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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