5/04/2009

Inflation Survival Bleg

We have been hearing a lot recently about inflation storms brewing over the horizon. Worse yet, the storms could in fact become hyperinflation. Many fear that the recent excessive growth in the money supply will make hyperinflation inevitable. Unfortunately I have not seen any major discussions on how individuals handle such events?

Thus, the question I have for anyone who might read this.....

What can the Average Joe (ie average consumer and investor) do *right now* to prepare for the effects of inflation, and even the ravages of hyperinflation???

Are there simple and effective steps to take ahead of time (of which I am seeing nothing reported), or do I need to go to Amazon and buy all the survival books that Instapundit has mentioned recently??

I am a bit worried about the effects of recent action on the future economy, and I don't want to be one of the masses who ask "Why weren't we warned about this?"

12 comments:

Mitchell said...

Look at these securities:

TIP
TBT

Hard assets:
EEQ
KMR
PCL
XOM
EXC

Gold:
RBY
GG
PZG
GLD


Stay away from bonds, fixed income, CD's

Sofa King said...

Simply put: don't hold cash, cash instruments, or things like bonds that have a reliable but fixed income. Convert cash into real tangible assets, things that will hold their value reasonably well. Don't rush to pay back loans that are at fixed rates.

S said...

You can look into Series I savings bonds, if you think the .1% real rate of return is enough to compensate for the default risk.

phwest said...

One other area to consider is foreign stocks/bonds, as this is a useful hedge. Just be careful the risks aren't worse on the other end.

I wouldn't be all that nervous about holding cash now - you don't want a lot of cash when inflation is raging, but it isn't yet, and cash gives you something to work with. What I would avoid are bonds and CDs - their prices will start to head down as soon as interest rates react.

It is the transition that tends to be painful (assuming we stay out of hyperinflation - which is a whole 'nother ball game). If inflation spikes up to 10% say, but then stabilizes, interest rates will increase accordingly and bonds can again be a reasonable investment. After-tax returns will suffer, since the return required to keep pace with inflation gets taxed as "income" but if your money is in tax-deferred accounts that can be avoided.

One thing that may help - at least from a peace of mind perspective - is making sure your mortgage (if you have one) is a 30 year fixed. Assuming you stay employed, your mortgage can be a straight hedge for an equal amount of bond or insurance investments.

Squid said...

Borrow like crazy! If the Fed is planning to spend ten trillion dollars it doesn't have, and then repay those debts with debased currency, then I figure the rest of us should follow its lead.

I wish I could say I was joking.

phwest said...

Hyperinflation is a real mess though. True hyperinflation is a political event, and creates an environment where real investment is impossible. In effect, hyperinflation is a government repudiation of debt, and a once the government starts defaulting on contracts nothing is safe. In that situation all you can do is go into survival mode and try to hang on to whatever you can. Other than making sure to bankroll your local politicians so they will look out for you, getting money out of the country pretty much the only option. A government that will blow up the currency will not hesitate to tax real property into oblivion as well. Only the politically-connected can survive with their assets intact - the middle class just gets wiped out.

sofa said...

Sofa_King - great nic !

David V.S. said...

I've blogged about this a bit.

http://davidvs.blogspot.com/search?q=inflationThe short answers are:

(a) Have a mortgage. Inflation in effect partially pays off debt, and for most people their mortgage is their main debt. Common advice is to be paying 30%-50% of your income as mortgage: more than this is financially risky, less is not taking enough advantage of tax benefits and inflation. Certain parts of the country have other recommended percentages.

(b) Invest in gold. What percentage of your investment portfolio should be in gold depends upon how your mortgage compares to your investment portfolio.

(c) Make big and long-lasting purchases now, when we are "due" inflation but is has not yet arrived. Anything that will last 10+ years is effectively on sale if cash is currently worth more than it should be. Buy that car, sofa, granite countertop, etc. that you have planned and saved for but were waiting for the "right" time.

(d) Buy more stocks. The reason is similar to (c) but the issue is more complicated. See the blog link for more detail.

David V.S. said...

I should add that the government simply cannot pay out its promises. Even before 2009 that was true. The "Entitlement Crisis" has been well known for years. (Even my parents knew to teach me not to count on Social Security existing when I retired.)

There will surely be some inflation because the government is now spending and promising to spend so much money. But a lot of what we are seeing is probably politicians trying to keep doors open: the more promises they make, the more options they have to pick and choose from when forced to break promises because the Entitlement Crisis finally hits hard.

In other words, federal obligations are too high, but inflation is not the only way out--simply breaking promises works too. During the next decade we'll see both happen, and I'm not wise enough to predict with any more detail how much of each we'll see.

Bhagwani said...

Interesting graph over at the Skeptical Optimist today – have a look



http://www.optimist123.com/optimist/

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