Nobody but a blockhead (=economist) likes indexation.

I mentioned this phenomenon in passing last week (#1552045) — e.g., Shiller’s paper from 1997 — but meant to delve into it more thoroughly.

Here’s my summary of the distributional concerns from the Economics of Peer-to-Peer post:

The Puzzle of the Public's Dislike of Indexation

The opposition to indexation has long puzzled economists, i.e., those of us with odd minds that think about money, money illusion, and the (un)fairness of nominal contracts/payments when the real worth of money changes. To recap the deep, long, important economic intellectual convo:

• if I make a loan to you at $100 for one year and at 5% interest, but at the end of the year the price level is 10% higher, I lost out 5% while loaning you funds.
• If I make a loan to you at $100 for one year and at 5% interest, but at the end of the year the price level is 2% higher, the real rate of interest was only 3%.

There are a couple of ways that banks (and more sophisticated securities markets and futures contracts) could deal with this, where the most common one is for the bank to have in-house experts forecasting the future price level and price loans accordingly. That is, if they're willing to lend to you at 3% and they believe the Fed will hit 2%, the loan contract will say 5% -- hashtag all the way back to Irving Fisher, and in honest to every merchant and money-lender throughout history.

The other, more obvious, option would be to just adjust the principal (= the $100) by the inflation rate after the fact, leaving the (real) interest rate intact. So in the first scenario, the loan balance due (without repayments) would be $115 after one year -- $5 interest, $10 adjustment -- and in the second scenario, the loan balance would be $107.

Basically, it’s an old and longstanding theoretical consideration of who, precisely bear the burden of money’s shifting worth.

Here’s Shiller again, saying not quite hyperbolically that this resistance to indexation is “one of the greatest economic puzzles of all time”:

That the public should generally want to denominate contracts in currency units —despite all the evidence that it is not wise to do so and despite the obvious examples from nominal contracts of redistributions caused by unexpected inflation — should be regarded as one of the great economic puzzles of all time.

“The success of the U.S. Treasury’s first issuance of consumer price-indexed debt in January 1997 does virtually nothing to diminish the salience of this puzzle”

Ergo Satoshi quote (Letters 10:15).

In the meantime, we have Jason Zweig, a longtime WSJ columnist on matters of personal finance who has quite frequently invoked TIPS — the U.S. Treasury’s own indexed bonds. They have notoriously (shockingly) low uptake despite being, as Zweig wrote in the Wall Street Journal yesterday, “the closest thing to a risk-free investment.”

Or, at least, somewhat risk-free:

Fellow investors,
You might spend some of a staycation playing golf, camping or binge-watching your favorite TV show. I spent some of mine buying inflation-protected bonds.

Hashtag lol. Continuing the madness:

Last week, I sat on the screen porch with an iced tea and put a substantial part of my IRA into TIPS at real yields of up to 3%. (I didn’t buy a TIPS ETF or mutual fund; I bought individual TIPS on the secondary market, in my brokerage account.)
you can lock in today’s historically generous rates if, but only if, you buy individual TIPS (not a TIPS fund) and hold them to maturity.

All the trust involved for this supposedly “risk-free” investment is the (admittedly quite low) risk of Treasury not paying you, but more importantly the risk that the actual-real value — i.e., what future money gets you — will fall well short of the 3% real Zweig envisions.

It’s not, as many Bitcoiners uncritically suppose, that the U.S. agency for calculating the inflation rate (= statisticians at the Bureau of Labor Statistics) are crooks, beholden to the President, or systematically biasing the rates to be lower than akschual real-world inflation. It’s that constructing an average price index is backward-looking, impossible, and a hopeless endeavor: how much better is "communication" or "light" today vs 20, 200, or 2000 years ago? Hedonic adjustments shove it downwards; quality improvements upward; "free" stuff (think YouTube) makes the basket lower than it would have been.

Zweig goes on to remark on the fiscal troubles facing America’s government (yes, we know: #1554544 #1554571, #1554591)

What makes me feel bad is that “the closest thing to a risk-free investment” isn’t as close as it used to be. The gross U.S. debt surpassed $40 trillion earlier this month—approaching its highest level, as a percentage of GDP, since shortly after World War II. Net interest payments, which consumed only 1.3% of GDP in 2016, totaled 3.2% of GDP in 2025. And, with bond yields at their highest in nearly two decades, that interest burden is almost sure to balloon.

What I like about indexation products -- at least on the savings side because that's where I hang out, not having a mortgage because, you know, ownership obsession https://www.stacker.news/items/1459569 -- is that the unanticipated surprise inflation (biased as it is, on the upside) protects me.

Standard savings account earn 7% (remember, these lands and their incompetent monetary rulers run structurally higher inflation and rates: #1555171 -- 10y yield is 6.9%, IOR 8%). My indexed savings account yield 2% (not unlike Zweig's TIPS, btw), plus whatever the statistics agency says the inflation is.

• If inflation undershoots, i.e. 4%, I am roughly OK (2% interest + 4% adjustment for a ~6% nominal gain) but relatively speaking lose -- could have earned 7% on a regular savings account.
• If inflation overshoots, i.e., 6%, I am also roughly OK (2% interest + 6% adjustment for a ~8% nominal gain -- but I relatively gain, since regular savings account would have paid me only 7%.

Plus, it _does_ feel pretty cool when my "principal" (= savings account amount) adjusts in hindsight depending on what happened to the inflation reading _rather_ than the predicted/previously stated interest rate.

Since I think there's more than even odds for the monetary clown hats #747181 to overshoot, I rather keep slightly more fiat for immediate bills in the indexed products than the standard savings account.

Of course, these products don't "earn" you anything; can't save your way into wealth or improve your financial standing in any material way. It's keeping you afloat, preventing you from immediately drowning. Wealth, and wealth generation, comes from riding the fiat wave on hard assets -- bitcoin, gold, stocks, and yes houses (with short fiat, e.g., debt #994746); so full circle.

Anyway, I like indexation. I think the future of Bitcoinland includes more of it

Beautiful meme, the old-school way