value of their high-flying financial assets.
Leaders in Washington are unnerved, and they should be. Their actions so far have been unequal to the challenge.
At his press conference after the Federal Open Market Committee meeting last month, Federal Reserve Chairman Jerome Powell acknowledged the Fed’s error. He reasoned that the length and severity of the pandemic were largely to blame. With inflation running nearly four times the Fed’s goal, Mr. Powell signaled a reversal of the central bank’s policy of easy money for all seasons and all reasons. Curiously, however, the Fed’s zero-interest-rate policy—and monetary financing of bigger government—persists. No wonder inflation isn’t cooling.
On Feb. 10, the Biden administration announced its own “comprehensive strategy” to “lower costs for working families.” The White House highlighted its policy response: a supply-chain “task force,” an “action plan” for ports, a separate “action plan” for trucking, and “new financing” to expand food-processing capacity. It also noted its “historic Executive Order” which includes “72 initiatives by more than a dozen federal agencies” to boost competition. This list of particulars won’t intimidate, never mind slay, the inflation dragon.
The accompanying White House fact sheet made no commitment to stop the big spending. Instead, it reframed the president’s proposed multitrillion-dollar Build Back Better spending bill as “the most significant effort to bring down costs.” And it called on the Fed to “recalibrate” its support for the economy, as if a little monetary fine-tuning would suffice.
Ideally the administration and the Fed would implement fiscal and monetary regime change to bring inflation down. That would require political courage and policy conviction, so it is unlikely. Even if it did happen, the long and variable lags between policy implementation and real economic effect mean at least several more quarters of unanchored inflation.
What could the administration do to provide some relief from the symptoms, if not the sources, of the inflationary menace?
President Biden, by executive order, should immediately direct Treasury Secretary Janet Yellen to raise the annual cap on Series I savings bonds from $10,000 to $100,000. I-bonds, established by President Clinton in 1996, are guaranteed, inflation-linked securities issued directly by the Treasury to people and companies. Today, I-bonds pay a healthy 7.12% annual return. The interest rate is adjusted every six months to reflect changes in consumer price inflation. It’s hard to find a better, safer investment in this environment.
Currently, however, individual investors are limited to purchasing $10,000 in I-Bonds a year. (An arcane rule also permits taxpayers eligible for a federal tax refund to buy an additional $5,000 of I-bonds.) Investor interest has ramped up with the rise in inflation. Over the past three months alone, I-bond purchases soared to $7.1 billion, compared with an average of $700 million a year during the decade before.
Raising the cap would enable more Americans to receive some inflation protection on their hard-earned savings. The executive order should also make clear that the higher purchase cap would fall when price stability is re-established, as certified by the Fed.
I-bonds are superior to other Treasury securities as a hedge against inflation, including Treasury inflation-protected securities, or TIPS. TIPS have experienced losses of up to 5% since Jan. 1, as news of more inflation lifted yields and hammered bond prices. At current prices—which are heavily influenced by the Fed—TIPS holders would lose purchasing power unless they hold the securities for as long as 30 years. I-bonds, on the other hand, can be redeemed any time after 12 months with a modest penalty, amounting to three months of interest. After five years there is no redemption penalty whatever.
If the revamped I-bond program grew in popularity, the government would accrue higher funding costs. That’s part of the point. The government should internalize the budgetary and reputational costs of its policy errors. On the margin, policy makers might find it less appealing to let inflation erode personal savings and compromise price stability.
Inflation’s 40-year hiatus from history is over. Errant monetary and fiscal policy decisions are to blame. If leaders in Washington are unable or unwilling to establish a new monetary and fiscal policy regime, they should allow Americans to protect more of their hard-earned dollars from the stealth tax of high inflation. That would be welcome, if unexpected, news in the president’s forthcoming State of the Union address.
Mr. Rauh is a senior fellow at Stanford University’s Hoover Institution and a professor of finance at the Stanford Graduate School of Business. Mr. Warsh, a former member of the Federal Reserve Board, is a distinguished visiting fellow in economics at Hoover.
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