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Thursday, May 31, 2012

DeLong: The Economic Costs of Fear

Brad DeLong:

The Economic Costs of Fear, by Brad DeLong, Commentary, Project Syndicate: The S&P stock index now yields a 7% real (inflation-adjusted) return. By contrast, the annual real interest rate on the five-year United States Treasury Inflation-Protected Security (TIPS) is -1.02%. Yes, there is a “minus” sign in front of that: if you buy the five-year TIPS, each year over the next five years the US Treasury will pay you in interest the past year’s consumer inflation rate minus 1.02%. Even the annual real interest rate on the 30-year TIPS is only 0.63% – and you run a large risk that its value will decline at some point over the next generation, implying a big loss if you need to sell it before maturity.
That is an extraordinary gap in the returns that you can reasonably expect. It naturally raises the question: why aren’t people moving their money from TIPS (and US Treasury bonds and other safe assets) to stocks (and other relatively risky assets)? ...

    Posted by on Thursday, May 31, 2012 at 11:03 AM in Economics | Permalink  Comments (21)


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