I hate TIPS. IMO, The public sale of TIPs is one of the dumbest things ever done by the Treasury. The idea of the government being obliged to print more money because it has printed too much money is absurd. I assume that if inflation heats up, the Fed will buy TIPS so that the ballooning payments will go back to the Treasury. (Why doesn’t the Social Security Trust own them?)

Meanwhile, shorting costs money. You have to borrow something from someone to sell it. I imaging the futures market is the cheapest place to do that, but I don’t know what kind of interest rate is implicit in the short side of the trade.

Is this pair trade better than owning a proportion of IEF and a short-term ETF like SHY. The short-term ETF is a bet that short-term Treasuries will pay a positive real rate of return if inflation returns. That seems to me a good bet; in an inflationary environment, raising the real return on short-term Treasury securities is a powerful strategy for diverting money from inflationary spending to deflationary saving. TIPs may outperform IEF in an inflationary scenario, but so, too should a combination of IEF and SHY. So why go to all the trouble?

Ideally, I would simply buy utilities and other dividend growth stocks to deal with inflation. (It’s interesting to see how closely XLU tracks VIG and IEF over long(ish) time periods.) But that’s become a very expensive trade thanks to the bond-like part of the deal (like the bond-like part of TIPs). If we don’t care about the balance sheet, utilities still offer higher income in time of inflation, because utility rates are inflation. It’s important to understand the extent to which these “trades” are indeed trades, i.e., what “winning” looks like and how and when to monetize the winnings.

Then there’s the question of how we get the inflation. For inflation to return, the government will have to buy in to Modern Monetary Theory. Otherwise, fiscal conservatism will assure that automation and globalization do overwhelm demand with supply, and inflation will never happen. I am no fan of AOC, but she has been using a term I like — “scarcity mindset” — not original with her, I’m sure, but still something that needs to be popularized.

Every policymaker should read Jeremy Rifkin on the Zero Marginal Cost Society. I can’t say I end up where he ends up, but his premises need to be grasped, much as Marx’s critique of capitalism needed to be understood whether or not one believed Marxism offered as solution. Marginal costs are falling, so, if there is to be inflation, we will have to spend on things immune to that process, things that typically are bought by governments, most notably, infrastructure improvements. If we’re looking for a long-term inflation trade, then, I suggest including the go-to infrastructure names.