That second idea seems like the opposite of consumption smoothing?? Maybe it’s worthwhile because I would become rich enough that the extra volatility is worth it to me? But what’s the point of being rich for just a short time before I die, or of being rich for just a short time before TAI-induced utopia makes everyone fantastically rich anyways?
The way to resolve the apparent contradiction is to return to the logic of consumption smoothing.
Let’s say you believe that TAI is coming. You expect that you and everyone you know will be dead or fabulously rich in the medium-term. You think that this has implications for markets. You like consumption streams to be smooth.
You (hopefully) start today with savings.
The logic of consumption smoothing says that you want to save less/dissave more relative to what would have been the case if you did not believe TAI is coming. In the first instance this means spending down your assets. But no borrowing! There’s no point in (expensive) borrowing if you can still spend down your assets. It also means that you still have assets! Where should you put those assets? Well, your beliefs imply that real interest rates will be higher than the market expects, so you don’t want to hold inflation-protected treasuries.
The point about risk is neither here nor there. If this is a concern you can decrease the degree of underweighting (or the size of your short position). The point is that at the margin you disprefer inflation-protected treasuries to what would have been the case if you did not have your TAI beliefs.
At some future point, you have spent down your savings.
But, no worries, TAI is coming! You commit to take out loans. You don’t have any more savings, so there is no point in investing, so there is no point bothering to underweight inflation-protected treasuries. (Unless leverage, but logic would be similar.)
The way to resolve the apparent contradiction is to return to the logic of consumption smoothing.
Let’s say you believe that TAI is coming. You expect that you and everyone you know will be dead or fabulously rich in the medium-term. You think that this has implications for markets. You like consumption streams to be smooth.
You (hopefully) start today with savings.
The logic of consumption smoothing says that you want to save less/dissave more relative to what would have been the case if you did not believe TAI is coming. In the first instance this means spending down your assets. But no borrowing! There’s no point in (expensive) borrowing if you can still spend down your assets. It also means that you still have assets! Where should you put those assets? Well, your beliefs imply that real interest rates will be higher than the market expects, so you don’t want to hold inflation-protected treasuries.
The point about risk is neither here nor there. If this is a concern you can decrease the degree of underweighting (or the size of your short position). The point is that at the margin you disprefer inflation-protected treasuries to what would have been the case if you did not have your TAI beliefs.
At some future point, you have spent down your savings.
But, no worries, TAI is coming! You commit to take out loans. You don’t have any more savings, so there is no point in investing, so there is no point bothering to underweight inflation-protected treasuries. (Unless leverage, but logic would be similar.)