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Friday, August 05, 2011

Question

Why would any sane person today loan out money for 10 years at an interest rate of less than 2.5% given the massive inflation looming and given that the borrower has the means, motive, and opportunity to cause massive inflation?

It's not a question of whether the government will default.  It's a question of whether the money you get back will be worth anything close to what you loaned out.  And you should be expecting more back, not less, given that the money is on the sidelines for 10 years.

It makes no difference whether you can sell the 10-year note in less than ten years.  The risk is still there and it seems to me that the market is seriously mispricing this stuff.

It makes no difference whether there's nothing better out there right now.  Something tells me that will change long before the 10 years are up.

UPDATE Aug 6, 2011:
I wrote that less than 24 hours before S&P lowered the US Gov rating to AA+. Lucky timing.

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