Reprint Of My June 1996 Letter To The US Treasury On The Need For GDP Indexed US Bonds Included In My Comment On Issuing Inflation Indexed Treasury Bonds

The following is a reprint of a letter I sent to the US Treasury on June 5, 1996, in response to its request for comments and information on inflation indexed bonds. At the time, Treasury was considering publishing a proposal on the details of issuing US government inflation indexed bonds. Included about midway through my comment is my still relevant recommendation for the issuance of GDP indexed bonds and bonds indexed to other economic indicators.

If a market for traded US GDP indexed bonds existed today, there would be much more certainty about the trajectory of short-term and long-term future US economic growth


Milton Recht
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX, NY xxxxx

June 5, 1996

The Government Securities Regulations Staff
Bureau of the Public Debt
999 E Street NW
Room 515
Washington, DC 20220

Dear Sir:

I am writing to comment on the Treasury Department’s proposal to issue a new type of United States Government bond that adjusts for the effects of inflation. My comments relate to the riskiness, structure, and uses of an inflation indexed treasury bond.

RISK

One of the purposes motivating the planned issuance of an inflation protected bond is the protection of investors, both individual and institutional, from the risk of an unanticipated loss of purchasing power due to unforeseen inflation over the life of a bond. Expected inflation, as you well know, is already included in the expected yield of the bond. Implicit in the Treasury Department’s attempt at purchasing power protection is the assumption that protection against inflation shocks reduces the riskiness of the investment security.

Volatility or the standard deviation of the total return of a bond is a yardstick for gauging the risk of a potential decline in market value and a capital loss, and while an inflation indexed treasury bond does not yet trade in this country, estimates can be made of its expected volatility. Using data from Ibbotson, Stock Bonds Bills and Inflation 1996 Yearbook, the standard deviation of the total return of a treasury bond from 1929 to 1995 is 9.2% per year. The standard deviation of the CPI for the same period is 4.6% per year. A real return can be derived by removing inflation from the nominal return, and the standard deviation of the real return series can be measured. Due to the negative correlation between inflation and the computed total real return on a treasury bond, the standard deviation of the computed real return, which is the equivalent of an inflation adjusted bond, is higher than a regular treasury bond and is 10.6%. The implication is that an inflation adjusted bond will be about 15% riskier due to increased volatility than a regular treasury bond. This will most likely be true even if historical CPI has been overstated and is restated. Since inflation has a dampening effect on the total nominal return, and since real returns are more volatile than nominal returns, an inflation bond does not protect against purchasing power loss when the increase risk of capital loss is also considered. Marketing the bond as purchasing power protection without mentioning the increased risk of prior to maturity principal loss is misleading to the average investor, and a misleading statement by a mutual fund. The point is particularly important to mutual fund investors since the funds are constantly rolling over maturing debt into new securities and are maintaining a relatively constant average maturity and duration. An inflation indexed bond also will increase the cost of hedging for those institutions that will hold inflation indexed bonds, and that manage their asset liability mix, such as banks, savings institutions, and insurance companies.

CHOICE OF INDEX

If minimizing risk is one of the goals of issuing an inflation bond, than the choice of an inflation index should be partially determine by an objective measure of risk. The selection of an index, whether CPI, PPI, or GDP Deflator, should be based in part on which one of the many indices minimizes the volatility of the total real return of the bond, while providing an accurate measure of inflation.

RATIONAL EXPECTATIONS

All publicly traded securities, particularly those that trade in highly liquid markets with the availability of short-selling, contain in their prices the market’s expectations of the future outcomes of the states of the economy over the life of the bond. This concept of expectations theory and efficient market theory has been well studied and documented and generally applies quite well to the treasury market. The market does not make these expectations readily observable other than by changes in the price of the bond or equity.

The issuance of an inflation pegged security by the government is an important milestone for allowing the observation of the market’s forecast of important economic variables, such as inflation expectations, that impact public policy and debate. By comparing a zero coupon treasury bond with the equivalent maturity zero coupon inflation indexed bond, the market’s expectation of average inflation over that period until maturity can be determined. (Estimations of any tax effects can also be made so that they can be removed to get a truer picture of expected inflation.) This expectation of inflation will represent a politically and statistically unbiased best guess of inflation which will incorporate all available information about the future of the economy, which will quickly respond positively or negatively to anticipated policy changes, and which could be an important tool for the setting of monetary policy. It would therefore be useful to have zero coupon inflation bonds of several different maturities outstanding at any time.

INFLATION OR ANOTHER ECONOMIC INDICATOR

When viewed with the perspective that the issuance of an inflation indexed bond is a method of risk reduction and information gathering for policy formation, the fundamental question is whether inflation is the most important economic variable for risk protection and information gathering, or whether another economic variable as an adjustment factor for a treasury bond would serve more useful purposes and be better for the nation. Such a bond could be issued alone or with an inflation bond.

One of the greater problems for the U.S. in recent times has been the inability to achieve sustainable, strong, yet non-inflationary, economic growth. Strong economic growth, as you know, reduces the deficit problem, creates employment, increases real wages, increases tax revenues, and improves consumer confidence and a sense of well-being. The government and the private sector have been stymied by a lack of theory and knowledge about the best courses of actions to take to facilitate and achieve sustainable and strong growth in the economy.

Furthermore, the greatest risk that a business faces is usually that of a downturn in the economy, i.e. recession. A bond that was linked to the general economy, such as a bond whose interest payments were a fixed percentage of concurrently reported GDP, would act a barometer of future recessions and expansions. Zero coupon nominal GDP bonds in conjunction with zero coupon inflation bonds of the same maturities would allow the production of a yield curve of the future yearly expected growth rates of the economy, similar to the yield to maturity curves that are now produced using treasury bond data. The existence of a market in GDP linked bonds would allow short selling and the development of options on the bonds. Either of which could be used by businesses and individuals as hedges to reduce the effects of economic downturns. The information about future growth rates and the changes in the growth rates as policy changes are anticipated could be used by policy makers, academics, and the Federal Reserve to better understand the forces in our economy and to develop strategies for a long-term non-inflationary period of economic growth.

When shocks do occur to the economy, such as the oil price shocks of the 1970’s, the inflationary effects are much greater than would be anticipated by the price increase in the raw material or labor input. In fact, studies have shown that wage increases do not correlate with or predict future inflation, and that economic predictors based on historical or current data, such as the leading economic indicator index, are poor predictors of changes in the growth rate of the economy. Inflation in many cases, as in the 1970’s, represents a resource allocation problem as the economy makes a fundamental structural shift in its productive capacity. Therefore the risk that concerns individuals and the government is more closely aligned to GDP than an inflation index. Bonds linked to GDP would allow hedging of this risk and provide data on the market’s expectation of future economic growth. Reliable data about future economic growth would allow for better production planning and resource allocation which in themselves would substantially mitigate changes in prices and inflationary concerns.


RECOMMENDATION

The Treasury should issue inflation indexed bonds, particularly zero coupons bonds of differing maturities, but it should also recognize that the bonds’ volatility and therefore their risk may be greater than regular treasury bonds. The issuance of inflation indexed bonds is an important milestone for the issuance of bonds that can provide valuable information about the future of the economy, and consideration should be given to bonds linked to other economic variables. Bonds with an index linked to GDP may provide greater risk protection to businesses and individuals than inflation indexed bonds. GDP indexed bonds can provide reliable information about the future growth rates of the economy, and the improved accuracy of the information will lead to better production planning, resource allocation, and monetary policy, which will reduce inflationary pressures in the economy.

Thank you for reading my comments on an inflation adjusted bond. If any clarification is necessary, please feel free to contact me.

Sincerely,

/signed/

Milton Recht

US Household Out Of Pocket Healthcare Spending Rose Steadily From 2004 To 2014 Despite Recession And Obamacare: Health Insurance Premiums Are Biggest Healthcare Expense For All Income Groups

From US Department of Labor, US Bureau of Labor Statistics, Beyond The Numbers, "Household healthcare spending in 2014" by Ann C. Foster:

Household healthcare spending has increased in dollar amount and as a share of household spending, even during the last recession when average household expenditures (and pretax income) declined. Consumer Expenditure Survey (CE) data show that household out-of-pocket healthcare spending rose steadily from an average of $2,664 (in nominal dollars) in 2005 to $4,290 in 2014 while the share of the household budget accounted for by healthcare spending held steady at 5.7 percent over the 2005–2007 period, but increased to 8 percent in 2014. (See chart 1.) In contrast, average total household expenditures rose from $46,409 in 2005 to $50,486 in 2008, then fell from 2009 to 2011. Spending increased to $51,442 in 2012, fell to $51,110 in 2013, and then rose once again to $53,495 in 2014.

Source: US Bureau of Labor Statistics

***Health insurance

Health insurance premiums accounted for the greatest proportion of healthcare spending among households at all income levels.This category includes spending for private health insurance obtained individually or through a group plan and for amounts for Medicare Part B and Part D coverage.

Obama Has Maxed Out The US Credit Card: He Leaves Clinton, Trump Too Poor For Infrastructure Spending, Free College, Daycare, Military, Etc.

From The Wall Street Journal, Opinion, "Another Obama Parting Gift: His final fiscal year federal budget deficit will increase by 35%:"

For the 2016 fiscal year that ends next month, CBO now forecasts that revenues will rise by only $26 billion while outlays will increase by some $178 billion. The federal deficit will therefore rise from $438 billion to $590 billion, the biggest deficit since 2013.
***As a share of the national economy, debt held by the public—the kind the Treasury must repay—will increase to 76.6% [of GDP] this fiscal year. That’s the highest share of GDP since 1950 when the debt burden was winding down after World War II. It was 52.3% in President Obama’s first year in office, and it usually is flat or falls during an economic expansion.

Source: The Wall Street Journal

No such debt reduction is on the horizon now. Thanks to ObamaCare and his refusal to reform entitlements, Mr. Obama has set the federal fisc on an even uglier path long after he’s left for a tour of the world’s great golf courses. CBO says spending will keep rising and so will debt as a share of GDP—to 77.2% in 2017, 79.3% in 2021 and 85.5% in 2026. (See the nearby chart.) All of this assumes no change in current policy and no economic recession. The odds of the latter are close to zero. [Emphasis added.]

With the CBO projected trajectory of increased future US debt under current government programs, even increases in tax revenues, as proposed by Clinton and others, will not give the next president money to establish new government funded programs.

Middle-Class Family Healthcare Spending Increased 25 Percent Since 2007

From The Wall Street Journal, "Burden of Health-Care Costs Moves to the Middle Class: Rising out-of-pocket health care costs ‘means less money for other things’ " by Anna Louie Sussman:

Source: The Wall Street Journal

***Rising out-of-pocket health-care costs, combined with slow economic growth and years of tepid wage growth, pose risks for an economy in which consumer spending accounts for more than two-thirds of overall output, economists say. In 2015, 8% of Americans’ household spending went toward health care, up from 5.8% in 2007, according to the Labor Department.

Health care costs are “eating up a larger share, and it means less money for other things,” said Diane Swonk of consultancy DS Economics.

Democrats And Republicans See The Other Party As Ideologically Extreme, But Not Their Own

From PewResearchCenter, "Partisans see opposing party as more ideological than their own" by Zachary Krislov and Jocelyn Kiley:

Source: PewResearchCenter

Members of both parties most commonly place the other party on the extreme end of the scale. Among Democrats, 34% placed the GOP at the most conservative point. Even more Republicans – 45% – put the Democratic Party at the liberal extreme.

Majorities in both parties view the other party as closer to the ideological extreme than the center. Nearly six-in-ten Democrats (58%) place the Republican Party at one of the three most conservative points on the scale (0-2), while 69% of Republicans place the Democratic Party on the most liberal points (8-10).

Meanwhile, partisans consider their own party to be less ideological. While most Republicans place the GOP on the conservative side of the scale, only 36% rate it as very conservative (0-2 on the scale). Similarly, most Democrats view their own party as liberal but just 33% rate it at the most liberal points on the scale (8-10).

EpiPen Costs $500 Because The FDA Will Not Allow Generic Competitors

From The Wall Street Journal, Opinion, "Anaphylactic Political Shock: Sorry, Hillary. The feds are to blame for Mylan’s EpiPen monopoly:"

EpiPen should be open to generic competition, which cuts prices dramatically for most other old medicines. Competitors have been trying for years to challenge Mylan’s EpiPen franchise with low-cost alternatives—only to become entangled in the Food and Drug Administration’s regulatory afflatus.

Approving a generic copy that is biologically equivalent to a branded drug is simple, but the FDA maintains no clear and consistent principles for generic drug-delivery devices like auto injectors or asthma inhalers. How does a company prove that a generic device is the same as the original product if there are notional differences, even if the differences don’t matter to the end result? In this case, that means immediately injecting a kid in anaphylactic shock with epinephrine—which is not complex medical engineering.

But no company has been able to do so to the FDA’s satisfaction.

Rate Of Violence Against Educators Is Twice The Rate Of Violence Against All Workers

From US Department of Labor, Bureau of Labor Statistics, Monthly Labor Review 100 Years, Featured Article, August 2016, "Putting violence in perspective: how safe are America’s educators in the workplace?"

Out of the 8.4 million workers employed in the education, training, and library occupations throughout the United States in 2014, 27 died on the job and 36,540 had nonfatal occupational injuries and illnesses that resulted in days away from work. Compared with all workers in the United States, those in the education, training, and library occupations (henceforth referred to as “educators”) were at less risk of both fatal injuries and nonfatal injuries and illnesses. The fatal injury incidence rate for educators, at 0.4 per 100,000 workers, was significantly lower than the rate for all workers (3.4 per 100,000 workers). Likewise, the nonfatal injury and illness incidence rate for educators for days away from work was 59 cases per 10,000 full-time workers and was almost half the rate for all workers at 107.1 per 10,000 full-time workers. All work injuries and illnesses are unfortunate, but among them, events of violence and other injuries by persons or animals (henceforth referred to as “violent events”) stand out as preventable. Violent events from 2011 through 2014 composed 27 percent (29 deaths) of the fatal injuries of educators. In 2014, they composed 24 percent of the nonfatal days-away-from-work cases (8,620 cases) that educators experienced. This article explores occupational fatal injuries and nonfatal injuries and illnesses that resulted in days away from work for educators, with a focus on violent events.

Types of violent events affecting educators
For this article, violent events are considered any event that falls into event category 1 in the Occupational Injury and Illness Classification System 2.01 coding structure. This category includes all intentional injuries (homicides and suicides), injuries involving weapons, and injuries from direct physical contact by another person or oneself. From 2011 through 2014, 109 educators were fatally injured on the job. Violent events accounted for 27 percent of fatal injuries (29 deaths) to educators and were the second most frequent type of fatal incident after transportation incidents (see figure 1). Of the educators who were fatally injured in violent events from 2011 through 2014, 69 percent (20 of the 29) were employed in state or local government. Of the 29 violent deaths, 25 were reported as intentional injuries by persons (this category includes injuries by other persons and self-inflicted injuries or suicides). Self-inflicted intentional injuries numbered 13 of the 29 violent fatalities (45 percent), and intentional injuries (i.e., homicides) by other person were the second most common fatal violent event, with 12 fatalities. Among the educators who were victims of homicides from 2011 through 2014, eight occurred as intentional shootings by other persons (67 percent). Four cases were classified as “injury by other person—unintentional or intent unknown.” These cases can include accidental shootings or physical contact during activities such as sports or attempts to restrain another person.

Of the 36,540 nonfatal injuries and illnesses that resulted in days away from work reported in 2014 for educators, nearly a quarter (8,620 cases) were the result of violent events (see figure 2). The share of the number of violent events to all nonfatal days-away-from-work cases was more than three times higher for educators than for all workers in the United States in 2014. Also, the incidence rate of violent events among educators (13.9 per 10,000 full-time workers) was almost twice the incidence rate (6.8) of violent events for all workers in the United States. Compared with major occupation groups with high rates of violent nonfatal events, educators were at low risk. For example, protective service workers (such as police officers or fire fighters) or healthcare support workers (such as home health aides or personal care assistants) had higher rates, at least by a factor of two, of violent events at work than educators (see table 1). [Empahsis added.] [Footnotes Omitted.]

Computers More Accurate Than Pathologists In Assessing Lung Cancer Tissues

From ScienceBlog, Aug 16, 2016, "Computers trounce pathologists in predicting lung cancer type, severity:"

Computers can be trained to be more accurate than pathologists in assessing slides of lung cancer tissues, according to a new study by researchers at the Stanford University School of Medicine.

The researchers found that a machine-learning approach to identifying critical disease-related features accurately differentiated between two types of lung cancers and predicted patient survival times better than the standard approach of pathologists classifying tumors by grade and stage.

“Pathology as it is practiced now is very subjective,” said Michael Snyder, PhD, professor and chair of genetics. “Two highly skilled pathologists assessing the same slide will agree only about 60 percent of the time. This approach replaces this subjectivity with sophisticated, quantitative measurements that we feel are likely to improve patient outcomes.”

The research will be published Aug. 16 in Nature Communications.

Rising Wage Inequality Driven By Growing Differences In Pay Across Industries And Businesses And Not Within Firms

From The Wall Street Journal, Real Time Economics, "When Unequal Pay Makes Everyone Less Productive: A study of hundreds of Indian workers shows pay inequity affects output and attendance" by Adam Creighton:

In advanced countries, income inequality has been increasing. Other research suggests employers are alive to the potentially damaging effects of paying close colleagues too differently. A study of U.S. wage dispersion from 1978 to 2012 indicated rising inequality was being driven by growing differences in pay across industries and businesses, rather than within them.

"Pay differences within employers have remained virtually unchanged, a finding that is robust across industries, geographical regions, and firm-size groups," researchers found.

Trust In Government Never Lower, As Measured By Gallup

From The Wall Street Journal, Opinion, "Trust in Business vs. Government: The public likes the private economy more than the politicians do:"

... the five industries that Gallup found are viewed more negatively than positively on net: oil and gas (minus-7), lawyers (minus-8), health care (minus-20) and pharmaceuticals (minus-23). Public opinion for health care has plunged to a five-year low, which also corresponds to its rough annexation by the federal government under ObamaCare.

Speaking of which, the worst performer in the Gallup survey? None other than the federal government, with merely 28% expressing a positive view and 55% a negative one for a net rating of minus-27 points. The pollster reports that "trust in the government’s ability to handle domestic problems has never been lower in Gallup’s trends, which stretch back to the 1970s."

Bill And Hillary Clinton 2015 US Tax Return

Bill and Hillary Clinton 2015 US Tax Return

Also, directly available at https://m.hrc.onl/secretary/10-documents/01-health-financial-records/Clinton_2015_Form_1040_with_Signature_Page.pdf

State Map Of Relative Value Of $100

From Tax Foundation, "The Real Value of $100 in Each State" by Alan Cole:

This map shows the real value of $100 in each state. Prices for the same goods are often much cheaper in states like Missouri or Ohio than they are in states like New York or California. As a result, the same amount of cash can buy you comparatively more in a low-price state than in a high-price state.***

Source: Tax Foundation

***The states where $100 is worth the most are Mississippi ($115.34), Arkansas ($114.29), Alabama ($113.90), South Dakota ($113.64), and West Virginia ($112.49). In contrast, $100 is effectively worth the least in the District of Columbia ($84.67), Hawaii ($85.62), New York ($86.43), New Jersey ($87.34), and California ($88.97).

Lengthen Student Loan Payback Time To Increase Millennials' Retirement Savings And Home Purchases

My posted comment to The Wall Street Journal article, "Most Millennials Don’t See Becoming Millionaires, Study Finds: Tough job market and high student debt has many doubtful they will bank a million dollars for retirement" by Veronica Dagher:

The current maximum Roth IRA contribution is $5500 per year or about $105 per week. A 25 year old putting $105 per week into a diversified mutual fund or ETF, such as an S&P 500 index, for 40 years until retirement at 65, with an average total return over the 40 years of 6 percent, will have over $900,000, tax free, in the Roth IRA. If the 40 year average return is 8 percent, the total will be $1.6 million. A 10 year delay in saving will reduce the $900,000 accumulated savings to $460,000 and the $1.6 million to $680,000. The earlier one starts saving, due to compounding, the more one has at retirement.

The biggest problem with student loan debt is not the amount, or the interest rate. It is the ridiculously short payback period of 10 years. Education is a life long investment. Increasing the payback period to 20 years, decreases monthly payments by almost 40 percent. A longer payback time for student loans will increase funds for home purchases and retirement savings.

US Net Interest Costs To Increase From 6 Percent To 21 Percent Of Federal Spending Over Next 30 Years: CBO

From the Congressional Budget Office, "Interest Costs in The Long-Term Budget Outlook" Posted by Stephanie Barello and Michael Simpson on August 2, 2016:

The government’s net interest costs are projected to more than double as a share of the economy over the next decade—from 1.4 percent of GDP in 2016 to 3.0 percent by 2026. By 2046, if current laws governing taxes and spending generally did not change, those costs would reach 5.8 percent of GDP—increasing from 6 percent of federal spending to 21 percent over the next 30 years.

Source: Congressional Budget Office

Net interest costs are projected to increase as interest rates rise from unusually low levels and as greater federal borrowing directly leads to greater debt-service costs. In addition, greater federal borrowing is projected to put further upward pressure on interest rates and thus on interest costs. Growth in net interest costs and growth in debt reinforce each other: Rising interest costs push up deficits and debt, and rising debt pushes up interest costs.