The U.S. Treasury Department is to be commended for the sensible step it took a few days ago by deciding to issue bonds indexed to inflation. It's a step that has been advocated for many years by all sorts of economists, ranging from liberal to conservative.
The chief appeal of the new bonds will, of course, be their safety. On average, stocks are a far more lucrative long-term investment. But their volatility can be nerve-wracking, and there's always the chance that particular stocks may go belly up. By contrast, the value of fixed-rate bonds can be eaten up by an inflation rate that exceeds the yield.For risk-wary investors wanting to save for such things as retirement or their children's education, the new inflation-adjusted bonds, with maturities of 10 or 30 years, make obvious sense.
For taxpayers, the bonds should be attractive because the guarantee against inflation will enable the Treasury to issue the bonds with a lower interest rate than the ones for fixed-rate securities. As a result, the Treasury's borrowing costs should be lower. That has been the experience in Canada and Britain, which have been selling inflation-pegged bonds for years.
For the Federal Reserve, the new bonds provide an extra tool in the fight against inflation. By comparing the prices of indexed bonds with the prices of fixed-rate bonds, the central bankers should be better able to assess the inflationary expectations of investors. If those expectations are rising, the Fed may be able to move more quickly to quash inflation by tightening the money supply.
Not all the details have yet been worked out, however, and there could be some glitches. One of them involves the choice of inflation indexes, some of which substantially overstate the seriousness of the price spiral. Another is that too many investors could forsake stocks and the chance of higher returns. Still another is that most buyers of the new bonds may understandably be expected to hold on to them, making it hard for other purchasers to sell their bonds quickly in an emergency.
So be it. The fleas come with the dog, including even thoroughbreds. Americans need to save more money but have long lagged behind the citizens of other industrialized nations. As a result, our competitors outpace this country in generating the investment capital it takes to create the new firms and factories that can provide more jobs and more personal income. The new inflation-indexed bonds should help the United States do some catching up on this score.