Monthly Archives: February 2008

The Truth About Economics: Part 6 What to Expect

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(see Comic) The Federal Reserve is stuck. The current economic situation is lose lose. If they remove money from the system, the result will be deflation and perhaps outright major depression. If they try to prop up the system, it could lead to runaway inflation (hyperinflation). If they try to play it light, and are successful, the result will be stagflation (increasing money supply and price increases without much economic growth). interest rate Over the Next several years, any one of these Three Scenarios could unfold. However, inflation of some kind is more likely than widespread deflation. Deflationary Depression In this scenario, it would be as safe to be in cash as gold. You would want to be out of “Things” (commodities, houses) though and out of the stock market. Prices across the board would plummet. Only money would increase in value. money market interest rate Hyperinflation In this scenario, inflation would get way out of hand. This scenario has happened before in various places. As an extreme example, in Germany, in the 1920’s, inflation got so bad that at one point in 1923 prices were doubling every 49 hours. Hyperinflation would basically mean the collapse of the US dollar. Prices across the board would go way up. The stock market would likely increase substantially just to keep up with inflation. In this scenario, you’d reminisce about those wonderful days when gas was only $3 a gallon and gold was only $1000 an ounce. forex rate Stagflation In this scenario, inflation would be high, persistent, and annoying for an extended period of time. The economy would be weak, with increased unemployment. The stock market would be range bound in a sideways pattern for many years. But, gold and silver would march much higher--as well as many other commodities. asset management What is the Best Hedge for Each Scenario? No matter what scenario unfolds, Gold and Silver are the safest bets. index fund What about real estate? Everyone needs to live somewhere and if you want to actually own the place you live that is great. Over extended periods of time, real estate prices tend to increase, especially in certain hot locations. However, real estate often proves a poor inflation hedge (and it can ruin an indebted person in a deflation scenario). People tend to buy real estate and take on debt when they feel optimistic about their economic situation. When times are hard and money is stretched, people don’t flock out to buy real estate; it is a big purchase and a commitment that usually requires financing. So, although technically real estate is an inflation hedge, it is not necessarily a very dependable or good one. Coming Next: Part 7, Lessons from History

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The Truth About Economics: Part 5 Inflation Protection

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(See Comic) How Much Money Do You Have? Little Or No Money If you have little or no money then you don’t have much to lose. However, inflation makes it that much harder to catch up and start accumulating money. If you don't have money sitting around, you have no money to put into an inflation hedge, like gold. All you can expect is for your cost of living to go up, while wages lag. If you are in debt, inflation will diminish the debt, but you still have to have enough money to pay off that debt. Moderate Amount of Money Due to inflation, you can’t just save money. You have to put it to work. money market Otherwise, over time, you lose purchasing power. You may be earning interest on your money, but it is still losing purchasing power, because interest rates don’t keep up with inflation. That is part of the problem to begin with: artificially low interest rates leading to excessive money demand and thus excessive money supply growth. And to add insult to injury, you are directly taxed on the little interest you make off your savings. Realistically, in the current environment, unless you are making over 10% a year on your money, you are losing out to inflation. Lots of Money If you have lots of money then you are in the best position to not only hedge yourself against inflation but also profit from it. If you have lots of money then you have lots of money to throw around into different investments. Plus, the more money you have, the more you become eligible to borrow more money at cheap rates and invest in things like hedge funds. But you still have to be wise. An unwise person with lots of money can be hurt by inflation more than anyone. Especially if the government wants to come in and redistribute wealth. money market accounts Where to Put Money In general, in an inflationary environment, you want your money to be in “things,” not paper. Since 2002, general commodity prices have risen about 3 fold (300%); that is very significant seeing as for the previous 20 years prices were practically stagnant—mostly due to increases in productivity. Gold/Silver The classic inflation hedge (and hedge against uncertainty in general) is to always have about 10% of your money in gold/silver. Gold and silver are historically what is considered real money (including in the U.S. Constitution). Unlike paper money and credit, there is a limited supply of silver and gold. Thus, gold and silver are a hedge against inflation and a hedge against economic uncertainty in general. In 2002 gold was selling for under $300 an ounce, silver under $5 an ounce. Today in 2008, gold is nearing $1000 an ounce and silver is nearing $20 an ounce. It would have been wise to buy gold and silver back in 2002, but if inflation keeps up, and speeds up, $1000 gold and $18 silver may seem cheap in the future. investing in gold, currency hedge, gold bullion investment Coming Next: Part 6, What to Expect in the coming years

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