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Inflation is like a cancer that eats away at our standard of living.
And those most vulnerable to inflation are retirees and
near-retirees. I believe we will experience a damaging level of
inflation over the next 10-20 years. If that’s true, then action
must be taken today to protect your way of life. Read on to see why.
Here in northeast Tennessee, the price of milk rocketed up 30% in
just a few days. Imagine if you only had $10 to buy groceries each
week and suddenly the price of milk went from $3.00 to $4.00. That
is inflation. It takes more money to buy the same thing.
Now imagine if the price of all groceries went up 30% in a short
period of time! Can you see how dramatically that could impact your
way of life? The necessities of life now take much more of your
fixed income than they used to, so you have to cut back.
I believe that we in America will see a prolonged period of
inflation much like we did between 1966 and 1982. The rate of
inflation may even be higher, much higher. It’s happened to Germany,
it’s happened to many countries in Asia and South America. It
occurred in Mexico. And it even happened in Great Britain.
In all of those countries, rampant inflation was the result of debt.
A government basically has four choices for dealing with an
unsustainable debt problem. It can default on its debt, raise taxes,
cut spending, or inflate the debt out of existence. Those are the
choices faced by our nation.
Default isn’t an option. We can raise taxes and cut spending, but
both would have to be done so drastically that it would leave our
economy in shambles. Even then it would take decades to pay down the
debt. Or, we can inflate our way out.
Inflation makes debt easier to pay off. For instance, let’s say I
earn $50,000 a year from my job and I buy a home with a mortgage
payment of $1,000 a month ($12,000 per year). That means it takes
24% of my earnings just to pay my mortgage.
Five years later, working the same job, I’m getting paid $60,000.
They call it a cost of living increase. Really, it’s inflation.
Anyway, my mortgage payment remained the same. Since I have more
income and the same mortgage payment, it’s easier to pay. Now it
only takes 20% of my income, leaving me 4% to spend on something
else.
That’s how a nation can inflate debt out of existence. They print
more money. As consumers it affects us because the price of milk
goes up. It gives the government more money, though, to pay their
‘mortgage’.
Think about how quickly our national debt is growing—it increased 9
times between 1990 and 2006. We’ve borrowed $3 trillion dollars over
the last 10 years because we bought more from other nations than we
sold. And that gap is still increasing. That $3 trillion will double
to $6 trillion in just 4 years based on our current trade deficit!
Which of the four options will our government choose? I believe it
will pursue a combination of raising taxes, cutting spending and
spurring inflation.
There are many ways it can raise taxes. For instance, in the late
1990’s a law was passed creating Roth IRA’s. People were allowed to
convert their traditional IRA to a Roth, but they would have to pay
taxes on that money. The law allowed that tax to be spread over 5
years so a lot of people did it. That produced a huge amount of
revenue because the government received taxes over 5 years that
would have otherwise taken decades to collect.
The government can also cut spending. I believe it will do so by
reneging on its promise to fully pay entitlements such as Social
Security and Medicare. Think it can’t happen? At one time they said
that they wouldn’t tax Social Security, now they do.
So what does this mean for investors? You can preserve wealth in an
inflationary environment by investing in the right things. Hard
assets and commodities should do well. So will assets owned in
foreign currencies. That’s why I’ll address inflation’s impact on
the dollar next week.
Nationally-syndicated financial columnist and Certified Financial
Planner® Jeffrey Voudrie provides personal, in-depth money
management services and advice to select private clients throughout
the USA. He’ll answer your financial question – FREE at
www.guardingyourwealth.com.
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