Perfect Recipe for Inflation?

I don't know how to predict the future, but I am buying a lot of TIPS.

I also do not know how to predict the future, but I am refinancing my mortgage from 15 year fixed to 30 year.

Here

is an excellent article that addresses thesubject directly and suggests some ways to insure against it. My opinion is that inflation (or at least avoiding deflation) is the only way out. Bernanke, of all people, knows this. He is one of the leading scholars of the Great Depression.

But we are sailing uncharted waters. If he gets it wrong, things could go badly in either direction. The article suggests that he is more likely to undershoot, getting more deflation and more recession, than to overshoot and get double digit inflation. Keep in mind -- the Fed can suck that money back in as fast as it is putting it out.

-- Doug

Economists themselves (the supposed experts) argue over how to describe inflation and exactly what causes it. While the common metric (CPI) is quite simple, the actual dynamics involved in the phenomenon are rather complex -- hence the endless debates over what inflation is and what amplifies/mitigates it. Personally, I lean in the direction of this fella's analysis:

second chart shows a strong historical correlation between inflation and growth in government spending).

TIPS convey the market's OPINION about future inflation, with the near-term currently having a deflationary outlook, which changes into inflationary prospects as you move the horizon further back.

A good quantitative treatment of the subject is here:

as competent as this professor appears to be, he's more like a tortoise when it comes to updating his website).

analysis:

(the second chart shows a strong historical correlation between inflation and> growth in government spending). I read him religiously. He posts a new article every sunday evening.

According to Hussman, his fix income investments are mostly in TIPS.

here:

(unfortunately, as competent as this professor appears to be, he's more like a> tortoise when it comes to updating his website).

Can you please lay out the details?

TIA

Well, I think that there is a non-trivial possibility of substantial inflation, though I do not necessarily envision extreme inflation.

My current loan is 15 year fixed at 4.875%. Assuming that I can refinance with a low closing cost, at 5% for 30 years, this would increase the effective duration of my mortgage.

If that substantial inflation does not occur, I am not much worse off with a 30 year loan, compared to a 15 year loan.

If substantial inflation does occur, the economic value of my mortgage payments would go down in inverse proportion to the degree of inflation.

In other words, I think that the market does not price the possibility of inflation correctly.

If I am wrong about it, my downside is minimal.

And perhaps you can avoid the downside by paying the same as you would for 15yr fixed, correct?

TIA