The Unknown Ideal

Tom Adams has calculated that, come the semi-annual savings bond rate adjustment November 1, the inflation component of the I Bond yield will be 3.1%, so judging what Treasury decides to do with the fixed component of the yield, new I Bonds will likely yield between 4.1% and 4.5% (that last part is me talking). Older I Bonds will yield anywhere between 4.1% and around 6.7%, depending on what the fixed yield component was when they were purchased.

Says Adams:

The Consumer Price Index fell during September to 202.9 from August's 203.9. The Series I Savings Bond inflation component is based on the level of the CPI in March and September. In March the index was at 199.8. This means the next I bond inflation component will be 3.10%.

To determine what your own I bonds will earn during their next six-month rate period, you have to add their fixed base-rate to 3.10%. The fixed-base rate for your I bonds can be anywhere between 1.0% and 3.6%, depending on when the I bond was issued.

Meanwhile, older variable rate EE savings bonds (those issued between May 1997 and April 2005) seem on track to earn about 4.4% come the November readjustment, given the recent relatively high yields on the 5 Year Treasury (these older EE savings bonds are pegged to 90% of the fiver's average yield for the six months preceding the readjustment).

Where Treasury will set the rate for new fixed-rate EE bonds is anybody's guess.

Posted by The Unknown at 10:10 AM | Permalink

Jeffrey Sachs writes in the November Scientific American

For decades economists and politicians have debated how to reconcile the undoubted power of markets with the reassuring protections of social insurance. America's supply-siders claim that the best way to achieve well-being for America's poor is by spurring rapid economic growth and that the higher taxes needed to fund high levels of social insurance would cripple prosperity. Austrian-born free-market economist Friedrich August von Hayek suggested in the 1940s that high taxation would be a "road to serfdom," a threat to freedom itself.

Most of the debate in the U.S. is clouded by vested interests and by ideology. Yet there is by now a rich empirical rec-ord to judge these issues scientifically. The evidence may be found by comparing a group of relatively free-market economies that have low to moderate rates of taxation and social outlays with a group of social-welfare states that have high rates of taxation and social outlays.

Not coincidentally, the low-tax, high-income countries are mostly English-speaking ones that share a direct historical lineage with 19th-century Britain and its theories of economic laissez-faire. These countries include Australia, Canada, Ireland, New Zealand, the U.K. and the U.S. The high-tax, high-income states are the Nordic social democracies, notably Denmark, Finland, Norway and Sweden, which have been governed by left-of-center social democratic parties for much or all of the post–World War II era. They combine a healthy respect for market forces with a strong commitment to antipoverty programs. Budgetary outlays for social purposes average around 27 percent of gross domestic product (GDP) in the Nordic countries and just 17 percent of GDP in the English-speaking countries.
. . .
On average, the Nordic countries outperform the Anglo-Saxon ones on most measures of economic performance. Poverty rates are much lower there, and national income per working-age population is on average higher. Unemployment rates are roughly the same in both groups, just slightly higher in the Nordic countries. The budget situation is stronger in the Nordic group, with larger surpluses as a share of GDP.
. . .
Von Hayek was wrong. In strong and vibrant democracies, a generous social-welfare state is not a road to serfdom but rather to fairness, economic equality and international competitiveness.

Posted by The Unknown at 10:14 AM | Permalink

William F. Sharpe, who won a Nobel Prize in economics in 1990 along with Harry Markowitz is saying in his new book that his prize-winning Capital Asset Pricing Model may no longer be all that gol-darned cool.

Kind of tough to argue with what his allies, like Santa Clara Prof. Meir Statman, are saying about the concept of risk:

"We've come to thinking about risk as standard deviation," Mr. Statman said. "What people want is protection when the economy tanks."

though it's also kind of hard to acquaint my tiny mind with Sharpe's new best friend "state-preference theory":

"The elegance of (the state-preference model) is that you can understand the elements of the various moving parts of the optimization," said Gifford Fong, editor of the Journal of Investment Management and president of Gifford Fong Associates, a Lafayette, Calif.-based consultant on fixed income and derivatives.

Investors can assign probabilities of any given state occurring. In a complete market, an investor can buy or sell a security for every possible outcome.

Guess I should put the book on my Christmas wish-list, squint real hard, and commence to cipherin'.

Meanwhile, Harry Markowitz isn't too terribly impressed, according to the same Investment News item:

"I find [the state-preference approach uses] a very general set of assumptions out of which very little specific can be deduced," said Mr. Markowitz. He and Mr. Sharpe will debate their differing views Oct. 16 at the Institute for Quantitative Research in Economics' 40th anniversary conference in Santa Barbara, Calif.

Posted by The Unknown at 9:36 PM | Permalink