The Real Interest Rate–No Longer A Mystery

On January 29, the U.S. Treasury issued its first inflation indexed bonds, known as Treasury Inflation Protection Securities (TIPS). These securities sold to yield a real rate of interest of 3.44%. Since the issue was greatly oversubscribed (demand was five times supply), the rate of interest in the future will likely be somewhat higher. Also, the real rate reflected in this issue is based more on the way the CPI will be measured in the future than it is today (remember that securities pricing is forward looking).

The bottom line of all of this is that the real rate of interest is probably about 4% and the real rate of wage growth about 1%, when inflation is measured by the "new" methods that will be announced sometime this year. This yields a net discount rate in the neighborhood of 3% and debunks completely the total offset argument.

These new issues are also not true ten year instruments. Since they index every six months, they can be sold at virtually anytime with no loss of principal. In other words, they are 180 day T-bills that roll not traditional ten year bonds.

The issuance of these new securities presents many new ways of demonstrating the ridiculous, uneconomic nature of the calculations made by most plaintiff’s economists. It should now be much easier to cut through the babble.