Will real assets be big winners as world finds Uncle Sam is not Santa Claus?
“If there is one panacea, it is fixing the inflation index. At the Fed we need more courage and less politics, and we need to reverse many of the changes that were made in the early 1980s to the inflation index, beginning with the decision to remove house prices from it and replace them with equivalent rents.
What is the problem?
Under this revision, inflation rates consistently have been below those of the past. For example, under the old method, inflation in the past 10 years would have ranged between 8% and 10%. Under the new method it has ranged between 2% and 4%. Had the inflation method been kept intact, inflation readings would have been 4% to 6% higher and, in response, interest rates would have been much higher. We would have grown more slowly during the boom, but avoided the bubbles and the ensuing bust. The inflation index, to use an analogy, reminds me of a parent who invents Santa Claus for his children and then begins to believe the fantasy himself. The government invented Santa Claus in order to cheer up the children -- pensioners and laborers -- who were worried about their parents' ability to pay for their entitlements. The children were happy with the yearly gift added to their benefits; the parents were satisfied the children were buying the fairy tale, and spending was reined in.
But inflation is well under control, say a lot of people.
Look where the dollar is. Look at commodity prices. Look at your bills. Besides bond managers and insurance companies, I don't know anybody who wants to own government bonds. There is no debate.
Foreign governments still own our bonds.
That may change. Sovereign wealth funds are waking up, and slowly but surely will buy fewer bonds and more real assets, equities and maybe foreign bonds. The biggest losers will be U.S. bonds; we are going to see much higher yields in the next five years. The bigger winners will be equities and real assets."