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Inflation Neutral Bonds: The Pluses And Minuses


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INFLATION-NEUTRAL BONDS: THE PLUSES--AND MINUSES

Dean Foust's "These bonds could blow up in Uncle Sam's face" (News: Analysis & Commentary, June 3), on the Treasury's proposed inflation-protection securities, errs in raising the specter of a large liability for the government in the event that inflation increases. If that happens, the government's revenues rise as well. This gives the Treasury resources to pay higher interest costs. Indeed, the Treasury's costs are already exposed to inflation, since more than one-third of the country's debt rolls over every year.

He also errs in alleging that indexed bonds will encourage investors to care less about inflation. First, while inflation-protected bonds are ideally suited to some investors' needs, there are currently over $5 trillion in nominal bonds outstanding, as well as countless other financial assets whose value is threatened by inflation. There are, as well, tens of millions of Americans who live on fixed nominal pensions. These anti-inflation constituencies are likely to dominate the political debate. Issuing these bonds is more likely to reduce inflation than to promote it. A government that sells inflation-protection securities is likely to keep a tight rein on inflation.

To date, the United Kingdom, Canada, Sweden, and Australia have successfully introduced variations of indexed bonds and all have cut borrowing costs as a result. All told, these securities represent a win-win situation for American savers and taxpayers.

Lawrence H. Summers

Deputy Secretary of the Treasury

Washington

Anything that seduces the public into believing they are insulated from financial mismanagement is a bad idea ("Rubin Bonds are a bad idea," Editorials, June 3). Increasing the federal deposit insurance from $10,000 to $40,000 to $100,000 per account led millions of depositors to believe they could not be affected by the business practices of their banks. It is not far-fetched to speculate that had depositors felt that their own money was at risk, instead of the Federal Deposit Insurance Corp.'s, public opinion would have led to tighter reins on bank policies and, ultimately, to far fewer bank failures. To the extent that Rubin Bonds may diminish public awareness of--and opposition to--inflation, they are simply not worth their negligible benefit.

Bruce L. Goldston

San AntonioReturn to top

NO BOTTOM-LINE NUMBERS FROM MEDCATH

Your article implies that an officer of MedCath conveyed to your reporter estimates of revenues and pretax profits of the McAllen Heart Hospital ("Helping hands for the heartsick," Cover Story, May 27). The reporter was provided with only limited information about our financial model for a heart hospital. He was given no information or estimates regarding the revenues or profits of the McAllen Heart Hospital. The company has not and will not comment on those types of estimates.

Stephen R. Puckett

President

MedCath Inc.

Charlotte, N.C.

Editor's note: BUSINESS WEEK obtained estimated revenues and pretax profits from an analyst.Return to top

AN AUTOCRACY AT APPLE WON'T WORK

If CEO Gilbert Amelio intends to manage Apple Computer Inc. "as a democracy of one," then Apple's days as a viable company are numbered. ("At Apple, a democracy of one," Up Front, May 27).

During my years at Motorola, the most astute and successful managers at all levels operated within the spectrum of what was then labeled Participative Management. The culture of participation precluded managerial autocrats from taking action in a vacuum, and, at the same time, decisions were not based on popular vote. Participative managers made wiser and better informed decisions as a result of the multidirectional flow of ideas and information throughout the company.

Harold Debbi

Scottsdale, Ariz.Return to top


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