The Inflation Solution? Austerity and inflation will go together.
Author: Holman W. Jenkins, Jr.</br></br>You can hardly turn over an investing advice newsletter without finding a recommendation to buy TIPS, or Treasury inflation-protected securities, to preserve the purchasing power of your dollar-denominated savings.</br></br>Economists and investment pros look out three years and can't believe we aren't due for a powerful flush of inflation. The usefulness of their favorite hedging advice, however, depends on the U.S. government actually carrying out the promise embodied in TIPS, honestly to apply an inflation adjustment to protect holders from loss of purchasing power due to the government's own mismanagement of the currency.</br></br>Will the spirit and letter of this guarantee be observed? The question has to be asked because Washington has shown no hesitancy to delegitimize legitimate claims by vilifying those asserting them--GM and Chrysler debt holders being the most recent examples. By the time the TIPS question comes up, moreover, the slope will likely have been greased by states and municipalities reneging on promises made to government retirees and bond investors. It will have been greased by governments around the world setting example after example of the many flavors of default. The justice or lack thereof in each such case is not the question. What matters is to recognize that government promises are not written in stone.</br></br>Take Japan: It has debt in the hands of its citizens amounting to an improbable 225% of its non-growing GDP, at a time when an aging citizenry will be wanting to cash out its savings to support its retirement, including workers and business owners now prematurely retired by the recent earthquake and tsunami. Already policy makers at the Bank of Japan are openly talking about using the central bank's printing press to finance rebuilding, incidentally setting course to inflate away some of the government's existing obligations.